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Rising US long-term real yields point to strong demand for investment funding

Sandy Batten

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The Conference Board’s index of Consumer Confidence fell 1.4 points to 90.8 in July from an upwardly revised 92.2 in June (previously 91.2). The overall index has generally trended down from a reading of 112.8 in November 2024. The Action Economics Forecast Survey looked for a reading of 92.3 in July. The July decline was due entirely to a gloomier view of present conditions. The Present Situation index fell to 114.9 in July from 118.5 in June, the third consecutive monthly decline and the lowest reading since February 2021. By contrast, the Expectations index was unchanged at 74.7. The survey period for today’s report was July 1-22.

The pessimism over the state of the economy was markedly larger in the under 35 years age group with confidence dropping to 100.7 in July, the lowest reading since January 2021, from 114.1 in June. Confidence also fell in the over 55 years age group, but by much less, slipping to 76.8 from 79.7. By contrast, confidence in the 35-55 years age group jumped up to 97.6 from 90.4 in June, the highest reading since last October.

Notwithstanding the breakdown of the Memorandum of Understanding between the US and Iran during July, inflation expectations for the year ahead fell for the third consecutive month to 4.5% in July from 4.9% in June and 5.3% in April, which had reflected the initial escalation of the US-Iran conflict. Inflation expectations had soared to a recent high of 5.9% in April 2025 after significant tariff increases were announced. Prior to the pandemic, inflation expectations were generally around 4%.

Assessment of labor market conditions softened further in July as indicated by a further decline in the labor market differential (the percentage of respondents who think that jobs are plentiful minus the percentage who think that jobs are hard to get). Respondents still have a slightly favorable view of the labor market as the percentage thinking jobs are plentiful (24.6%) still exceeds the percentage thinking that jobs are hard to get (21.5%). However, that differential slumped to 3.1% in July from 3.8% in June and 5.0% in May. This was the lowest reading since February 2021. The correlation between the labor market differential and the BLS’s unemployment rate over the past 15 years has been -0.78. Thus, the recent decline in the labor market differential points to increases in the overall unemployment rate.

Respondents generally felt that business conditions had deteriorated in July with the percentage considering conditions to be good falling to 18.9% from 20.2% in June while the percentage considering conditions to be bad increasing to 17.8% from 16.5% in June. Furthermore, the respondents expressed similar feelings about the coming six months with the percentage expecting business conditions to improve falling to 17.8% from 18.9% in June while the percentage expecting conditions to worsen rose to 21.1% from 20.7%.

The Consumer Confidence data are available in Haver’s **CBDB** database. The total indexes, which are indexed to 1985=100, appear in **USECON**, and market expectations are in **AS1REPNA**.

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- The Conference Board’s measure of consumer confidence fell to 90.8 in July from 92.2 in June, continuing its downtrend since early last year.
- The Present Situation index fell to 114.9, its lowest reading since February 2021. The Expectations index was unchanged at 74.7.
- Inflation expectations one year ahead fell to 4.5% in July from 4.9%.
- The labor market differential fell to 3.1% in July, its lowest level since February 2021, from 3.8%, pointing to further softening of labor market conditions.

U.S. Consumer Confidence Continues Downtrend in July

Winnie Tapasanun

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The U.S. international trade deficit in goods narrowed to a larger-than-expected $101.46 billion in June after widening to $105.89 billion in May (the largest since March 2025), according to the advance estimate from the U.S. Census Bureau. The June reading marked the second narrowing in the goods trade deficit in three months, still exceeding an $84.17 billion shortfall in June 2025. A deficit of $99.0 billion for June had been expected by the Action Economics Forecast Survey. The deficit reached a low of $61.44 billion in October 2025 (the smallest since February 2020) and a record high of $158.73 billion in March 2025. On a quarterly basis, the deficit averaged $96.53 billion in Q2'26, the largest since Q1'25, versus $81.96 billion in Q1'26.

