Inflation in Japan – invariant to monetary policy and be careful what you wish for (tourism)

I have been thinking about the recent inflation trajectory in Japan in the light of constant calls from mainstream economists (including a bevy of private bank economists who work for institutions that benefit from interest rate hikes) for the Bank of Japan to hike rates. What is driving CPI movements? What has been the impact of the yen depreciation? How responsive is the yen to interest rate changes anyway? Are the increasing yen-denominated import prices being passed on to Japanese consumers? Why doesn’t the Takaichi Administration realise that in the face of supply-side inflation the remedy is not to expand fiscal policy? How responsive are exports to the yen depreciation? All these questions are popping up continually in the financial media at the moment. I haven’t time today to answer all these questions in detail. But here is a start.

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Those who invoke the ‘Truss Moment’ should look at what is happening in Japan

In the annals of ruses used to provoke fear in the voting public about government deficits, central bank currency issuance, and fiscal activism, the experience of Germany in the 1920s was a long-standing favourite, that could be wheeled out on demand and have immediate effect. Wheelbarrows full of money being pushed to the local bakery to buy the daily bread, etc. It was a very effective vehicle for advancing the interests of the ruling class because it created a political brake on government action to reduce poverty and maintain full employment. More recently, Zimbabwe became the vehicle. It was equally effective even though it, like the Weimar ruse, was largely based on fiction. Even more recently, we have a new ‘ruse on the block’, the so-called ‘Truss Moment’, which is particularly effective in the UK. The current Labour government is petrified to do anything that might resemble a Labour government because they have a deep-seated paranoid ideation that the ‘City’ is out to get them, and the ‘Truss Moment’ is used as the summary event that apparently justify that delusion. They might have looked to the East, to Japan, to see why the ‘Truss Moment’ was about something quite different to the popular narrative that accompanies the mention of the ill-fated few months in British politics.

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Japan’s Government Pension Investment Fund and the yen – mainstream macro myths driving bad policy

With a national election approaching in Japan (February 8, 2026), there has been a lot of discussion about the so-called ‘weak yen’ and whether the Bank of Japan should be intervening to manage the value of the currency on international markets. PM Takaichi has been quoted as saying that the weak yen is good for Japanese exports and has offset some of the negative impacts on key sectors in Japan, including the automobile industry. She also said that the government would aim to encourage an economic structure that could withstand shifts in the currency’s value, largely by encouraging domestic investment. The yen depreciation is another example of the way mainstream economists distort the debate. They argue that the Bank of Japan should be increasing interest rates further to shore up the yen. Previously, they pressured the government into creating a pension fund investment vehicle to speculate in financial markets to ensure the basic pension system doesn’t run out of money. These two things are linked but not in ways that the mainstream public debate construes. It turns out that pension myths, are directly responsible for the evolution of the yen. This blog post explains why.

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Japan goes to an election accompanied by a very confused economic debate

These notes will serve as part of a briefing document that I will send off to some interested parties in Japan. Japan is about to go to the poll for a snap national election on February 8. The recently installed Prime Minister, Ms Takaichi is betting that her recent solid showing in the polls will allow her to capture more seats in the Diet and reduce or even eliminate her dependency on the ‘uncomfortable’ coalition partner, the Japan Innovation Party (JIP) aka Ishin. That coalition was formed after Mr Ishiba, the previous PM, also bet on a snap election result, which saw the ruling Liberal Democratic Party (LDP) go backwards (losing 68 seats) and the coalition partner Komeito also lose seats. Together the ruling coalition lost its majority in the National Diet (for the first time since 2009) and Shigeru Ishiba’s popularity began to evaporate. The background to that loss was a major political funding scandal among the Cabinet ministers and the election result signalled that the Japanese people had seemingly had enough of the corruption at the top. Ms Takaichi took over after Mr Ishiba could no longer sustain his position as PM. The old coalition between the LDP and Komeito fell apart because the Buddhist Komeito could no longer stomach the new PMs imperialist ideology nor her unwillingness to deal with he insidious corruption in her party. This forced Ms Takaichi to forge a new coalition – hence the rather unlikely pairing with Ishin, which is a right wing populist party espousing neoliberal economic policies. The government is proposing a major fiscal expansion but the debate during the campaign that is now underway is very confused. The confusion arises because all the main players keep wheeling out mainstream economic arguments that tie them up into nonsensical policy proposals.

