Japan’s Cabinet Office said in its July monthly report that the economy is recovering at a moderate pace, though risks from U.S. trade policy and other global uncertainties remain.
The report followed the signing of a trade deal between Tokyo and Washington that reduced tariffs on most Japanese goods, including automobiles, from a proposed 25% to 15%.
While the deal eased investor concerns and clarified the U.S. policy stance, officials in Tokyo warned that continued monitoring is needed. The government said the agreement cleared some uncertainty but still poses a potential drag on the export-led economy.
Export prices for Japanese cars to the U.S. have dropped since April due to the tariff changes, but officials said there has been no clear impact yet on export volumes, domestic prices, or employment. The Cabinet Office noted that while earlier concerns about a major economic downturn from U.S. trade actions have eased, the risk still exists.
The report also downgraded Japan’s export outlook for the first time in a year, pointing to lower shipments of semiconductor equipment to Taiwan and South Korea. Exports to the U.S. fell 11.4% in June, marking the third straight monthly decline, mainly due to weaker demand for cars, auto parts, and pharmaceuticals.
Exports to China dropped 4.7% in June, the fourth monthly decline, while exports to the European Union rose 3.6%.
The government kept its view on private consumption, which makes up more than half of GDP, saying it is picking up due to improving employment and income. Household spending rose 4.7% year-on-year in May, supported by rising vehicle sales and strong demand for dining and air conditioners.
The core measure of household spending rose 2.5% after a small decline the previous month.
On industrial production, the government maintained its view that it is flat. June output is forecast to rise only 0.1% after a 0.1% decline in May. Machinery, aircraft parts, and metals led earlier declines, while a rebound is expected in some sectors before pulling back again in July.
The trade balance recorded a surplus of ¥153.1 billion in June, the first positive figure in three months. Imports rose 0.2%, mainly due to drugs, smartphones, and semiconductors. Exports of non-ferrous metals and automobiles fell, partly due to tariff effects.
The Cabinet Office also revised its language on domestic corporate goods prices, saying growth is now slowing, compared to “gradually rising” in June. The change reflects the impact of energy subsidies and slower increases in food prices.
Inflation remains at 3.3% as of June, the second highest among G7 nations. The Bank of Japan is expected to keep interest rates unchanged at its July 30–31 meeting, continuing a gradual path toward policy normalization. Despite easing inflation, the BOJ remains cautious due to weak economic growth and limited domestic demand.
Globally, Japan said the world economy is recovering slowly, with growth pausing in some areas. The government kept its view of the U.S. economy as “slowing,” and described China’s recovery as “pausing.” It upgraded its assessment of Thailand and the Eurozone, both showing signs of a pickup.