Total goods exports declined 1.8% m/m (+14.8% y/y) to $204.70 billion in June, the lowest level since January, following a 5.3% drop to $208.50 billion in May and a 4.1% gain to a record-high $220.11 billion in April. However, exports were up 25.9% from a June 2023 low. The m/m decline in exports in June reflected drops of 4.4% (+31.3% y/y) in industrial supplies & materials, 3.1% (+11.5% y/y) in foods, feeds & beverages, 2.8% (+12.3% y/y) in other goods, and 1.1% (+10.9% y/y) in capital goods excluding autos. To the upside, exports of automotive vehicles & parts (+5.1%; -0.5% y/y) and nonfood consumer goods excluding autos (+3.2%; -7.2% y/y) rose m/m in June.

Total goods imports fell 2.6% m/m (+16.6% y/y) to $306.17 billion in June, the first monthly fall since January, after a 4.0% rise to $314.40 billion in May (the highest level since the March 2025 record high of $340.11 billion). Nevertheless, imports were up 22.1% from a March 2023 low. The m/m fall in imports in June was broad-based across all end-use categories, led by a 6.3% drop (+16.3% y/y) in other goods, followed by declines of 3.8% (-0.3% y/y) in nonfood consumer goods excluding autos, 2.5% (+1.9% y/y) in automotive vehicles & parts, 2.5% (-1.3% y/y) in foods, feeds & beverages, 2.0% (+37.4% y/y) in capital goods excluding autos, and 1.9% (+15.0% y/y) in industrial supplies & materials.

The advance international trade data can be found in Haver's **USECON** database. The expectation figure is from the Action Economics Forecast Survey, which is in **AS1REPNA**.

- Deficit: $101.46 bil. in June, down $4.43 bil. (-4.2%) from May’s $105.89 bil.
- Exports -1.8%, second straight m/m decline to a five-month low, driven by a 4.4% drop in exports of industrial supplies & materials.
- Imports -2.6%, first m/m decrease since Jan., w/ all end-use import categories down, led by drops of 6.3% in other goods and 3.8% in nonauto consumer goods.

U.S. Goods Trade Deficit Narrows in June from May’s 14-Month High

Robert Brusca

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Household confidence in France improved in July, rising to 86.4 from 84.3 in June. Confidence was last higher in March, and the average for confidence over the last 12 months is 87.7. The July value, despite its climb, is still below that average; confidence is still weak in a historic context. According to data back to 2001, the current confidence metric in July has a 16.2 percentile ranking, an extremely weak reading. The mean of confidence readings back to 2001 is 95.1. The July reading is nearly nine points below that.

**Weak but improved living standards readings**: Living standards in July improved slightly compared to June. The assessment of the last 12 months is -79 compared to -81 previously. However, the 12-month average is a rating of -74; the July reading is still short of that. Looking to the next 12 months, living standards are expected to improve; the reading of -59 in July compares to -65 logged a month ago. It compares to a 12-month average of -61. The expectation for living standards over the next 12 months is higher than it has been on average for the last 12 months, although the reading itself is still quite weak. The standing in its 10th percentile for a current rating at -59 is below its full-period average of -38.

**Fewer unemployment worries**: Unemployment over the next 12 months is expected to be less of a concern, but the reading in July drops to 55 from 61 in June; however, the July reading is still above the 12-month average of 52. The ranking for unemployment concerns has a 72nd percentile standing, putting it in the top third of its historic range of readings.

**Inflation fears drop, comparatively**: Price developments show that over the past 12 months inflation has been a concern, with the July reading falling relative to June to 17 from 22, but this reading is much higher than its 12-month average of +2. However, looking to the next 12 months, the July reading is -33 compared to -15 in June, and it compares to -20 on average over the last 12 months. Inflation expectations are for conditions to show weaker inflation pressures. The ranking of the July reading is at its 44th percentile, below its historic median; the medians on rankings occur at a ranking of 50. Of course, all these readings will be dependent on how oil prices evolve.