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When contraction is called expansion – Japanese government style

Well my holiday is over. Not that I had one! This morning we submitted the manuscript to the publisher for the Second Edition of our Macroeconomics text, which will come out later this year. Finishing a massive project like that is always non-linear – the last few months are hideous – checking everything and filling gaps. Anyway, that was the Xmas break. And as the New Year starts, one always hopes that humanity learns from the mistakes of the previous year. In economics, though, that is the hope of the forlorn. I read this morning’s Japan Times newspaper and lo and behold there are predictions of dire consequences as a result of the current Cabinet decision to shift focus away from pursuing a primary fiscal surplus to massaging the public debt ratio. The mainstream economists are arguing about the relative virtues of each and forecasting gloom. The reality is that neither target is worth attention. Meanwhile, the privatised rail companies are negotiating with communities for the closure of certain rail segments because they are loss making. All that discussion is about costs per passenger km, rather than satisfaction gained from bringing people together. The priorities are all wrong.

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Video – Japan at a Crossroads: Fiscal Policy, China, and the Growth

I have limited time today to write a blog post and last night I was sent a new video that I recently recorded with my research colleague at Kyoto University, Professor Fujii where we talk for some hours on the topic – Japan at a Crossroads: Fiscal Policy, China, and the Growth. It was a conversation we had via Zoom that was recorded on Friday, December 5, 2025. We reflect on recent developments in Japan and its relationship with other major countries (US, China, etc) and consider the policy challenges facing the new Takaichi Cabinet. It is a very long session. The transcript was generated by YouTube AI I believe and then edited and is not perfect. A lot of unnecessary aspects are edited out and the latter part of the transcript is really just an AI summary. But I think the record is acceptable. At times, the discussion changed from English to Japanese, where there was some ambiguity in terminology etc, and those segments have been cut from the transcript. I put in timestamps during the transcript to help you zoom into topics of interest. I hope you find something useful in our long discussion.

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Panel of Japanese economists mired in erroneous mainstream constructions and logic

Last Friday, I met a journalist in Tokyo and we discussed among other things, the results of the latest Nikkei/JCER ‘Economics Panel’, which was conducted between November 13 and November 18, 2025. The panel involves “questionnaires” being “sent to approximately 50 economists to gather their evaluations of various economic policies. The aim is to promote deeper and more active discussions on economic policy by clearly conveying the consensus and differences of opinion among experts, along with presenting individual comments from each economist.” The results are quite striking and demonstrate that the Japanese academic economics profession is mired in destructive Groupthink that means the profession is failing to contribute in any effective and functional way to advancing the well-being of the Japanese population or providing insights into how the nation can meet its considerable and immediate challenges.

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Corporate welfare is rife in Japan’s banking sector

I am travelling a lot today so I am typing this up in between segments. I met a journalist in Tokyo on Friday and we discussed various matters relating to the current policy debate in Japan. In addition, we discussed the latest situation for the Japanese banking sector and the fact that they are recording record levels of net profits almost across the board, but particularly for the three mega banks, and it might surprise readers when they learn the source of those profits. It is actually quite scandalous but demonstrates the bind that the Bank of Japan now finds itself in – of its own doing, while being cheered on by mainstream economists, several of which are probably receiving lucrative consulting income from the very same banks.

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Japan GDP growth contracts as politicians fight it out over size of fiscal stimulus

I am travelling today to Tokyo and have little time to write here. But with the latest national accounts data coming out on Monday (November 17, 2025), the discussions within the government are about the size of the fiscal stimulus that will be initiated in the next fiscal round. This The Japan Times article (November 18, 2025) – Extra-big extra budget pushed by some Japanese lawmakers – provides some information. The new Prime Minister is proposing to limit the fiscal shift to an extra 17 trillion yen (about $US110 billion) but a small group within the ruling LDP want the package to be around 25 trillion yen. I think the stimulus should be around 50 trillion yen and there are economists in the financial markets who agree with me. More on that another day. But the current debate is being conducted within the context of the latest – National Accounts – for the September-quarter 2025, issued by the Cabinet Office (November 17, 2025). The economy grew by 1.1 per cent over the last 12 months (down from 2 per cent in the June-quarter). In the September-quarter, GDP shrank by 0.4 per cent, the first negative quarter since the March-quarter 2024. The need for stimulus is clear. The debate is over how much.

