Sentiment toward the yen has also been dampened by concerns over Prime Minister Sanae Takaichi’s fiscal policy, while escalating US-Iran tensions have intensified worries about Japan’s energy security, given the country’s heavy dependence on imported fuel. At the same time, Japan’s headline inflation accelerated to a six-month high in June, reinforcing expectations for further interest rate hikes.

The yen has declined 0.8% so far this week, putting it on course for its worst weekly performance since May, when it weakened following Japan’s record-sized currency intervention.

The stronger greenback erased gains in the Aussie that followed better‑than‑expected domestic employment data, even as the jump in oil prices strengthened the case for another Reserve Bank of Australia rate hike. Interest rate markets now assign roughly a 40% probability that the RBA will raise the 4.35% cash rate in August, up from about 10% only a few weeks earlier, with a move by November almost fully priced in. Investors are now looking ahead to next week’s release of second‑quarter inflation data for further guidance on the policy outlook.

On the monetary policy front, surging energy prices driven by mounting tensions in the Middle East, together with a still-robust US labor market, strengthened expectations for further policy tightening. Swap markets are now pricing in a 34% probability of a Federal Reserve rate hike next week, at least one additional increase by September, and the possibility of another move before year-end.

Sentiment was further hit by a selloff in technology stocks after disappointing earnings from major US firms, pressuring South Korean chipmakers in particular. In addition, newly announced US tariffs of up to 12.5% on South Korea and other trading partners over forced labor concerns fueled uncertainty about the country’s export outlook. Among index heavyweights, Samsung Electronics (-3.6%), SK hynix (-3.1%), SK Square (-6.1%), Hyundai Motor (-6.1%), LG Energy Solution (-3.7%), and KB Financial Group (-5.0%) all finished lower.

The moderation was driven by a slight decline in non-landed property prices (-0.1% vs. +1.3% in Q1). This was largely due to weaker prices in the Rest of Central Region (-1.2% vs. +0.8%) and the Outside Central Region (-0.1% vs. +2.2%), partially offset by stronger price gains in the Core Central Region (1.8% vs. +0.6%). In contrast, landed property prices rebounded, rising 2.5% after a 0.4% decline in the previous quarter.

The government reiterated its commitment to maintaining a high and steady supply of private housing. A total of 4,745 units will be launched under the Government Land Sales Programme in the second half of 2026, and about 60,600 private residential units are expected to be completed in the coming years.

On the macroeconomic front, Japan’s headline inflation accelerated to 1.7% in June from 1.5% in May, its highest level in six months, reinforcing expectations that the Bank of Japan may deliver additional interest rate hikes.

Technology and AI-linked stocks led the declines, with notable losses in Kioxia Holdings (-3.1%), Advantest (-3.9%), SoftBank Group (-5.1%), Tokyo Electron (-2.0%), Taiyo Yuden (-3.4%), Lasertec (-1.2%), and Murata Manufacturing (-2.1%).

Despite Friday’s pullback, the Nikkei 225 remains up more than 1% for the week and is on track for its first weekly gain in three weeks.

On the pricing front, input cost inflation continued to soften. However, firms increased output prices at the fastest rate in more than 12 years, underscoring sustained efforts to pass higher costs on to customers.

Looking ahead, business confidence weakened amid ongoing uncertainty related to the war in the Middle East—particularly its effects on energy and raw material prices—as well as persistent supply chain disruptions.

Employment increased at a quicker pace, while purchasing activity expanded at its fastest rate in over four years, contributing to higher input inventories amid ongoing supply chain disruptions and elevated costs associated with the conflict. Stocks of finished goods also increased, registering their first rise in two years.

On the price front, input cost inflation moderated, and output price inflation slowed to a three‑month low. Business sentiment strengthened to its highest level in four months, supported by expectations of new product launches and firmer demand, particularly in the AI and semiconductor sectors.

Manufacturing output accelerated at its fastest pace since 2014, even as growth in the services sector moderated. Overall new orders increased at a slower rate, reflecting softer demand for services, although new export business rose at the quickest pace in four months.

Employment continued to expand for a 34th straight month, with the pace of job creation broadly unchanged. However, capacity pressures intensified, as backlogs of work accumulated at the fastest rate since February’s record high.

On the price front, input cost inflation slowed to its weakest level since April but remained elevated, amid persistent supply and energy cost pressures linked to conflict in the Middle East. Firms raised output charges more aggressively, while business sentiment deteriorated from June, dampened by concerns over energy and raw material costs, as well as ongoing supply chain risks arising from geopolitical uncertainty.

On a quarter-over-quarter comparison basis, the “actual” figure reflects the change in the current quarter (Q1 2026) versus the previous quarter, while the “previous” figure captures the change in the prior period (Q2 2026) relative to its preceding quarter. The softer pace of price appreciation in Q1 2026 suggests a cooling in momentum compared with the stronger gains seen in the earlier reference period.

The July 2026 reading, updated on 24 July 2026, remains above the 50-point threshold that separates expansion from contraction, indicating that activity in Japan’s services economy is still growing, albeit with a modest loss of momentum compared with June. The marginal decline suggests that while demand conditions remain supportive, the pace of improvement has cooled somewhat over the month.