**Saving/spending**: Both the favorability and the ability to save improved in July compared to June; both readings in July are above their respective 12-month averages. The rankings of these observations are around their high 90th percentiles; for the favorability to save, the reading is the highest in the whole period back to June 2001. The ability to save is often not a good reading but rather one that reflects consumer defensiveness, and we see that as we move to the next metric, the favorability to make a major purchase. In July, that reading improved to -36 from -38 in June, but it's weaker than its 12-month average of -31.8. In historic context, it's extremely weak and has an 8.3 percentile standing. So, the favorability to make a major purchase is in the lower 10th percentile of all monthly observations back to June 2001, indicating considerable consumer defensiveness.

**Financial situation**: The financial situations over the past 12 months and projected over the next 12 months show slightly improved readings compared to June. The past 12 months reading is weaker than its 12-month average, while the expectation for the next 12 months is the same as its 12-month average. The rankings of the two financial situations are just below their respective 40th percentiles, placing them about 10 percentile points below their historic medians.

**Summing up**
The consumer in France sees some improvement in July, and conditions remain mixed across these various components. But most of the rankings for the components are quite weak, with the exception being concerns about unemployment and the favorability to save, which was a defensive reading. The weighting scheme for this survey gives us a slightly more positive read on the month, but it's clear that the French consumers are still concerned about economic conditions and the future.

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France

French Household Confidence Improves

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New orders for durable goods increased a weaker-than-expected 0.3% m/m in June, the third monthly gain in four months, following an upwardly revised 4.0% decline in May (-4.5% initially) and an 8.5% advance in April (unrevised), according to today’s advance report from the U.S. Census Bureau. The Action Economics Forecast Survey had expected a 2.1% m/m June increase. The year-on-year rate accelerated to +7.4% in June from -3.0% in May (+10.9% in June 2025), remaining positive since January 2025 except for May. Excluding transportation, durable goods orders rose 0.6% (11.0% y/y) in June, the 14th straight m/m rise, after a 1.8% increase in May. Durable goods orders excluding defense grew 0.3% (5.7% y/y) following a 4.3% May drop.

The m/m increase in June durable goods orders was driven by a 3.7% m/m rebound in orders for nondefense aircraft & parts, following a 51.1% plunge in May and a 167.4% surge in April. Orders for defense aircraft & parts fell 7.2% (+46.8% y/y), the first m/m decline since January, after gains of 8.9% in May and 2.4% in April. Orders excluding aircraft climbed 0.3% (11.0% y/y), the seventh consecutive m/m rise and the 11th in 12 months, on top of a 1.4% May increase.

Durable goods orders for transportation declined 0.2% (+1.1% y/y) in June following a 13.5% drop in May and two successive m/m gains. In addition to June’s m/m rebound in nondefense aircraft orders and decline in defense aircraft orders, motor vehicles & parts orders slid 0.6% (+10.3% y/y), the first m/m slide since November, after a 1.1% May increase. Orders for computers & electronic products advanced 3.1% (16.7% y/y), the ninth m/m gain in 10 months, building on a 1.2% May rebound. Orders for primary metals rose 1.1% (17.6% y/y), the seventh straight m/m increase, after a 4.2% May gain. Orders for electrical equipment, appliances & components rose 0.9% (6.7% y/y), the fourth consecutive m/m rise, following a 0.2% May increase. Orders for all other durable goods grew 0.2% (3.4% y/y), the 10th straight m/m gain, after a 0.7% May rise. Meanwhile, orders for fabricated metal products fell 0.5% (+10.6% y/y) in June after two successive m/m increases. Machinery orders dipped 0.1% (+14.4% y/y), the first m/m easing since February 2025, following a 2.8% May gain.

Capital goods orders rebounded 1.1% (3.8% y/y) in June, the third m/m rise in four months, following a 13.0% decrease in May. Nondefense capital goods orders rose 1.2% (-1.1% y/y), the second m/m gain in three months, after a 15.3% May drop. Core capital goods orders (i.e., nondefense capital goods orders excluding aircraft) rose 0.9% (12.5% y/y), the fourth m/m gain in five months, following a 1.9% May recovery. Defense capital goods orders increased 0.5% (31.6% y/y), up for the fourth time in five months, after a 1.6% May decline. Notably, core capital goods shipments (core capex shipments)—a reliable coincident indicator of business spending on equipment in the national accounts—rose 1.9% (9.3% y/y), the ninth m/m rise in 10 months, after a 0.2% May increase.

