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Japan’s 30-year JGB auction cleared at a yield of 2.808%, down from 2.904% at the previous auction, reflecting lower long-term borrowing costs for the government as demand for ultra-long bonds rebounded amid market volatility and speculation over the Bank of Japan’s policy path.

The decline in yields suggests investor appetite for long-duration Japanese debt remains strong despite recent weakness in the yen and global uncertainties, with some participants seeking safety or anticipating a slower pace of BoJ normalization.

Analysts note that the softer 30-year yield could ease financial conditions in Japan’s bond market, but caution that persistent inflation pressures and shifting BoJ guidance could keep yields volatile in the coming months.

• Foreign investors bought ¥182.8 billion in Japanese bonds last week, a sharp slowdown from the prior week’s ¥615.1B inflow, indicating cooling demand for Japanese fixed-income assets as global bond yields fluctuate and yen volatility persists.
• Meanwhile, foreign investments in Japanese stocks surged to ¥651.3 billion, rebounding dramatically from the previous week’s net outflow of ¥524.1B, reflecting renewed appetite for Japanese equities amid easing concerns over yen strength and positive sentiment around corporate governance reforms.

Analysts note that the divergent trends highlight investors’ shifting preferences within Japanese markets, with equities regaining favor as the Nikkei trades near multi-decade highs, even as uncertainty about the Bank of Japan’s policy path tempers enthusiasm for bonds.

Japan’s au Jibun Bank Services PMI climbed to 51.7 in June, slightly above expectations of 51.5 and up from May’s 51.0, marking the third consecutive month of expansion in the services sector and the strongest reading since February.

The uptick reflects modest improvements in new business and employment, as demand for services — particularly in travel, hospitality, and business services — continued to recover amid resilient domestic spending and easing cost pressures. Input price inflation also moderated, supporting better profit margins for service providers.

Analysts note that while the PMI remains comfortably above the 50.0 threshold, the pace of expansion is still moderate, and ongoing uncertainty around global demand and yen volatility could weigh on sentiment in the coming months.

Japan’s Household Confidence Index climbed to 34.5 in June, beating expectations of 33.6 and up from May’s 32.8, marking the third consecutive monthly gain and the highest reading since late 2022.

The improvement reflects increased optimism among consumers regarding employment prospects and income expectations, even as high living costs continue to weigh on household budgets. The sustained rise suggests a gradual recovery in consumer sentiment, which is critical for boosting domestic consumption, a key driver of Japan’s economic growth.

However, analysts caution that overall confidence levels remain well below the neutral 50 mark, highlighting lingering caution among households amid uncertainty over inflation trends and future wage growth.

The 10-year Japanese Government Bond (JGB) auction cleared at a yield of 1.442%, down sharply from the previous auction’s 1.512%, indicating robust investor demand despite global uncertainties and rising yields elsewhere.

The decline suggests that domestic appetite for long-term government debt remains strong, as investors seek safe-haven assets amid persistent concerns over the global economic outlook and the Bank of Japan’s cautious stance on monetary normalization.

Analysts note that the lower yield could ease government borrowing costs, but also reflects market skepticism about a near-term exit from ultra-loose monetary policy, with traders betting that the BOJ will move gradually even as inflation trends higher.

The au Jibun Bank Manufacturing PMI for Japan rose to 50.1 in June, up from 49.4 in May, signaling a return to expansion for the first time since March. However, the reading fell short of expectations for 50.4, indicating that the pace of recovery remains subdued.

The move above the 50.0 threshold reflects slight improvements in output and new orders, but lingering headwinds like weak domestic consumption, global trade uncertainty, and supply chain challenges continue to weigh on the manufacturing sector’s momentum.

Analysts note that although the uptick suggests encouraging stabilization, the sector’s fragile footing highlights the need for sustained demand recovery and supportive policies, especially as Japan’s broader economic outlook remains clouded by global risks.

