On July 1, the BOJ released the results of its Tankan survey conducted in June. The major point of focus was the extent of the impact on business sentiment of rising tensions in the Middle East and skyrocketing crude oil prices, which the previous survey in March had not been able to assess fully.
The business conditions (DI) for large manufacturers improved by five points over the March survey, and the DI for large non-manufacturing enterprises was also up by one point, despite the fact that both figures had been expected to worsen. Meanwhile, business sentiment for oil and coal products, chemicals, electricity, and gas also exceeded earlier expectations, despite predictions that higher costs stemming from the soaring crude oil prices would spur a significant downturn in all of these areas.
This better-than-expected result for corporate business sentiment may be a reflection of tailwinds created by the AI boom, improving conditions in the Middle East since June, and the impact of falling crude oil prices. In addition, it may have something to do with the fact that enterprises have been passing on their higher costs relatively seamlessly to those downstream, which in turn has prevented deterioration of corporate earnings.
With the business conditions (DI) for large manufacturers, the DI for input prices (current) rose substantially by 16 points over the March survey, and the DI for output prices was also up an impressive 12 points, suggesting that companies have been reflecting their own higher costs seamlessly in their prices. This suggests that the greater proportion of the impact of rising crude oil prices is ultimately being passed on to consumers, rather than being absorbed into corporate earnings.
Although the current business sentiment DI was more favorable than expected, the business sentiment DI forecast showed a downturn across the board for personal consumption-related foodstuffs, retail, services for individuals, travel accommodations, and restaurant services. Likely points of interest going forward include: how the negative impact of rising crude oil prices on corporate earnings will translate to a rise in consumer prices as costs continue to be passed on; and what adverse impact this will have on personal consumption.

Conditions in the Middle East seem to be moving in a positive direction, as exemplified by the memorandum of understanding reached in June between the U.S. and Iran toward a final agreement to resolve the ongoing hostilities. WTI crude oil futures, which at one point had climbed to $100 per barrel, have recently dropped significantly to around $70 per barrel.
With the prolonged closure of the Strait of Hormuz, Japanese companies have been on guard against the risk that procurement of crude oil and naphtha could reach a deadlock, which would deal a major blow to Japan’s economy. That possibility, however, now seems less threatening. Nevertheless, despite the recent drop in crude oil prices, domestic prices of everyday items and foodstuffs will take time to reflect the earlier sharp rise in crude oil prices, meaning that the costs of these items should begin climbing in earnest going forward.
Since April, we have seen sharp increases in the prices of items like trash bags, packaging materials, solvents, paints, and medical supplies. In June, the price of tires, which are rubber products, also rose conspicuously. From July onward, price hikes will become even more apparent and widespread, particularly for products derived from naphtha; detergents, shampoos, apparel using chemical fibers, and various plastic products are expected to see noticeable price increases as well.
Forecasts suggest that, starting in November, the Japanese people will begin to notice a gradual stabilization in pricing conditions reflecting the fall in crude oil prices. Yet, aside from certain products such as trash bags, a drop in price levels is unlikely, and the positive effects may go no further than a drop in the inflation rate.

Between January and May of this year, the CPI inflation rate (excluding fresh foods) remained at around 1% year-on-year, indicating that the historic high prices over the past several years have largely run their course. To some extent this can be attributed to transient price-constraining factors, such as electricity and gas subsidies or the rescission of provisional gasoline taxes, but it could also be a sign of the beginning of a moderation of the rising price trend for foodstuffs and so forth caused by the depreciating yen.
The dollar-to-yen exchange rate dropped from around 115 yen to the dollar in early 2022 to around 160 yen to the dollar in 2024, but this downward slide was then halted from going further. For this reason, starting in early 2026, the price hikes for foodstuffs etc. stemming from the weakening yen seemed to begin to taper off.
Immediately thereafter, though, the price of crude oil shot up with the escalation of tensions in the Middle East. As mentioned earlier, prices, especially for naphtha-derived products, are likely to begin rising in earnest between July and October, after which they may start to level off again toward year’s end. However, any further depreciation of the yen will reignite the upward pressure on prices, pushing back the day when these historic high prices finally recede and likely prolonging the damage to personal consumption.
If the yen continues to depreciate, import prices will rise, which will mean a higher domestic inflation rate; but at the same time, inflation is a factor behind the yen’s depreciation because it ultimately weakens the value of the currency. The weak yen further fuels inflation, creating a link between the yen’s depreciation and high prices. This may be the main reason the excessive downturn in the yen has persisted for so long.

