Peter Cowhey and Meg Rithmire suggest selectively opening American doors to China’s tech exports in order to keep America competitive (”The Cost of Keeping China Out“, Foreign Affairs, August 17, 2026). They argue for a “more mature strategy of selective openness” to “permit carefully structured Chinese investment in areas in which the economic and technological benefits are substantial” while “imposing stringent safeguards” to reduce security risks. They cite the Tesla model as an example of how this can work and suggest that a beefed-up CFIUS can mitigate risks.

Perhaps Drs. Cowhey and Rithmire are right. But our Japanese and Korean allies may be forgiven for asking: “what are we, chopped liver?”

Like ❤️ this post and you’ll help to re-industrialize America….

Nowhere in this article do the authors consider the alternative hiding in plain sight: work with Japan instead of China because there are few things China does that Japan cannot do as well or better. The difference between China and Japan lies in quantity, not quality. The reasons for this are evident even in the examples cited in the article: Tesla’s foundation was the Toyota production system. Every single Tesla made in the US or China relies on Japanese robots. It is true that China has local competitors, but if Cowhey and Rithmire took time to read the latest results from Japanese automation companies like Fanuc and SMC, they’d learn two things. First, while Chinese competitors are working hard to unseat Japanese peers, they have so far been unsuccessful. SMC’s Mr. Miyazaki is typically understated in his latest quarterly conference call. Answering a question about why, despite the Chinese industrial dominance celebrated by Cowhey, Rithmire (and Ray Dalio), SMC’s China sales had grown at 36% y/y, he noted:

As for the Chinese market, price competition is fierce. It’s just now becoming polarized. There’s a two-way split: on the one hand, some companies are fine with the cheap and good approach, while on the other hand, multinational corporations and other companies that operate overseas consistently use SMC worldwide, even if it costs more. As I briefly mentioned earlier, even customers who initially switched to cheaper options have experienced production line stoppages due to poor quality, and only then do they return to SMC or start using SMC, creating a cycle.

And, if Rithmire and Cowhey cared to peer into the factories of their Chinese champions, they would find that many of these companies share Tesla’s reliance on systems designed by Fanuc. SMC’s consumables are the trailing edge of industrial production. Fanuc’s are the leading edge, and that edge has expanded dramatically outside of China in the past decade. According to Capital IQ, Fanuc’s total sales to the Americas comfortably exceeded sales to China by nearly 2x in the year ended in March of 2026 while its sales to other parts of Asia (including India) exceeded sales to China by 1.5x.

There are certainly areas in which China has surpassed American engineering in the physical realm, thanks partly to the $50bln+ that American firms such as Apple have spent each year educating China’s workforce at home and to the billions spent by universities like UCLA and Harvard educating many of China’s top engineers and officials. However, the very best industrial automation tools remain Japanese. This is why black-market Japanese tools are in such demand in the Chinese arms industry that is supplying Russian and Iranian weapons makers. The makers of these tools provide high-quality products for their customers while generating high-quality jobs for their employees, following stringent environmental and worker-safety rules and generating healthy profits for their shareholders. The vast majority of China’s industrial champions fail one or more of these tests while relying on Japanese tools to make their best products.

This brings up another point: our Japanese allies have complied with US restrictions on dual-use technology exports used by the very companies that Cowhey and Rithmire argue should become the partners of US industry (as they are already the partners of many US investors, especially the endowments of most elite schools). Japan’s China sales would be even higher if Japanese companies chose to follow Apple’s strategy of contesting bipartisan restraints on sensitive technology exports to China.

I am neither a politician nor a professor, but it seems to me that if a treaty ally does something as well or better than a geopolitical rival, then we should try to work more closely with this ally than with the adversary. And this extends to the academy, where our elite schools educate Chinese engineers at a ratio of nearly 10:1 compared to Japanese engineers even as Japanese companies add to their nearly $1T investment in the US with a broad range of projects spanning steel, nuclear energy, shipbuilding, defense technology, quantum computing and all manner of automated manufacturing.