• Big business capital expenditure (CAPEX) plans surged 11.5% YoY in Q2, dramatically beating expectations and up sharply from Q1’s 3.1%, indicating strong investment intentions among large companies, especially in manufacturing and construction.
• In contrast, small business CAPEX plans fell 5.6% YoY, a smaller decline than the previous 10.0% but still reflecting ongoing caution among smaller firms facing labor shortages and cost pressures.
• The Large Manufacturers Index improved to 13, above expectations (10) and the previous 12, showing renewed optimism among big factories, while the Big Manufacturing Outlook Index rose to 12, also ahead of forecasts (9).
• The Large Non-Manufacturers Index held steady at 34, matching expectations but slightly below Q1’s 35, indicating solid but plateauing confidence in services, while the Large Non-Manufacturers Diffusion Index softened to 27, below forecasts (29).
• For small firms, sentiment diverged: the Small Manufacturing Index fell to 1 (vs. expected -1) from 2, and the Small Manufacturers Diffusion Index worsened to -2, signaling mounting pessimism in the small manufacturing sector.
• The Small Non-Manufacturers Index ticked down slightly to 15, from 16, with the Small Non-Manufacturers Diffusion Index unchanged at 9, suggesting flat but fragile sentiment among smaller service firms.

Overall, the Tankan points to a clear divergence between big and small businesses: large firms remain upbeat and plan significant capital spending, while small companies continue to struggle with cost burdens and tepid domestic demand — a dynamic likely to shape Japan’s economic trajectory through the second half of 2025.

• Construction orders rose by 14.0% YoY in May, slower from April’s rise (52.7% previously), suggesting renewed strength in commercial and public works projects, although the pace has normalized from March’s extraordinary highs.
• Housing starts, however, plummeted 34.4% YoY, far worse than expectations of -15.0% and deeper than April’s -26.6% drop. This marks the steepest decline in housing activity in nearly a decade, pointing to severe weakness in residential construction, likely linked to high material costs, labor shortages, and sluggish household confidence.

The divergence highlights an unbalanced construction sector in Japan, where robust infrastructure demand contrasts sharply with a crumbling residential market, which could weigh on broader economic momentum in the coming quarters.

• Industrial production rose 0.5% MoM in May, recovering modestly from April’s steep -1.1% decline but falling far short of expectations for a 3.4% jump — signaling a fragile recovery in manufacturing.
• The official forecast for June predicts a modest 0.3% MoM increase, sharply lower than the prior month’s forecast of 9.0%, indicating tempered optimism as manufacturers face weakening global demand and persistent supply chain issues.
• Looking ahead, the forecast for July points to a 0.7% MoM decline, reversing June’s expected gains and suggesting that Japan’s industrial sector may struggle to sustain momentum into the summer months.

These figures highlight persistent volatility in Japan’s manufacturing activity, reflecting the challenges posed by global economic uncertainties, softening exports, and cautious domestic demand.

• Retail Sales (YoY) rose by 2.2% in May, slightly below expectations (2.4%) and significantly slower than April’s 3.5% increase — indicating a moderation in consumer spending.
• Large-Scale Retail Sales (YoY) also decelerated to 2.0%, down from 3.0%.
• On a monthly basis, sales at large retailers declined by 0.2%, reversing the 0.7% gain from April.

These figures reflect waning momentum in household consumption, a key component of Japan’s economic recovery. While inflation is easing, sluggish wage growth and weak consumer sentiment may be weighing on spending. The data may reinforce the Bank of Japan’s cautious approach, as strong, sustained consumption is essential for durable inflation.

• The unemployment rate in Japan held steady at 2.5% in May, matching both market expectations and the previous month’s figure — reaffirming the country's historically tight labor market.
• However, the jobs-to-applicants ratio eased slightly to 1.24, down from 1.26, indicating a marginal decline in labor demand.

Despite the low unemployment rate, the dip in the job-to-applicant ratio suggests that employers are becoming more cautious in hiring, possibly in response to softening economic conditions or global uncertainty. Analysts expect the Bank of Japan to monitor labor metrics closely as it evaluates the sustainability of inflation and wage growth.

Inflation in Tokyo, a leading indicator for nationwide trends, showed further signs of easing in June:

• Tokyo CPI (YoY) fell to 3.1%, down from 3.4%.
• Tokyo Core CPI (YoY) — which excludes fresh food — also moderated to 3.1%, down from 3.3% and well below last year's peak of 3.6%.
• Tokyo CPI Excluding Food & Energy (YoY), a key gauge of underlying inflation, declined to 1.8%, under expectations of 2.1%.

The broad deceleration suggests that underlying price pressures are easing, likely influenced by stabilized energy prices and a strong yen. This could relieve pressure on the Bank of Japan (BoJ) to tighten policy aggressively, supporting the central bank’s gradualist approach to monetary normalization.