Japan's Economy: Monthly Outlook (Aug 2026)

◆In light of the announcement of the Apr-Jun 2026 GDP 1st preliminary results, we have revised our economic outlook. We now see growth in Japan’s real GDP according to our main scenario at +0.7% in FY2026, and +0.9% in FY2027 (+0.7% in CY2026 and +0.7% in CY2027).

◆For the time being, downward pressure is expected from factors such as price pass-through of surging crude oil import prices driven by turmoil in the Middle East, and domestic prices of goods and services. On the other hand, real wages are likely to continue rising, supported by sustained high wage increases and tax cuts on food and beverage consumption. Against the backdrop of strong corporate earnings, we expect to see expanding investment in labor-saving technologies, AI-related initiatives, and research and development.

◆The core CPI is projected to rise by +2.1% y/y in FY2026 and +1.2% in FY2027. The sharp slowdown in FY2027 is attributed to the consumption tax cut on food and beverages (which is expected to directly lower the rate by approximately 1.2%pt); excluding the consumption tax cut and other policy factors, the rate is expected to remain in the +2% range. We anticipate that the Bank of Japan will raise short-term interest rates to 1.25% in October 2026, and then raise them by 0.25%pt approximately once every three months, reaching 1.75% in the Apr-Jun period of 2027 (after which rates are expected to remain unchanged). Long-term interest rates are expected to continue rising gradually, reaching approximately 3.1% at the end of FY2027.