Shipments of all manufactured goods fell 0.3% (+8.0% y/y) in June, the first m/m fall since November, following a 1.6% gain in May. Durable goods shipments rose 0.7% (9.0% y/y), the seventh straight m/m rise, after a 1.1% May increase. Nondurable goods shipments declined 1.3% (+7.0% y/y), the first m/m decrease in seven months, following a 2.1% May gain.

Unfilled orders of durable goods increased 0.6% (8.2% y/y) in June after a 0.7% rise in May. Excluding transportation, unfilled orders rose 0.9% (5.3% y/y) following a 1.0% May advance. Both series posted the 11th consecutive m/m increase.

Manufacturing inventories edged up 0.1% (1.8% y/y) in June, the eighth successive m/m gain, after a 0.2% rise in May. Durable goods inventories grew 0.3% (2.2% y/y), the ninth straight m/m increase, after a 0.1% uptick in May. Nondurable goods inventories, however, fell 0.3% (+1.1% y/y), the first m/m decline since January, after rising 0.4% in May and April.

Manufacturers’ orders and shipments of durable and nondurable goods, along with unfilled orders and inventories, are compiled by the U.S. Census Bureau. They are available in Haver’s **USECON** database. The Action Economics forecast data are in the **AS1REPNA** database.

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- June headline orders +0.3% m/m, third rise in four mths.; +7.4% y/y, positive since Jan. ’25 except for May (-3.0%).
- Nondefense aircraft & parts +3.7% m/m vs. May’s -51.1%; defense aircraft & parts -7.2% m/m, first drop since Jan.
- Transportation orders -0.2%, second consecutive m/m decline; orders ex transp. +0.6%, 14th straight m/m gain.
- Computers & electronic products +3.1%, ninth increase in 10 mths.
- Core capital goods shipments +1.9%, ninth gain in 10 mths., pointing to a moderate contribution to Q2’26 GDP from business equipt. spending.
- Durable goods shipments +0.7%; unfilled orders +0.6%; inventories +0.3%.

U.S. Durable Goods Orders Rebound Less Than Expected in June

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**Money works with a lag but sometimes it’s reported with a lag too**: U.S. and U.K. money supply data lag the results for the monetary union and for Japan by one month. Monetary trends currently based on the most up-to-date data, which are either May or June depending on the country we're looking at, show that three-month money supply growth, and credit growth in the case of the monetary union, have slowed compared to six months, except in the case of Japan. In Japan, for the six-month and three-month growth rates are identical at 1.9% overall; growth rates are lower over three months and six months compared to 12 months.

**Real money balances**: The growth rate of real money balances shows the step-down in growth in the monetary union from 1.6% over 12 months to a 1% annual rate over six months to a 0.6% annual rate over three months. Over the same sequence of dates, private credit in the monetary union has gone from 1.2% over 12 months to a pace of 1.4% over six months, and then down to 1.1% over three months. In the U.S., money growth over this period has decelerated from 2.5% over 12 months to 2% at an annual rate over six months to -0.4% over three months annualized. The U.K. shows a slightly different pattern for real money balances that grow 2.4% over 12 months, accelerate to 3.4% annually over six months, but then back down to a 1.6% annual rate over three months, showing a net deceleration from 12 months to three months but with an intervening bulge. In Japan, the money growth slowdown is monotonic, from 0.5% over 12 months to a 0.3% pace over six months to a -1.2% pace over three months.

**Pattern reversal**: Nominal money growth, which had shown some acceleration early in the year, is now beginning to show deceleration, and this is before central banks have generally begun to raise rates, although there have been ongoing rate increases of a slight amount in Japan and also the start of a tightening cycle in the European Monetary Union. In the U.S., there's a new head of the central bank and policies there are expected to shift, but the jury is out on what to expect, as is often the case with a new chairman. There are a variety of views on what he plans to do; he will most likely make his reputation by what he in fact does rather than by what he says about what he intends to do. On balance, growths in the U.S., the monetary union, and Japan are all showing deceleration with a slight exception from the U.K. But generally speaking, money supply no longer is showing a moderate disturbing acceleration pattern; in real terms, money growth has lost a great deal of steam, particularly in the U.S. and Japan, where three-month growth rates of real money balances are declining and show negative rates of growth.

