--Government Also Warns Mideast Conflict Has Triggered a Spike in Producer, Import Costs
(MaceNews) – Japan’s government continues to predict that the economy will stay on a gradual recovery track, pointing that its fuel subsidies and free high school education are helping ease inflation and hot weather is lifting consumer sentiment, but also warned that the Mideast conflict has triggered a spike in producer and import costs.
In its monthly report for June released Tuesday by the Cabinet Office, the government maintained its overview, saying that the economy is “recovering at a moderate pace but the impact of the situation in the Middle East needs a close attention.”
The government upgraded its view on Japanese exports for the first time in 16 months in light of strong global demand for memory chips needed for artificial intelligence, which is also leading Tokyo stock prices to record highs.
It also noted that the monthly Economy Watchers Survey, which was conducted by the Cabinet Office from May 25 to May 30 and released on June 8, indicated that confidence improved after the five-day long weekend in early May pushed up consumption and unusually hot weather boosted air conditioner sales. There is also solid demand for replacing air conditioners with those with new energy-saving features that are designed to meet stricter government standards taking effect in April 2027.
The Watchers’ sentiment index showing the direction of Japan’s current economic climate rose to a four-month high of 43.6 in May on a seasonally adjusted basis, posting the first increase in three months after falling to 40.8 in April from 42.2 in March. Before the impact of the Iran war emerged, the index climbed to a nearly two-year high of 48.9 in February from 47.6 in January.
The Watchers’ outlook index, which shows sentiment in two to three months, marked the third straight increase, rising to 40.7 in May from 39.4 in April and 38.7 in March, when it plunged from the neutral line of 50.0 in February.
In its near-term outlook, the government remains focused on the lingering geopolitical risks in the Gulf region, saying “The improvement in the employment and income conditions and the effects of various (fiscal) policies are expected to support a moderate recovery while the impact of the situation in the Middle East needs a close watch.”
The government has been facilitating increased purchases of crude oil and naphtha, the key material for producing plastics and resins, from the United States and other countries, bypassing the Middle East. The blockade of the Strait of Hormuz, the crucial passage for energy and commodities exports from the Mideast Gulf, has reduced factory output in Japan, but the recent U.S.-Iran ceasefire agreement is expected to lift production at refineries and chemical plants.
Producer inflation in Japan accelerated at a faster-than-expected pace in May, up by a three-year high of 6.3% on the year vs. an upwardly revised 5.3% rise in April, as global energy and commodities prices remain elevated amid the lingering Middle East conflict and supply disruptions and strong demand boosted non-ferrous metal prices further.
Import prices for businesses jumped 25.5% on the year in yen terms, marking a double-digit percentage gain for the second month in a row after a 21.0% rise in April. Rising production costs are expected to be reflected in consumer prices in coming months, which could raise both upside risks to inflation and downside risks to economic growth.
The 6.3% y/y increase in the corporate goods price index is the highest since 7.4% recorded in March 2023, when upstream prices were on a gradual downtrend after having peaked at 10.6% in December 2022 in the aftermath of Russia’s invasion of Ukraine in February that year.
The rate of month-on-month increase eased to a still high 0.9% in May after surging to a revised 2.8% in April from a revised 0.9% in March, partly due to a slower rise in import costs thanks to a firmer yen in the wake of rounds of currency market intervention by Japan’s Ministry of Finance to sell dollars aimed at preventing the yen from depreciating sharply. The initial spike in crude oil prices and the impact of shortages of naphtha and other materials have moderated slightly from the previous month.
The government maintained its core assessment of global growth. “The world economy continues to show gradual recovery while some regions are showing weakness,” it said, “However, the uncertainty over the global economy including the situation in the Middle East continues.” Last month, it said the uncertainty was “growing.”
After downgrading the U.S. economy in the March report, the government upgraded its view on the world’s largest economy for the first time in more than two years, saying it is “expanding moderately,” compared to the previous statement that it was “expanding moderately, although showing weakness in some areas.” The official views are unchanged for the Eurozone, which is “showing signs of a pickup” and China that is still “slowing gradually.”
By contrast, the government downgraded its assessment of the German economy for the first time in 10 months in light of flat consumer spending and weak business investment, saying its pickup is “pausing.” Previously, it said Europe’s largest and the world’s third biggest economy was showing “signs of a pickup.”
Key points from the monthly report:
The government upgraded its assessment of exports for the first time in 16 months, saying they “have shown signs of a pickup.” Previously, it said exports were “largely flat.”
Trade data released this month showed Japanese export values rose 17.0% on the year to ¥9.5 trillion in May for a ninth straight rise on continued solid demand from Europe and a pickup in shipments to the key U.S. and Chinese markets as Japan’s economy has weathered the impact of stiff U.S. tariffs on the auto industry. Earlier, exports rose 14.8% in April to ¥10.5 trillion, the second-highest level on record, after having climbed 11.5% to a record high of ¥11.0 trillion in March.