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Japan – errant fiscal rule is sure to backfire

The Prime Minister’s Office of Japan has now released the transcript of the – Policy Speech by Prime Minister TAKAICHI Sanae to the 219th Session of the Diet (October 24, 2025). This was her first major speech after taking on the office of Prime Minister and allows us to see some detail beyond the rather general statements she had made previously about being supportive of fiscal expansion. The detail does not build much confidence.

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Japan challenges – is there really a labour shortage? – Part 6

This blog post continues my exploration of the available productive resources in Japan which would allow a nominal fiscal expansion to be accommodated without adding to the inflationary pressures. People consistently point to the low official unemployment rate as a proxy for a shortage of labour in Japan. It is good that the official unemployment is consistently low and that is a good thing. But the official rate might not be a very good indicator of the degree of labour market slack, especially as Japan has endured many years of low economic growth and falling real wages. A focus on underemployment probably provides a better guide to the availability of idle labour resources. That is what I consider in today’s instalment.

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Japan challenges – is there really a labour shortage? – Part 5

I do not have much time to write today as I am moving house later this afternoon and have a few work meetings to attend before that. So the next topic might take two shorter parts. As predicted, Ms Takaichi became the first female Prime Minister for Japan on Tuesday after consolidating a coalition with the unlikely 日本維新の会 (Japan Innovation Party or Ishin for short), who are based in Osaka and is a sort-of right wing group that opposes central government in Tokyo and is a mixture: free market narratives, anti-immigration, mixed with things like government-provided free education for all. It is an unlikely coalition that only a place like Japan could conjure up. But she is now PM and the ailing LDP elite rules on, although for how long is another matter. The new PM is, as I have indicated against using monetary policy as the main macroeconomic policy tool and favours further fiscal expansion under the new heading 責任ある積極財政 (Responsible and proactive fiscal policy), which was a term given to her by my research collaborator here at Kyoto University (Prof. Fujii), who will become one of her senior advisors in the new government. The question I am toying with as we prepare for this major symposium at the Diet on November 6, 2025, is what actual scope is there for fiscal expansion when we are told that there is a drastic labour shortage. That is what I am discussing in this part of the series today.

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Japan – where will the productivity growth come from? – Part 4

A few weeks ago I wrote this blog post – Japan – the challenges facing the new LDP leader – Part 2 (October 9, 2025) – documenting the viability of a fiscal expansion in Japan given the availability of idle labour resources, which are in short supply. I noted that the recent estimates from the Bank of Japan of the Labour Input gap were +0.47 per cent, which means the available labour force is working over their trend potential, and raise the question: How can output growth be possible with the labour capacity already well above potential? Which is what today’s discussion is about.

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Japan – the challenges facing the new LDP leader – Part 3

This is a third part of an as yet unknown total, where I investigate possible new policy agendas, which are designed to meet the challenges that Japan is facing in the immediate period and the years to come. The first two parts were written in the context of the elevation of Ms Takaichi to the LDP presidency. It was anticipated that she would then become the Prime Minister as a result of commanding a majority on the floor of the Diet, with help from long-standing coalition partner Komeito. However, in the last few days, things have changed considerably in Japan with Komeito withdrawing from the ruling coalition and throwing the question of who will become the Prime Minister up in the air. One of the issues that are shaping what happens next is the question of social security sustainability as the society ages. This divides the parties and will help to determine the configuration of the next government in Japan.

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Japan – the challenges facing the new LDP leader – Part 2

This is a second part of an as yet unknown total, where I investigate possible new policy agendas, which are designed to meet the challenges that Japan is facing in the immediate period and the years to come. This is also in the context of the elevation of Ms Takaichi to the LDP presidency and soon Prime Minister. She has suggested that her policy agenda will shift somewhat from the current government position, in the sense that she wants lower interest rates, while the majority of economists want higher, and she is advocating further fiscal expansion, while the mainstream want austerity. In the first part I examined the inflation issue in Japan, which suggests that the mainstream view that rates have to rise is misguided. Today, I am considering the scope for fiscal expansion.