**Summing up**
These are new trends, and they are not much talked about in markets because markets don't speak the language of money supply growth much anymore. However, it's a good idea to continue to look at money supply and what it does. Just because central banks aren't targeting money doesn't mean that it isn't relevant anymore; it just means that central banks have put their attention someplace else. At present, central bankers seem to be arguing about where their attention should be. It could be a good time for us to keep close tabs on what money supply is doing.

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An Update on Withering Money Growth Metrics

Tian Yong Woon

In this week's Letter, we trace three threats converging on Asia's inflation outlook. The first is renewed US tariffs, with the latest salvo of duties imposed over alleged forced labour issues. That move is widely seen as a replacement for the now-expired Section 122 tariffs, with only mild incremental effects from the new Section 301 duties. Set against that, the US effective tariff rate has pulled back from its 2025 highs in recent months (chart 1). The second is the Strait of Hormuz, where the re-escalation of US-Iran tensions has once again reduced shipping volumes to a trickle. Crude oil prices have been driven up as a result (chart 2). It could have been worse, were it not for China's sharply reduced crude imports over the period (chart 3). Arguably, though, at least part of that reduced intake simply reflected the absence of supply from the Strait. The third is the ongoing El Niño event, which several authorities have warned will likely be the largest on record (chart 4). It risks disrupting food crop yields, among other effects, channelling a price shock through food supply. Together these pressures threaten to upend the pullback in commodity inflation seen in recent months (chart 5), once again complicating policymaking. As an aside, we also explore economy-specific political developments that are brewing or could become an issue further down the road. One is the recent resignation of Indonesia's central bank governor, which came amid protracted rupiah weakness (chart 6) and concerns about fiscal health.

**Tariff trouble**
Recent US forced labour tariffs have revived concerns, pushing the tariff theme back to the fore. The US imposed additional Section 301 duties of 10% or 12.5% on imports from 60 investigated economies, effective 24 July 2026. These followed USTR investigations into those economies' failure to impose and enforce prohibitions on goods produced with forced labour. They took effect the same day the temporary 10% Section 122 global surcharge expired by statute, and are seen as its replacement. Yet overall US effective tariff rates, calculated as duty as a percentage of the respective dutiable value, have pulled back significantly from their 2025 highs (chart 1). That retreat began with the numerous bilateral trade deals the US eventually struck with many of its trading partners. It went further in February, when the Supreme Court struck down President Trump's tariffs imposed under the International Emergency Economic Powers Act (IEEPA). That ruling dented the overall impact of US tariffs on its trading partners, with possible tariff refunds still in the works. Cutting the other way, the Section 122 surcharge had partially raised overall rates while it ran. Even so, some estimates suggest the new duties will only marginally increase US effective tariff rates on its trading partners.



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**Strait trouble**
Tariff concerns have not resurged in isolation. Worries about the US-Iran conflict have returned alongside them, along with their consequences for shipping flows and crude oil prices. Those flows are the starting point, and shipping volumes through the Strait of Hormuz have tumbled once more, reduced again to a trickle (chart 2). Crude prices have followed, surging towards their post-conflict highs, with Brent flirting with $100/bbl. Against that, some interim reprieve may have come from the pause in strikes between the US and Iran, which followed 13 straight nights of US attacks. A pause is not a reopening, however, and the key metric remains the flow of goods, and especially energy, through the Strait. Those flows have not yet recovered to anywhere near pre-crisis levels. Resolving them is what the talks now under way between Oman and Iran are meant to address.