The May increase was led by computer chips, automobiles and non-ferrous metals, roughly as seen in recent months. Auto shipments to the United States also rose compared to a year earlier when Japanese auto and steel industries were hit by stiff Trump tariffs.
The government maintained its core assessment of private consumption that accounts for about 55% of the GDP, saying that it is “showing signs of a pickup.” It left out the part about “softer consumer sentiment needs a close watch” but stopped short of upgrading its view on consumption.
Real average household spending continues to show a sluggish tone, marking a fifth straight year-on-year decline, down 0.5% in April, after a 2.9% slip in March, amid falling real wages for many workers. The decrease was led by declines in private university tuition fees and money sent to children studying away from home as well as lower electricity bills due to subsidies. It was partly offset by auto purchases, home repairs and maintenance and solid demand for air conditioners.
Autos and related items, a widely fluctuating category, pushed up overall spending by 1.42 percentage points after trimming overall expenditures by 2.82 points in March. Excluding home maintenance and repairs and other volatile items like vehicles and gift money, the core measure fell a sharper 2.0% (down 0.5% in nominal terms) in April after falling 1.3% (up a nominal 0.3%) in the prior month.
Overall, consumers have been cautious about spending beyond necessities amid slow recovery in real wages, trimming expenditures on eating out and gift money at weddings while they have paid higher medical and dental bills in recent months. Inflation is also hurting households. In the April report, spending on food rose 2.9% on year in nominal terms but dipped 0.6% after adjusted for inflation, led by lower purchases of grains, vegetables and sea weed. There is also a widespread move to switch to more affordable mobile communications plans.
The government continues to describe industrial production as being “flat.” The monthly economic report had been prepared before the May output data was released on Tuesday morning.
Japan’s industrial production posted its second straight rise in May, up a modest 0.5% on the month (consensus +1.3%), led by higher output at petrochemical plants and refineries, as the government is helping increase imports of crude oil and naphtha, the key material for producing plastics and resins, from the United States and other countries, bypassing the Middle East. The blockade of the Strait of Hormuz, the crucial passage for energy and commodities exports from the Mideast Gulf, had reduced factory output in Japan.
May’s increase follows April’s downwardly revised 0.5% rebound on a 0.4% dip in March. Overall, it reflects solid export demand for production machinery from Europe, global needs for computer chips and a pickup in shipments of vehicles to the key U.S. market.
Japan has increased crude oil imports from other regions to reduce its heavy reliance on the Middle East and the U.S.-Iran ceasefire agreement this month has led to the reopening of the Strait of Hormuz. But the blockade of the crucial pathway until recently choked off energy and commodities exports from the Mideast Gulf, causing shortages of naphtha and other materials and hurting output of plastics and resins used in vehicles, appliances and food packages.
The monthly survey by the Ministry of Economy, Trade and Industry indicated that output would rise 2.6% on the month in June, led by a rebound in the production of equipment to produce flat-panel displays, general machinery to make analytical instruments and electric/telecom products (laptop computers), all of which dropped in May. Factory output is projected to be flat in July.
Other details:
The government’s assessment of key components of the economy in the monthly economic report:
Private consumption is “showing signs of a pickup but softer consumer sentiment needs a close watch” (unchanged; upgraded in September 2025; downgraded in February 2024).
Business investment in equipment and software is “picking up” (unchanged; upgraded in April 2026; downgraded in November 2023).
Housing construction “has a weak undertone” (unchanged; upgraded in August 2024; downgraded in August 2025).
Public investment is “solid” (unchanged: upgraded in April 2026; downgraded in December 2025).
Exports are “largely flat” (the first upgrade in 16 months; last upgraded in February 2025; downgraded in July 2025).
Imports are “largely flat” (unchanged; upgraded in May 2025; downgraded in November 2025).
Industrial production is “flat” (unchanged; upgraded in May 2024; downgraded in Oct 2024).
Corporate profits are “showing signs of improvement but the Mideast situation needs a close watch” (unchanged; upgraded in February 2026; downgraded in August 2025).
Business sentiment is “largely flat but firms are cautious about their outlook and thus the situation in the Middle East needs a close watch” (unchanged; upgraded in December 2023; downgraded in April 2025).
The pace of increase in bankruptcies is “largely flat” vs. “rising” (the first upgrade in 17 months; last upgraded in January 2025; downgraded in October 2025).
Employment conditions are “showing signs of improvement” (unchanged; upgraded in June 2023; downgraded in May 2020).
Domestic corporate goods prices have been “rising” (unchanged; wording last changed in May 2025).
Consumer prices are “rising moderately” (unchanged; wording last changed in March 2026).