The monthly average of the unsecured overnight call rate reached 0.978% in July 2026, up further from 0.841% the previous month. After rising from 0.727% in May, the short-term rate has increased by more than 25 bp in two months, reaching a level near 1%. At the same time, the monetary base fell to ¥554.9 trillion, with its year-on-year decline widening to -13.8%, indicating that the BOJ is pursuing higher interest rates and balance-sheet reduction in parallel. Meanwhile, upstream costs continued to rise as of July, with the CGPI at 135.8 and USD/JPY at ¥162.6, while the core CPI for June—published one month earlier—stood at 1.6% year on year and the trimmed mean for the same month was 2.7%. A gap therefore remains between downstream prices and underlying inflation indicators.
Monetary Policy Stance: Simultaneous Rate Hikes and Quantitative Reduction
The BOJ is proceeding with normalization on both the price (interest-rate) and quantity (liability) fronts. According to BOJ statistics, the overnight call rate remained broadly flat at 0.727–0.728% from January through May before rising in two stages to 0.841% in June and 0.978% in July. The month-on-month increase in July was 13.7 bp. Given that the monthly average includes the timing of policy changes, the effective rate at the end of the month was likely near 1%.
The monetary base declined by ¥34.5 trillion, from ¥589.4 trillion in January to ¥554.9 trillion in July, while its year-on-year rate of decline widened from -9.5% in January to -13.8% in July. During a rate-hike cycle, the cost of interest payments on current account deposits is a consideration, but the BOJ is also reducing the amount of funds it supplies. The fact that interest rates and liquidity supply are moving in the same direction is a defining feature of the policy stance as of July.
Interest-Rate Environment: Unpublished Lending Rates Limit Assessment of the Transmission Channel
The available monthly data do not show whether higher short-term interest rates have fed through to lending rates. The average contracted lending rate has not been published since January, when it was 1.383%, making it impossible to measure the extent of transmission as of July. This article therefore assesses the chain from call rates to lending rates to corporate activity indirectly, based on the consistency between the first stage—policy rates—and the third stage—corporate sentiment.
In the Q2 2026 Tankan, the diffusion index (DI) for large manufacturers improved by 5 points from 17 in Q1 to 22, while the DI for small and medium-sized manufacturers rose from 7 to 9. The Q2 survey primarily reflects the period when the call rate was still low at 0.727%. Accordingly, the restraining effect of higher interest rates had not yet emerged in the Q2 results. The impact of the 25 bp increase in June and July should be assessed in the next survey and thereafter.
Prices and Production: Upstream Goods Costs Accelerate While Downstream Prices Remain in the High 1% Range
The gap between upstream and downstream prices is widening. The CGPI rose 5.8% from 128.4 in January to 135.8 in July, with the acceleration particularly evident from March onward. By contrast, according to the Statistics Bureau of MIC, the all-items CPI rose 1.7% year on year in June, compared with 1.5% the previous month, while the core CPI rose 1.6%, compared with 1.4%. Both remained in the high 1% range. However, the six-month change in the CGPI and the year-on-year change in the CPI are based on different standards, so a pass-through rate cannot be calculated directly from the two. The difference in coverage also normally produces differences in their rates of change: the CGPI covers goods traded between businesses, while the CPI includes goods and services purchased by households.
The comparable measures over the same period are both upstream indicators. From January to June, the CGPI rose from 128.4 to 135.4 (+5.5%), while the SPPI rose from 112.0 to 114.3 (+2.1%), meaning that upstream prices for goods increased 2.6 times faster than upstream prices for services. The SPPI fell to 114.3 in June from 114.8 the previous month, confirming a structure in which the cost increase led by goods has not been fully passed through to service prices.
The divergence among the three CPI measures indicates a reversal in the energy factor. In June, core-core CPI at 1.7% exceeded core CPI at 1.6%, but the difference narrowed to 0.1 percentage point from 0.4 percentage point in May (1.8% versus 1.4%). Core-core CPI exceeding core CPI means that energy prices are pushing inflation downward, and that downward contribution is fading rapidly. However, core-core CPI itself declined by 0.9 percentage point, from 2.6% year on year in January to 1.7% in June, indicating that underlying inflation excluding energy also slowed. The interpretation that “core-core CPI above core CPI means the underlying trend is firm” is possible, but if the downward trend in core-core CPI itself is given greater weight, the June rebound in headline and core CPI can be read as a rebound partly driven by the technical factor of a fading negative contribution from energy.
The economic cycle is in an expansionary phase. The Cabinet Office's Indexes of Business Conditions showed the coincident index at 118.2 in June, up from 117.9 the previous month; the leading index was 116.4, unchanged from the previous month; and the lagging index improved from 111.4 to 112.3. The coincident index was 4.3 points above its level of 113.9 in August 2025, indicating that rate hikes and an expansionary phase are coexisting. The industrial production index is not included in the data available for this article, so no detailed assessment of production trends is provided.
