Yen falls to 162 yen range for first time in 39 and a half years; BOJ Tankan improves on AI demand, but additional rate hike faces difficult coordination with government

Yen temporarily hits 162.84 yen, lowest in 39 and a half years In the Tokyo foreign exchange market on the 1st, the yen fell against the dollar, temporarily reaching 162.84 yen, its weakest level since December 1986. In addition to US Fed rate hike expectations and the US-Japan interest rate differential, the Ishiba administration's expansionary fiscal policy and its basic policy framework are accelerating yen selling by restraining BOJ rate hikes. Finance Minister Katayama mentioned 'decisive measures,' but the effect has been limited, with the market also eyeing the 165 yen level. 123

June BOJ Tankan: Large manufacturers' DI improves for 5th straight quarter to plus 22 In the June Tankan survey released by the BOJ on the 1st, the business conditions DI for large manufacturers improved by 5 points from the previous survey to plus 22, the highest level since March 2018. Solid AI and semiconductor demand drove the improvement, and the non-manufacturing DI also improved to plus 37. On the other hand, the outlook DI deteriorated, leaving caution over the Middle East situation and high oil prices. Corporate inflation forecasts were revised upward for one year, three years, and five years ahead, which is seen as supporting additional BOJ rate hikes. 4567

Nikkei average rises for 3rd straight day, closing at 70,474 yen, up 412 yen On the Tokyo stock market on the 1st, the Nikkei average rose for the third consecutive day, closing at 70,474 yen, up 412 yen from the previous day. The previous day's record high on the NY Dow and buying of AI and semiconductor-related stocks pushed the market higher, with gains temporarily exceeding 1,900 yen, but the pace of increase narrowed due to a wait-and-see stance ahead of the US employment statistics release. 89

July price hikes for 2,566 items; historic yen weakness directly hits households According to Teikoku Databank, the number of food products and other items to be raised in price in July totals 2,566. Items such as bread, cup noodles, and sausages are affected, and in addition to the Middle East situation, the historic yen weakness at the 162 yen level against the dollar is pushing up costs for imported raw materials. Experts warn that the government's restraint on rate hikes and concerns over fiscal deterioration are leading to further yen depreciation, deepening the impact on households. 10

Draft of basic policy framework: Market confidence is key focus The government's draft basic policy framework advocates 'responsible expansionary fiscal policy' and positions fiscal year 2027 as the first year of expansionary fiscal policy. The focus has shifted from achieving a primary balance surplus to stabilizing the debt-to-GDP ratio, but whether market confidence can be gained remains a challenge due to unclear funding sources. The word 'market confidence' appears nine times in the draft. 11

New BOJ board member Ayano Sato does not state position on rate hikes Newly appointed BOJ board member Ayano Sato (former professor at Aoyama Gakuin University) held a press conference and stated regarding the pros and cons of rate hikes, 'I would like to refrain from commenting on policy stance.' She is considered a 'reflationist' appointed by the Ishiba administration and indicated a stance of 'carefully assessing' the impact of the weak yen on prices. The market is watching for her influence on future BOJ policy. 12

First-half new car sales rise for 2nd straight year; Nissan down 10.8% Domestic new car sales in the first half of 2026 increased 1.8% year-on-year to 2,387,189 units, rising for the second consecutive year. The abolition of the environmental performance tax and the launch of new models supported demand. Toyota performed well with a 5.3% increase, but Nissan continued to struggle with a 10.8% decline, aiming for a recovery with the new Kicks model launched in June. 13

Consumer confidence index improves for 2nd straight month, but trend remains 'weak' According to the Cabinet Office's June consumer confidence survey, the consumer confidence index rose 0.2 points from the previous month to 33.8, improving for the second consecutive month. The agreement to end hostilities between the US and Iran was viewed favorably, but since the index was nearly flat, the overall assessment remained 'weak.' Concerns over inflation due to high oil prices continue to weigh on consumer sentiment. 14