The administrations advised by Dr. Cowhey have overseen an outflow of nearly 5 million manufacturing jobs to China. I know CFIUS staffers who pleaded with Commerce to overrule deals like the “Magnequench Betrayal“ in which GM’s Magnequench rare earth magnet business was sold to a US PE firm called Sextant. The firm was led by Washington insider Archibald Cox Jr. and partners who included two in-laws of Deng Xiaoping. With GM’s blessing and in violation of its promises to US workers, Sextant moved the entire plant to China. GM allegedly played along with the deal to support its (ultimately doomed) China strategy.

By Dr. Cowhey’s logic, we should now welcome Chinese expertise in rare earth magnets because it would take too long for the US to catch up on its own. And he’s right. But there’s another option. A Japanese firm belonging to the Sumitomo group invented rare earth magnets around the same time as GM. More circumspect about China’s intentions than Dr. Cowhey, Sumitomo retained this business and has improved it for the past twenty plus years. Today, most of the supplies from the nascent US rare earths mining business are shipped to Japan (and Korea) for processing. In time and with the right investment environment, this production can be brought back to the US just as steel production is flourishing under the tutelage of Nippon Steel. Nippon’s ~$30bln investment in US Steel comes with nearly 100 engineers who are teaching Americans to make the highest quality, most environmentally friendly steel in the world. It’s true that we could have brought more subsidized Chinese steel into the US or followed the UK into allowing a Chinese firm to take over our steel business. Almost anyone could have improved on US Steel’s track record. The company was led by an accountant, had terrible labor relations, a poor balance sheet and unsafe facilities that were up to 90 years old. But the Japan choice was better precisely because Japan did not take the counsel of countless US advisors and “outsource heavy industry to China to focus on asset-light models.” It’s this persistence and focus on quality that puts Japan ahead even now, provided Japan retains access to free markets. This same quality focus makes (or should make) Japanese universities better partners for schools like Harvard than the PRC universities whose military links increase risks for everyone involved (except the CCP’s military).

But Dr. Cowhey’s logic implies that we should welcome firms like CATL and BYD at the expense of Japanese competitors. He argues that their willingness to shirk US environmental regulations, rely on highly subsidized, largely coal-powered steel and cooperate with the very Chinese military that threatens us should not be weighed in the balance. Like almost everyone else in the elite policy world, particularly those located on our coasts, Cowhey and Rithmire seem to have forgotten that Japan not only exists, but continues to lead the world in most of the areas of advanced manufacturing that really matter...while also leading the world in soft power and providing an example that free-market, liberal democracies can thrive in Asia.

At a time when faith in both democracy and capitalism has lost ground in our popular culture, it seems odd that a former public servant would so enthusiastically pass over an ally like Japan to embrace an adversary who doesn’t simply want to compete with us, but whose stated objective is to displace us. Unfortunately, this myopia is not the fault of the authors, but of the institutions that employ them. China’s rise has coincided with a collapse in Japan-focused expertise within academic, financial and policymaking fields. As Adam Liff wrote recently for the US Japan Foundation:

Sadly, just as recognition of Japan’s unique importance has reached a historic peak in Washington, there is an inconspicuous but looming crisis facing the bilateral relationship: the accelerating disappearance at major American research universities of faculty expertise and courses for students focused on contemporary US-Japan relations and Japanese foreign and security policy.

It is possible, indeed probable, that Dr. Cowhey and Ms. Rithmire simply don’t know the facts. Why should they? Their universities, like almost all elite universities, have prioritized China over Japan for thirty years in admissions, “development,” board representation, endowment exposure and overseas partnerships. In the humanities, if Japan is addressed at all, it is treated as an oppressor (abroad, of China) or a victim (at home, of US WWII policy). It is rarely treated as an example of a liberal democracy that evolved from an Asian totalitarian state into a valuable partner thanks partly to mostly wise US policy decisions. In economics and business schools, when Japan is discussed at all, it is generally treated as a case study on “lost decades” or “poor ESG.” It is rarely viewed as a country that made difficult decisions to transform its economy and social safety net in ways that seem to elude the rest of the G-7. No one seems willing to ask the question: “What if Japan is winning?”