Underlying Inflation: A 1.2-Point Gap Between the 2.7% Trimmed Mean and 1.5% Weighted Median
Underlying inflation indicators have remained above core CPI. According to the BOJ's measures of underlying inflation, the trimmed mean was 2.7% in June, unchanged from the previous month, while the weighted median was 1.5%, up from 1.4%. The trimmed mean exceeded core CPI at 1.6% by 1.1 percentage points and has remained downwardly rigid at 2.7–2.8% since April.
The fact that the trimmed mean exceeds the weighted median by 1.2 percentage points indicates an upward asymmetry in the distribution of price revisions. While the increase for the median item is around 1.5%, below the 2% target, relatively large price increases are concentrated among some of the items remaining within the trimmed range. This suggests that inflation has “depth” but limited “breadth.” Because the share of items recording price increases has not been published, breadth cannot be confirmed directly; this will be an issue for verification when the next data are released.
Foreign-Exchange Environment: Yen Weakness and Upstream Costs Continue Despite Rate Hikes
The yen has continued to weaken despite higher interest rates. The monthly average USD/JPY rate was ¥162.6 in July, representing yen depreciation of ¥1.9 from ¥160.7 the previous month and ¥5.9 from ¥156.7 in January. During this period, the call rate rose by 25 bp, yet the change toward a narrower interest-rate differential between Japan and overseas economies has not been reflected in the exchange rate. The effective exchange rate has not been published beyond February for either the NEER or REER, preventing measurement of the yen's depreciation in real terms.
The periods of CGPI acceleration and yen depreciation overlap. From March, when the CGPI began to accelerate, USD/JPY moved from ¥158.6 to ¥162.6. The July CGPI was 135.8, up 0.3% from the previous month. However, this article does not contain data that would allow the contribution of exchange-rate movements to the CGPI and CPI to be separated, so the relationship can only be identified as one of co-movement. The fact that monetary normalization has not led to tighter conditions through the exchange-rate channel is a source of uncertainty for the path toward achieving the price stability target.
Money Flows: A Rise in the Credit Multiplier to 2.34 Absorbs Quantitative Reduction
The sharp decline in the monetary base alongside stable money stock can be explained by the credit-creation mechanism. M2 stood at ¥1297.0 trillion in July, a slight increase from ¥1296.4 trillion the previous month and up ¥17.9 trillion from ¥1279.1 trillion in January. As the monetary base declined by ¥34.5 trillion over the same period while M2 increased, the credit multiplier (M2 ÷ MB) rose from 2.170 in January to 2.318 in June and 2.337 in July.
This means that deposit creation through bank lending is more than compensating for the decline in base money supplied by the BOJ. The contraction of the BOJ's balance sheet has not yet reached a stage where it directly constrains the private sector's money supply. Whether the credit multiplier continues to rise under higher interest rates or stops increasing as lending rates rise will be an indicator of the effectiveness of quantitative tightening.
Corporate Sentiment: A ¥10 Gap Between Assumed and Actual Exchange Rates
Companies' exchange-rate assumptions are considerably more yen-positive than the actual rate. In the Q2 2026 Tankan, the assumed exchange rate was ¥152.57 for all firms and industries and ¥151.55 for large manufacturers, roughly ¥10 below July's actual rate of ¥162.6. Although this article does not contain data to quantify the impact on corporate earnings, the fact that business plans assume a stronger yen than the actual rate means that exchange-rate effects are more likely to produce an upside deviation from initial plans.
Companies remain cautious about the outlook. The forward-looking DI for large manufacturers fell by 8 points, from 22 recently to 14, while that for large nonmanufacturers declined from 37 to 29. Differences by company size also remain: the DI for small and medium-sized manufacturers was 9, 13 points below that of large manufacturers. If the assumed exchange rate is revised toward the actual rate in the Q3 survey, the gap between the assumption and the actual rate will narrow. The pass-through of wage increases to small and medium-sized firms and the pass-through to service prices—a reversal in the SPPI trend—will be key turning points in determining whether a virtuous cycle of wages and prices is taking hold.
External-Demand Channel: Trade Balance Turns Positive Without Moving in Tandem with the Yen
The improvement in supply and demand conditions reflected in the trade balance has not been reflected in the exchange rate. According to Ministry of Finance trade statistics, deficits of -¥294.1 billion, -¥277.7 billion, and -¥242.9 billion continued from August through October 2025 before the balance turned positive, with a surplus of +¥306.0 billion in November and +¥94.8 billion in December. Exports expanded to ¥10.4077 trillion in December, exceeding imports of ¥10.3129 trillion.
Even after the trade balance moved into surplus, USD/JPY continued to weaken from ¥156.7 in January to ¥162.6 in July. Trade-related yen supply and demand alone cannot explain the recent exchange-rate trend. The latest trade-statistics reading is for December 2025, creating an approximately seven-month publication lag relative to the CGPI and CPI. As of now, there is no confirmation from import-value data corresponding to the July rise in the CGPI.