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A less appreciated point amid the US-Iran flare-up and the subsequent surge in oil prices is that it could have been considerably worse. One reason concerns China, whose crude oil imports fell sharply after the conflict broke out (chart 3). That absence of demand was partly involuntary, since little crude was flowing through the Strait in any case. Even so, it likely alleviated much of the price surge that would otherwise have occurred. Over the same period, China's exports of refined petroleum products also tumbled. That decline was driven by the authorities' fuel export restrictions, imposed in March soon after the conflict began. Those restrictions were largely lifted only recently, after the US and Iran reached a ceasefire and the Strait reopened. Now that the situation has escalated again, how long the lifting holds remains to be seen. The broader question is how long China can sustain such sharply reduced crude imports. That turns on the size of the reserves it can draw upon, and those figures are undisclosed, with external estimates carrying wide uncertainty.

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**Climate trouble**
Adding to investor and policymaker concerns is the ongoing El Niño event, which has already formed. Recent Southern Oscillation Index readings offer one line of evidence (chart 4). Agencies such as the US National Oceanic and Atmospheric Administration (NOAA) have confirmed the event separately. Many authorities warn that this year's event is set to be the largest on record. That points to more severe effects than previously seen, from sharply higher global temperatures to flooding and landslides. Crop yields would be among the casualties, and the resulting disruption ultimately amounts to economic losses. Those losses look unlikely to be confined to 2026, since the current Super El Niño is expected to stretch well into next year.

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**Converging on inflation**
Bringing it all together, three pressures now converge on the inflation outlook. First is a resurgent oil price shock from renewed US-Iran tensions. Layered on top are the potential knock-on effects from the Super El Niño pattern, which run through food crop yields and subsequently food prices. Renewed US tariffs add a third, milder push. Together they threaten to upend the pullback in commodity inflation seen in recent months (chart 5), once again complicating policymaking. That threat has further to run, since the worst of the El Niño price surge may not yet have materialised in full. Should the oil shock persist or worsen alongside it, price pressures would likely be pushed sharply upward. All of this lands on Asian economies already clinging to what few drivers of growth remain, such as the ongoing AI upcycle, while a slew of domestic issues weighs from within.

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**Political troubles?**
Finally and as an aside, we also explore other economy-specific developments that have been brewing or threaten to evolve into an issue further down the road. These troubles sit on the political front and have, so far, remained contained within their respective economies. Indonesia offers the first case, where central bank governor Perry Warjiyo resigned citing personal reasons, adding a layer of uncertainty. The timing sharpens it, with the rupiah already under protracted weakness (chart 6). Compounding that, Indonesia's President continues to pursue loose fiscal policy in an attempt to boost growth. Japan presents a different kind of pressure, with Prime Minister Takaichi's cabinet approval rating diving 10pp in the latest Nikkei and TV Tokyo poll. That took it below 60% for the first time since she took office last October, with perceived reasons for the decline varying. The resulting 58% rating is still comparatively high by historical standards. Even so, an extended slide from here could spell deeper underlying perception issues.

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Asia

Economic Letter from Asia: Triple Threat

Michael J. Moran

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Sales of new homes rose 1.6% in June, and results in the prior three months were revised upward by a combined 2.8%. The results were favorable when viewed in isolation, but they still left the performance so far this year lagging that in the prior three years. Annual sales from 2023 to 2025 averaged 676,000 units; the average annual rate so far this year has totaled 626,000 (chart, upper left).

Not only are results this year lagging those of the prior three years, but they are light relative to the experience in the 1990s (a period not affected by the inflating and bursting of a housing bubble, and one not influenced by a pandemic). New home sales in the latter portion of that decade topped 800,000. With the number of households now much larger than at that time (133 million versus approximately 100 million), one might expect current sales to be at least as firm as in that earlier period.

Developments in the existing home market also would lead one to expect strong results in the new home market. Many homeowners with low-rate mortgages have postponed or cancelled plans to move in order to retain their attractive financing. This has led to a dearth of existing homes for sale and pushed activity to a dreadfully low level – the lowest since the trough that followed the bursting of the housing bubble (chart, upper right). Aspiring homeowners could turn to the new home market to satisfy their demand, but uninspiring sales of new homes suggest that such shifts have not been pronounced.

The supply of new homes on the market does not seem to be a factor in restraining activity, as the number of homes for sale is in the upper reaches of the historical experience. The number of listings at the peak of the housing bubble in 2006 was notably larger, but otherwise, observations in the past year exceed previous results by a sizeable margin (chart, lower left). The months’ supply of homes (the length of time to clear inventory at the current sales pace) also is in the upper portion of its historical range.