But this is not true in the middle of Asia, where a Pax Nipponica stretching from South Korea to India has been quietly taking shape over the last twenty years under the radar of Foreign Affairs but quite evident to the contributors to Jesper Koll’s Japan Optimistsubstack.

And it is not true in the center of our country, where Warren Buffett has continued to add to his ~$30bln investment in Japan while divesting from Chinese companies including Cowhey’s preferred BYD partner. Mr. Buffett is neither a policymaker nor a professor, but he does have a fair amount of expertise picking good investments; he has no interests beyond those of his country and shareholders, and he has considerable direct experience with various Japanese engineering companies who have worked with his own industrial firms over the years. I’ve had the honor of learning from him as his views of Japan have evolved over thirty years. Here’s what he and his partners say about learning from Japan.

It is a strategic relationship…we think of [our Japanese investments] as forever because it goes beyond the investment and is very much around the relationships we want to build there. We really hope to do big things with them globally. It’s super long term. Japan’s record has been extraordinary, actually. They have different customs…that’s true around the world. We don’t have any intention in any way of trying to change what they do, because they do it very successfully. There have been moments of learning.

Dr. Cowhey gets specific, so I’ll use Mr. Buffett’s lens to illustrate the Japanese alternative. His investments include Sumitomo Corp, which remains involved in the rare earth supply chain even as GM’s China strategy has led to a $5bln write-off in China amid a 99% collapse in Chevy China sales. These losses were despite billions of dollars in US taxpayer subsidies and bipartisan efforts to assist GM’s China push. Dr. Cowhey’s enthusiasm for China is perhaps understandable given that Qualcomm funds his faculty chair and that China accounts for nearly half of Qualcomm’s revenues. But Dr. Cowhey might recall that GM told a similar story a few years ago when assuring investors that “China was its future” (I was there: my old firm was one of GM’s largest shareholders before it filed for bankruptcy). Dr. Cowhey might also reflect on the fact that Toyota continues to grow its US investment with a recently announced $10bln commitment to US plants. Toyota, which correctly predicted US consumer preferences for hybrids over EVs, is growing sales in the US even as GM’s US sales decline alongside its Chinese sales. And India is partnering with Toyota, too. If Dr. Cowhey is willing to provide the tens of billions of dollars necessary to force US consumers to buy EVs and the trillions of dollars necessary to create a grid to support them, there’s no reason that Toyota, Sony and other Japanese companies could not produce these cars, too. The robots and software are all the same. The difference is the incentives.

Wouldn’t it be interesting if our leading universities and policymakers were to take a page from Mr. Buffett’s playbook and try deepening our existing partnership with countries who have superior technology to China while also sharing our values and interests? Japan’s investing another $500bln in us. Shouldn’t we at least consider investing in them before opening the door to a country whose envoy to Tokyo recently called for the head of Japan’s Prime Minister and who works around the clock to undermine our global influence while poisoning our domestic politics?

Thank you for reading.

Like ❤️ this post and you’ll help to re-industrialize America….

The opinions expressed are my own. They are not intended as investment advice. I currently own and may in the future own positions in securities mentioned in this article.

Andrew McDermott Nashville, August 2026

Here a link to Andrew’s previous guest contribution What if Japan is winning? Buffett & Japan which include his bio & photo

see also the Japan Optimist previous post "Nothing to Fear but a US-China Deal" on the mood in Tokyo ahead of the Sept 24 US-China Summit

Japanese elites are very respectful of spirits, higher forces, and certainly honor trusted superstitions and traditions. Careful attention is paid to the Rokuyō Buddhist calendar of good and bad days. When President Trump meets Premier Xi for lunch & deliberations in Washington Sept 24 it will be the early hours of Sept 25 here in Tokyo — 仏滅 Butsumetsu: the worst day in the cycle, Buddha’s demise…

In a normal year, the hot & humid Tokyo summer is more of a time for ghost stories and playful hallucinations than for serious scenario planning. Elite technocrats’ positions have gone through the annual appointment and promotion cycles and, while politicians are away from Tokyo in their local constituencies, there is typically a relaxing calm in the hallways of power. It could not be more different this year. Tokyo’s policy elite is running hot with worry and working overtime. In my forty years here, I've never sensed such high alert.