According to the Cabinet Office’s “Short-term Japanese Economic Macro-econometric Model” (2022 edition), a 10% depreciation of the yen would push prices up (personal consumption deflator) by a cumulative 0.27% over a three-year period.
Meanwhile, according to the Family Income and Expenditure Survey, consumption expenditures in 2025 for four-person households came to 4,474,932 yen for the year. If a 10% depreciation of the yen leads prices to increase by 0.27% (and stay at that level), then even if households continue the same consumption behavior, their consumption expenditures will rise by 0.27% per year. If we think about that in terms of the increased household burden caused by persistently higher prices and the weak yen, it comes to 12,082 yen on an annual basis.
Now consider, for the moment, the possibility that any acceleration of the yen’s slide could drop the currency’s value to around 170 yen per dollar. If we suppose that the dollar-yen exchange rate depreciates by 6.3%, moving from 160 yen to 170 yen to the dollar, then a pro-rata calculation based on the impact of a further 10% depreciation (0.27%) finds an increase of 7,551 yen in the annual household burden.
Furthermore, my calculations show that the yen’s 39.1% depreciation, which took it from around 115 yen to the dollar back in early 2022 (when it rapidly began to lose value) to the recent level of around 160 yen to the dollar, has added 47,241 yen to the burden on households (this being the annual household burden increase versus what that burden would have been had the yen not depreciated from 2022 onward).
Thus, the yen’s recent downward slide has placed a heavy burden on households. Should the yen continue to lose value, that burden will only rise further, and this, together with the impact of high crude oil prices, could make it impossible for the strain to be offset easily even through inflation countermeasures such as cutting the consumption tax on foods.

In the one month after the end of April, the government embarked on a massive dollar-selling, yen-buying intervention to the tune of approximately 11.7 trillion yen. However, the effects of this move in terms of remedying the yen’s decline were not long-lived.
The chance that the government will undertake another such intervention in the near future appears relatively high, but it is unclear whether even this could halt the yen from spiraling further downward. In the worst case scenario, if the yen’s value continues falling to around 170 yen to the dollar, the defensive line the government is assumed to be holding may be forced to retreat from around 160 yen to 170 yen to the dollar — in other words, the may have no choice but to allow another 10-yen drop in the exchange rate.
A factor of recent interest in relation to the strong dollar/weak yen trend is the expectation that the U.S. Federal Reserve Board (FRB) may raise policy interest rates. In addition, speculation in financial markets about the Japanese government’s policies also may be exacerbating the depreciation risk to some degree. By this, I am referring to expectations that the government will seek to rein in the BOJ’s interest rate hikes, as well as fears of fiscal deterioration.
The draft of the Basic Policies (economic and fiscal policies) formulated every year by the government was amended to include content which could be read as intended to restrain the BOJ’s rate hikes, and this has reinforced expectations in financial markets that the BOJ may delay raising interest rates, thus amping up the pressure around the yen’s depreciation.
Moreover, the government has indicated that its policy is to lower the consumption tax rate on foodstuffs and to promote public-private investments in 17 strategic areas, but no concrete explanation has been given as to where the funding will come from, and the policy essentially amounts to a revision of fiscal consolidation targets. Given the foregoing, fears are rising in financial markets about possible fiscal deterioration ahead, which also seems to be partly driving the yen's ongoing depreciation.
One also gets the sense that the government is displaying somewhat contradictory behavior by seeking to halt the yen’s slide through a currency intervention (or “lip-service” intervention) while also directly elevating the risk of further depreciation through its policy stance.

Generally speaking, the scale of government currency interventions tends to be relatively small compared to the overall volume of transactions in currency markets, and for this reason, a currency intervention would have little chance of substantially impacting the direction those markets take. A currency intervention is a “time-buying” policy measure, made in the hope that, in whatever time the measure can buy, the economic fundamentals will change and lead currency developments in the desired direction.
However, if the government’s currency interventions and the BOJ’s financial policies move in lockstep, they can be expected to have certain effects toward halting the yen’s depreciation. Yet in the recent lower house election, Prime Minister Takaichi made remarks stressing the advantages of a weak yen, and financial markets took this to suggest that she may not have any strong intention to arrest the yen’s downward slide. Meanwhile, there is also the persistent view that the government is restraining the BOJ from raising interest rates out of concern for the potential deleterious effects on Japan’s economy.
For these reasons, it appears right now that the financial markets believe conditions do not allow for close cooperation between the government and the BOJ to prevent a drop in the yen, and that this belief, in some respects, is perpetuating the yen’s downward trend.
The key to preventing further depreciation would seem to be for the government to push a fiscal soundness policy and strive to improve market confidence through fiscal policy management, while also respecting the BOJ’s monetary policies and working closely with the Bank to stabilize the currency markets. In the interest of bringing stability to people’s daily lives, the government needs to use these initiatives as a mechanism to prevent further damage to the yen and gradually weaken the linkage between the yen’s depreciation and inflation that has persisted these past several years.