Soft demand seems to explain recent results, with affordability being the key consideration. The housing affordability index published by the National Association of Realtors has moved to the low portion of its historical range. Indeed, the only time with lower readings was in the late 1970s and 1980s, when double-digit mortgage rates pushed the measure to its record low (chart, lower right). With housing costs joining other financial challenges (health care, child care, education), housing activity is lacking vigor.

New home sales are recorded when the sales contract is signed. New home sales activity and prices are available in Haver's **USECON** database. The consensus expectation figure from Action Economics is available in the **AS1REPNA** database.

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- Respectable advance in the latest month…
- …and net upward revisions in the prior three months
- …but still trailing results in the prior three months

New Home Sales: Improvement in June, but a Still-Soft Performance

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The Bank of Japan is in a bit of a policy pickle. Inflation has picked up. After a long period of super-low inflation and interest rates, the policy rate itself has only been lifted to 1%. The BOJ faces a world with key geopolitical strains, higher inflation, supply chain disruptions, and rising oil prices with gains in other commodity prices as well. The war in Iran and the closure of the Strait of Hormuz, after a brief respite in June, is back in force. The future is again clouded and has led to negativism.

The yen has been weakening; that has put the BOJ in another difficult spot. So far, it has been unwilling to use interest rates to defend it. And we know that intervention is only a fleeting tool and not any sort of lasting solution.

But with all this on its plate, the BOJ has to deal now with some unexpected fiscal stimulus. The Takaichi government, like every Japanese government, has a special relationship with the central bank having two representatives at BOJ meetings, one from the MOF and another from the Cabinet Office. These representatives do not vote but can request that policy moves be delayed. Still, the BOJ has become more independent since 1998 when governing laws were changed. BOJ is directed to cooperate with government and to act independently. Earlier this year, when inflation flared on rising oil prices, the Takaichi government took steps to mute the impact on Japan’s inflation. So its inflation data have been dressed up a bit by inflation-suppressing government programs, which also make it seem less pressing that the BOJ act.

Still, inflation is heating up. The core inflation rate, which excludes fresh foods & energy, is now at 1.7% year-on-year, while the suppressing impact of some of the government programs is still in force. For its part, the BOJ has seen firms reporting more pass-throughs of prices and cost increases, making it more wary of building inflation pressures.

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Takaichi’s government has just finished a new policy blueprint that it is promoting, with a pool of $2.3 trillion (yes, dollar equivalent) being committed in public and private funds to finance new technologies in a government-industry joint effort. This comes after Takaichi had been elected knowing she has plans for a stimulus but being aware that Japan has a fragile excessive fiscal spending situation and a massive debt-to-GDP ratio. It was thought that she could promote some deregulation impediments and take some steps to promote research, but this sort of commitment of funds was not on the radar. Her new plan sets the old goal of fiscal austerity aside and promotes a new era of dedicated spending to improve industry. Her first blueprint draft contained language that offended markets because it seemed to bully the BOJ. The final version of the blueprint is a revised statement with a note urging the BOJ to do what it can to achieve its inflation target and make it clear that the BOJ is not being bullied. But was it?

For its part, the BOJ has recently said that it could hike rates faster and it connects that to the weakness of the yen. The BOJ has specifically said it is not tied to rising rates only every six months.

The government is also trying to get investment firms, especially pension funds, to buy more JGBs and to invest less aggressively outside the yen area. If firms do this, some pressure will be off the yen, and the government will find its rising deficit easier to fund. While this might seem manipulative, and it is, the U.S. is doing the same sort of thing. A proposal for U.S. treasuries held by banks to incur no capital change is the same sort of fudge. That will encourage banks to buy and hold more U.S. treasuries. The bottom line is that countries with large fiscal deficits will go to great lengths not to deal with the problem and to instead finance kicking the can down the road some more.

