Outlook Report Highlights (July 2026)
Overview
Japan's economy is expected to continue growing moderately, with growth slowing under pressure from rising crude oil prices but supported by AI-related demand and government measures. Year-on-year consumer price inflation is expected to rise clearly above 2% from the second half of this fiscal year, then move toward around 2% by the fiscal year after next. The underlying inflation rate is expected to rise gradually and remain at a level broadly consistent with the 2% target, although there is also a risk that it could exceed 2%. The stated monetary policy approach is to raise the policy rate while assessing the likelihood of the outlook materializing and the associated risks, with the aim of stabilizing underlying inflation at around 2%.
Key points
- While high crude oil prices weigh on economic activity, AI-related demand and government measures provide support, and moderate growth is expected to continue.
- Year-on-year consumer price inflation is expected to clearly exceed 2% temporarily, then move toward around 2% by the fiscal year after next.
- Risks to the economic and price outlook include the situation in the Middle East, AI-related demand, and exchange rate fluctuations.
- The policy is to raise the policy rate and adjust the degree of monetary easing while assessing the outlook and risks.
Overview
Crude oil prices have risen under the influence of the situation in the Middle East, weighing on Japan's economy. At the same time, increased AI-related demand and various government measures are expected to provide support, allowing moderate growth to continue even as the growth rate slows.
Year-on-year consumer price inflation is expected to rise clearly above 2% from the second half of this fiscal year, reflecting higher crude oil prices, rising semiconductor prices associated with AI-related demand, and the weaker yen. Thereafter, as the effects of high crude oil prices fade, inflation is expected to move toward around 2% by the fiscal year after next. The underlying inflation rate is expected to rise gradually and remain at a level broadly consistent with the 2% price stability target.
In light of more proactive wage and price setting and rising medium- to long-term inflation expectations, there is a risk that underlying inflation could exceed the 2% target.
Details
The stated approach to monetary policy is to raise the policy rate in response to economic, price, and financial conditions and adjust the degree of monetary easing. The timing and pace of adjustments will be considered by assessing the likelihood that the economic and price outlook will materialize and the associated risks, with emphasis on stabilizing underlying inflation at around 2%.
The full report is listed as "Outlook for Economic Activity and Prices" (July 2026, Main Text) and "Outlook for Economic Activity and Prices" (July 2026, Full Text).