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The LDP officially decided to hold the election to choose the successor to Prime Minister Ishiba, the party president, on October 4th. Currently five candidates are under consideration. According to public opinion polls, Sanae Takaichi, the former Minister of Economic Security, and Shinjiro Koizumi, the Minister of Agriculture, Forestry and Fisheries, are expected to advance to the runoff. Nonetheless, as the election campaign has not yet commenced, it remains essential to closely monitor the statements of each candidate on economic policies and public response to their election campaigns.

We expect no policy change at the next policy meeting on September 18-19. According to the latest Bloomberg BoJ watchers survey, all 50 respondents agree with us.

We have some sympathy for the view that the BoJ intends to raise its policy rate from the current 0.5% to at least 1%, provided there are no obstacles.��We remain more cautious regarding the tariff effects. We thus continue to expect the next rate hike in March 2026. However, an earlier rate hike in October, December, or January cannot be ruled out. We are closely monitoring US development as well as the BoJ's communication.

Q2 GDP was revised up more than expected to 2.2% q/q, saar from 1.0%. With some revision in the residential investment, we revised up CY2025 and FY2025 forecasts by 0.1ppt and 0.2ppt to 0.8% YoY and 0.4%. Compared to market consensus, they are still somewhat lower.

Our baseline economic forecast looks for a contraction of real GDP and slower CPI inflation in H2 this year. However, the near-term risk on the GDP forecast skews to the upside with still resilient manufacturers' business sentiment and resilient goods exports through July. We note, though, that the drag from weakening external demand may materialize with a delay. On inflation, higher fresh food prices due to an extremely hot summer may lead to higher prices for related processed foods and dining out. Also, we are paying attention to service prices in October, the first month of the second half of the fiscal year, when firms change their prices.

Key data to watch includes Flow of Funds, Custom Trade statistics, and nationwide CPI. Nominal exports and imports may continue to contract on a YoY basis in our view, but the decline is expected to moderate compared to the previous month. We forecast nationwide core-CPI is likely to slow by 0.4ppt to 2.7%YoY, mostly due to the introduction of another government subsidy on energy.