Investors and policymakers will be watching upcoming releases to determine whether July’s easing points to a temporary pause in services-sector strength or the start of a more sustained moderation in growth. For now, the latest data continue to signal resilience in Japan’s services industry through mid-2026.

At the same time, cereal prices declined for a second consecutive month (-2.5% vs -0.9%), while fresh fruit remained in deflation (-0.9% vs -1.6%). In contrast, inflation picked up for several categories: fish and seafood (6.9% vs 5.5%), meat (4.3% vs 3.5%), dairy products and eggs (4.6% vs 3.6%), oils, fats, and seasonings (4.2% vs 3.9%), alcoholic beverages (0.4% vs 0.2%), and meals eaten out (1.2% vs 1.0%).

Among staple foods, rice prices fell 8.7% from a year earlier, declining for the second month in a row and posting the steepest drop since August 2015.

The shift from strong net buying to net selling suggests a notable cooling in foreign appetite for Japanese equities over the latest period. While no additional details were provided on the underlying drivers, the data highlight a clear change in sentiment, with international investors scaling back exposure after a previously strong accumulation phase.

Market participants will be watching subsequent releases closely to determine whether this move marks the beginning of a more sustained retrenchment from Japanese stocks or a short-term adjustment following earlier heavy inflows.

The indicator for foreign bond buying fell from a previous reading of ¥1,090.0 billion to -¥714.4 billion, marking a swing of around ¥1.8 trillion. This negative figure indicates that, over the latest period measured, Japanese investors sold more foreign bonds than they purchased, cutting back their exposure to overseas fixed-income assets.

The abrupt turnaround from strong net buying to sizeable net selling may reflect changing market conditions and investor positioning, with participants reassessing yield differentials, currency dynamics, and global interest-rate trends as they adjust their foreign bond portfolios.

Additional upward pressure came from several categories: transport (2.4% vs 1.9% in May), housing (1.0% vs 0.9%), clothing (steady at 1.7%), household goods (2.4% vs 2.2%), healthcare (1.3% vs 0.0%), recreation (1.5% vs 1.7%), and miscellaneous items (0.3% vs 0.2%). In contrast, education costs remained in deflation at -6.0%, compared with -6.1% previously.

Food prices increased 3.2% year-on-year, easing from 3.5% in May and marking the slowest pace since July 2024, as rice prices declined for the second consecutive month. Core inflation, which excludes fresh food, edged up to 1.6% from 1.4%, in line with market expectations and reaching its highest level since March. Nonetheless, it stayed below the Bank of Japan’s 2% target for the fifth consecutive month.

Despite the uptick, core inflation remained below the Bank of Japan’s 2% target for a fifth consecutive month, as government fuel subsidies continued to cushion the impact of higher oil prices stemming from tensions in the Middle East.

The CPI measure that excludes both fresh food and fuel—closely monitored by the Bank of Japan as a better indicator of demand-driven inflation—climbed 1.7% year-on-year in June, its slowest increase since August 2022.

At its June meeting, the Bank of Japan raised its policy rate by 25 basis points to the highest level since September 1995, and the second hike since last December, aiming to prevent rising oil prices from feeding through more broadly into inflation.

The Treasury noted that although nominal wages have risen significantly, inflation is still eroding households’ purchasing power, highlighting the need for further policy normalization. The comments came as the yen fell to a new 40-year low against the U.S. dollar on Thursday, intensifying market expectations that Japanese authorities may intervene in the foreign exchange market after repeatedly warning they would act against excessive currency moves.

The comparison is based on changes from one month to the next: June’s “actual” reading reflects price movement versus May, while May’s “previous” figure captures the change from April to May. The shift from 0.5% to 0.0% indicates that price momentum faded in June, with overall consumer prices neither rising nor falling compared with the prior month. Investors and policymakers will be watching subsequent releases closely to gauge whether this pause signals a temporary easing of inflation pressures or the start of a more persistent trend of price stability.

The comparison is made on a month-over-month basis, with June’s 0.3% gain measured against May and the previous 0.4% rise reflecting price changes from April to May. The back-to-back moderation suggests that while prices are still rising, the pace of monthly increases has softened heading into the summer.

For policymakers and markets, the latest CPI reading reinforces the picture of a gradual pullback in inflationary pressure rather than a sharp reversal, potentially influencing expectations for the timing and scale of any future policy adjustments in Japan. /body

On a year-over-year basis, the June reading compares the price level with June of the previous year, while May’s 1.5% figure reflects a comparison with May a year earlier. The uptick from May to June suggests a gradual strengthening in consumer price growth, which may factor into expectations for monetary policy and wage negotiations in the months ahead.

The move from 1.5% to 1.7% marks a continuation of inflation running above ultra-low levels seen in earlier years, keeping investors and policymakers focused on how sustained the current price dynamics will prove in the broader context of Japan’s economic outlook.

Both the June and May readings are based on year-over-year comparisons, with the actual figures reflecting price changes relative to the same month a year earlier. The move from 1.4% to 1.6% suggests that, while inflation pressures remain contained, underlying price momentum in Japan is strengthening at the margin.

For markets and policymakers, the gradual rise in national core CPI will be closely watched as an indicator of how firmly inflation is taking hold in the economy, and whether the trend can be sustained without eroding household purchasing power or destabilizing price expectations.