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Japan – the challenges facing the new LDP leader

This will be a series of blog posts where I analysis the period ahead for Japan under the new LDP leadership of Ms Sanae Takaichi. The motivation is that on November 7, 2025, the research group I am working with at Kyoto University will be staging a major event at the Diet (Parliament) Building in Tokyo where I will be one of the keynote speakers. The strategic intent of the event is to outline a new policy agenda to meet the challenges that Japan is facing in the immediate period and the years to come. It is highly likely that the Lab Director here at Kyoto, who promotes and Modern Monetary Theory (MMT) perspective and was formerly the special advisor to the Shinzo Abe, will return to that position under Ms Takaichi. This gives the event increased importance for outlining an Modern Monetary Theory (MMT)-based perspective. Today, I examine the inflation issue in Japan.

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Bank of Japan’s ETF sell-off is a sideshow

On September 19, 2025, the Bank of Japan issued its latest – Statement on Monetary Policy – where they announced that there would be no change in the overnight call rate (the policy rate). However, they also announced that they would begin selling off their holdings of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs). Many people are unaware of what these assets are and why the Bank of Japan would be holding them. Further, the media went wild and the Japanese share market gyrated (down) upon the news, suggesting that there was something significant going on or that the ‘markets’ are just dumb. It was the latter by the way. However, this has become an issue in Japan and this blog post is about sorting through the nonsense.

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Major shifts in sentiment within Japan as they try to escape the cost-cutting excess profits mindset

This week (July 29, 2025), the Cabinet Office in Tokyo released the Economic and Fiscal Report – 年次経済財政報告 – which is a comprehensive statement of where the Economic and Fiscal Policy Ministry thinks the Japanese economy is going and the challenges it faces. It is a long and very thorough document. But like many official documents that the Japanese government publishes, it reads quite unlike what other governments that are sort of in IMF-spin mode pump out. The fundamental takeaway from reading the Report is that the Japanese government is still uncertain about whether the country has evolved out of its deflationary mindset and become a ‘growth-oriented’ nation driven by real wages growth. There is certainly criticism (implied in the Japanese fashion) for corporations sitting on large cash assets who are underinvesting in local productive capital. But the overwhelming hope of the government is that the nascent wage increases that have been offered mostly by the large major corporations continue and spread throughout the economy into the dominant small and medium enterprises. Most governments are still in the corporate cost-cutting mindset – thinking that is somehow how productivity and improved material well-being will occur. So their foci is on deregulation and attacking trade unions and that sort of ‘supply side’ nonsense. The Japanese government is firmly banking on a consumer-led, domestic economy growth strategy fostered by extensive wage rises outstripping the growth in prices.

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There will not be a fiscal crisis in Japan

The global financial press think they are finally on a winner (or should that be loser) when it comes to commentary about the Japanese economy. Over the last few years in the Covid-induced inflation, the Japanese inflation rate has now consolidated and it is safe to say that the era of deflation is over. Coupled with the government (and business) goal of driving faster nominal wages growth to provide some real gains to offset the long period of wage stagnation and real wage cuts, it is unlikely that Japan will return to the chronic deflation, which has defined the long period since the asset bubble collapsed in the early 1990s. It thus comes as no surprise that longer-term bond yields have risen somewhat. But apparently this spells major problems for the Japanese government. I disagree and this is why.

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Japan sales tax debate continues – Reiwa are the only Party that understands the reality

On July 22, 2025, the – 2025 Japanese House of Councillors election – will be held. I have a good friend who is standing for the – Reiwa Shinsengumi – which is a genuine progressive, Left-wing party, not like the fake progressive parties these days that masquerade as social democratic parties (for example, British Labour, Australian Labor, US Democrats, to name a few of many). My friend is the endorsed candidate for the Kyoto Electoral District (頑張ってね、みなこ). One of the major policies that Reiwa proposes is the abolition of the consumption tax. In fact, this election has spawned widespread opposition to the consumption tax from other parties as well. It has been a highly contentious issue in Japan for several decades and its introduction and regular increases to the present level of 10 per cent reflects the dominance of neoliberal misinformation about the fiscal capacities of the Japanese government. Perhaps, this election we will see some more sensible outcomes.

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