The BOJ is still in a tough spot in Japan. It is trying to deliver price stabilizing policy. The government has hidden building inflation pressures by providing subsidies and programs that blunted the impact of inflation on the economy. That kept inflation down and gave the BOJ a less urgent inflation situation to deal with. The government then uncorked a blueprint that was far more expansive than what had been expected, shelving the previous tilt toward fiscal austerity. On one hand, the expansion of the fiscal deficit from such a pre-existing large position is surprising. But spending is not classical demand stimulus; it is targeted to improve the supply side and that may explain why markets have not reacted as adversely to this spending. Still, there continue to be hints and scattered evidence of the government using its influence to try to slow down BOJ rate hikes. So far, this is all talking and worrying around the fringes. The BOJ has managed to make the policy it wants. But this will be something to continue to watch as the BOJ tries to get its policy rate back up to neutral while the government is trying to stimulate growth.

Japan

Japan’s CPI Is Misbehaving as BOJ Faces a Stern Test

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The price index for personal consumption expenditures, the inflation measure targeted by the Federal Reserve, fell 0.1% in June, led by a drop of 5.9% in the energy component. The decline pushed the year-over-year increase to 3.7%, down from 4.1% in May but still above readings of 2.9% in January and February, before the Iran conflict became a factor.

The drop in the energy component would be more encouraging were it not for the re-escalation of fighting with Iran and renewed pressure on oil prices. The average prices of crude oil and gasoline in July are likely to be below those in June, raising the prospect of another drop in the energy component of the PCE price index. However, prices near the end of the month climbed above the June average, leaving upside risks for August.

While the energy component dominated the change in the headline price index, other items also were restrained. Food prices rose 0.3%, although they almost rounded down to 0.2% (0.253%) and the monthly change was comfortably within the range of the past few years. The core index (excluding food and energy) rose only 0.1%, matching the lightest readings in the post-pandemic period (although a few observations were smaller if rounded to more than one decimal point). The core index has risen 3.3% in the past year, down from 3.4% in May, but still far above the Federal Reserve’s target of 2.0%.

The Fed pays close attention to a subcomponent of the core index (services excluding energy and housing), which has been responsible for much of the advance in the core index in recent years. This measure, too, was restrained in June (0.1%), but the year-over-year change of 3.8% remained near the top of the range of the past two years.

Personal income rose 0.2% in June, with employee compensation, non-farm proprietors’ income, and dividends all posting favorable results. The increase translated into a gain of 0.3% after adjusting for inflation, following an advance of 0.2% in May. The back-to-back increases are notable in that they perhaps signal the end of a soft patch that began in the closing months of 2025. The growth of real personal income slipped into negative territory in March, influenced by the surge in energy prices, but growth had been decelerating since October of last year and had slipped to a pace of less than 1.0% before the conflict with Iran became a factor. Results in the past two months suggest that real income growth might be returning to a firm path.

Real income growth in the past two months certainly supported spending by households, as real consumption expenditures rose 0.4% in both May and June. For the second quarter, the GDP report published today showed annual growth of 3.2%, a brisk pace. Moreover, the firm results at the end of the quarter brighten prospects for the third quarter. With real outlays in June already above the average for Q2, the summer quarter is likely to show a higher average than that in Q2. Indeed, even if real PCE remains unchanged over the July-September period, the average for Q3 would translate to real PCE growth of approximately 2.0% (annual rate).

The active spending by consumers has provided solid support for the economy, but it has come at the expense of an eroding saving rate. The saving rate averaged 5.5% in 2023 and 2024, peaking at 6.4% in January 2024. Deceleration since then left the saving rate at 2.7% in June. One could put either a positive or negative spin on the downward trend. An optimist could argue that wealth gains from the stock market are allowing many households to live the high life. Others might counter that affordability issues leave households with little ability to save. These explanations for a low saving rate are not mutually exclusive; both are likely having an influence.

Data on weekly unemployment claims are from the Department of Labor itself, not the Bureau of Labor Statistics. They begin in 1967 and are contained in Haver’s **WEEKLY** database and summarized monthly in **USECON**. Data for individual states are in **REGIONW** back to December 1986.

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- (Temporary?) relief on price pressures
- Respectable income gain and active spending by consumers

Personal Income, Consumption, and Prices in June

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