Market Reaction: TOPIX Rises Toward 4200 Even After Rate Hikes
The stock market absorbed higher interest rates. TOPIX recovered to 4197.20 on August 14 from 4028.79 on July 16, despite two sharp declines of -2.72% on July 17 and -2.52% on July 28. It was up 4.2% from July 16. The upward trend continued after August 5, with the index rising to 4176.04 on August 13 and 4197.20 on August 14.
The fact that share prices rose as the call rate approached 1% indicates that the TOPIX performance during this period shows no evidence that monetary tightening acted as a constraint on risk-asset prices. The real economy was also in an expansionary phase during the same period, with the coincident index at 118.2, consistent with the level of share prices.
Structural Consistency: Assessment of Three Transmission Channels
Consistency among the data differs by transmission channel. First, through the price-transmission channel, the rise in the CGPI coexists with sluggish SPPI growth, indicating that pass-through from goods to services is still under way. When headline and core CPI rebounded in June, the fading negative contribution from energy was occurring in parallel.
Second, through the monetary-policy transmission channel, lending rates remain unpublished despite the 25 bp increase in the call rate, while the credit multiplier continues to rise. The transmission of tightening to the real economy is therefore limited at this point. Both the coincident index and the Tankan DIs are improving, providing no indication of tighter financial conditions.
Third, in the foreign-exchange channel, the opposing combination of rate hikes and yen depreciation continues. Tighter conditions through interest rates are coexisting with yen weakness through the currency channel, maintaining upward pressure on upstream prices. Because effective exchange-rate data have not been published beyond February, assessment on a real purchasing-power basis is deferred.
Outlook: Assessing Target Achievement Requires Separating “Depth” from “Breadth”
Three factors will be central to the assessment ahead of the next policy meeting. First, how much will the July CGPI at 135.8 and the yen at ¥162.6 appear in the CPI data released in August and September? If core CPI reaccelerates from 1.6% toward 2%, distinguishing the boost from imported costs from underlying price increases will become a key policy issue.
Second, will the 1.2-point gap between the 2.7% trimmed mean and the 1.5% weighted median narrow? If the median rises toward 2%, the “breadth” of price increases will be confirmed, raising the likelihood of achieving the target. Conversely, if the gap widens, inflation will be viewed as dependent on large price increases for a limited number of items. The republication of the share of items recording price increases would provide another means of assessing the same issue.
Third, the resumption of publication of the average contracted lending rate and the direction of the credit multiplier will be important. If the multiplier turns down from 2.34, the effectiveness of quantitative tightening will be confirmed; if it continues to rise, private-sector credit creation will still be absorbing the effects of normalization. In addition, the size of the revision to the assumed exchange rate in the Q3 Tankan (¥152.57 in Q2) will be an indicator of the direction of the ¥10 gap with the actual rate.
Glossary
Unsecured Overnight Call Rate (O/N): The interest rate at which financial institutions lend funds to one another without collateral, subject to repayment the following day. It is the BOJ's operating target for its policy rate and the short-term rate that most directly reflects its monetary policy stance.
Monetary Base: The total amount of money supplied by the BOJ, comprising currency in circulation and financial institutions' current account deposits at the BOJ. A decline indicates a contraction of the BOJ's balance sheet, or quantitative tightening.
Credit Multiplier: The money stock (M2) divided by the monetary base. It shows how many units of deposit money are created through bank lending for each unit of funds supplied by the BOJ; an increase indicates active private-sector credit creation.
Core CPI / Core-Core CPI: Core CPI is the all-items index excluding fresh food and serves as the benchmark for the BOJ's price stability target. Core-core CPI excludes both fresh food and energy. The difference between the two can be used to isolate the contribution of energy prices.
Trimmed Mean: A weighted average calculated after excluding the top and bottom 10% of CPI items by year-on-year change. The BOJ publishes it as an indicator for identifying underlying inflation trends by removing items subject to temporary large fluctuations.
Weighted Median: The year-on-year price increase of the item located at the midpoint of the cumulative weight distribution when CPI items are arranged by their rates of increase. The difference from the trimmed mean reveals asymmetry in the distribution of price revisions.
CGPI (Corporate Goods Price Index): A price index for goods traded between businesses. Because imported goods and raw materials account for a large share, it is used as an upstream goods-price indicator that reflects exchange-rate movements at an early stage.
SPPI (Services Producer Price Index): A price index for services traded between businesses. As an upstream services-price indicator, it can be compared with the CGPI to assess the progress of price pass-through from goods to services.
Effective Exchange Rate (NEER / REER): An index showing the yen's overall strength against multiple currencies. NEER is the nominal effective exchange rate, while REER is the real effective exchange rate adjusted for price differentials and used to assess real purchasing power.
Tankan Assumed Exchange Rate: The exchange rate that companies assume as a premise for their business plans in the BOJ's Tankan survey. The difference from the actual rate provides an indication of the magnitude of exchange-rate effects relative to initial plans.
This column was automatically generated by AI integrating Bank of Japan statistics (monetary base, money stock, etc.), e-Stat public statistics, and market data as a monetary policy analysis resource. This is not a recommendation to buy or sell any financial instruments. Please make investment decisions at your own responsibility and consult professionals as needed.