And new “unthinkable” events just keep compounding the nervousness: in just the past weeks, a very heavy dose of North Korea saber rattling; Putin visiting and flexing his muscle right where many believe is a rightful part of Hokkaido; and now Trump starting a new trade war with Canada. How special is Japan to America? Make no mistake: the ghost of a “Trump 裏切りBackstab” is very real in Tokyo this summer.

Like ❤️ this post and Trump won’t throw you under a bus..…

Why? The logic is as impeccable as it seems farfetched: Clearly —so go the conversations— Trump needs a big win to improve his midterm chances; and, from an economic and financial focus, China is the only nation big and powerful enough to pull this off for him:

• he’d get lower bond yields if China re-allocates financial capital into the treasury market (a ‘deal’ to reverse the sell in place since 2015 when China holdings of U.S. debt peaked at $1.3 trillion, now down to less than half at $633bn….huge announcement effect backed by credible firepower).

• he’d get lower inflation if China is allowed to re-start exports of her excess capacity of consumer- and capital goods. The big price would be the opening of the U.S. market to Made-by-China passenger cars: almost 14% of the U.S. CPI is cars and car related, so an opening here would almost immediately boost the purchasing power of the American people.

• he’d get manufacturing jobs and skills transfer if China capital goods (and car) companies are allowed to set up joint ventures with US manufacturers. Plenty of rumors that Team Trump has studied carefully the contracts China imposed on U.S. companies investing in China in the 1980s and 1990s and, in consultation with U.S. car makers and other industrialists, is supposedly preparing deals offering similar terms to China manufacturers wanting to set up shop in America now.

• and yes, wouldn’t Premier Xi also be a big winner here? He’s struggling to keep his nation’s employment and capacity from falling — a match made in heaven: China exports its deflation to an America that increasingly wants it.

Thus goes the fear-the-worst chain of thoughts in Tokyo these days.

Personally, I think there are way too many “ifs” in these scenario chains — but I admire the Machiavellian pragmatism that’s guiding Japan’s elites to think in earnest through these scenarios. Prepare for the worst. Butsumetsu after all…

Of course, there is a creative next-step link to the domestic agenda: if —or should I say when by now— Trump and Xi cut a deal and China starts buying U.S. treasuries again then Japan can start re-patriating her treasury holdings — a Trump-Xi “deal” will make possible what PM Talkaichi wants to engineer. Think the unthinkable: the great GPIF-China swap is coming to U.S bond markets….

Meanwhile, in the real world

The run-up to the September U.S-China summit has elite technocrats lobbying frantically Japan’s CEOs to commit to next concrete projects for the $550 billion ”investment or tariffs” deal ahead of the SuperPower summit.

But: Japan CEOs are increasingly confused — should we prioritize U.S. projects to appease Trump (and avoid tariffs…); or should we focus on the ambitious Y370 trillion domestic industrial re-building national strategy now spearheaded by Prime Minister Takaichi?

Of course it’s never a complete “either — or”; but Japan does have significant resource constraints and, more importantly, CEOs now face boards that actually insist on higher returns on investment. Which is better and more rewarding to our shareholders and stakeholder, to invest in America or here in Japan? It would be more than ironic if a Trump—Xi investment deal became the catalyst for “repatriation” of Japan’s financial and productive assets.

All this, of course, is pure scenario speculation. The one certainty we have is that, in the run-up to the September 25 Butsumetsu ‘bad day’, we’ll get ever more intense “noise” leaked and postulated from here in Japan as well as from Washington. (In contrast, Beijing looks poised to enter and lead the Summit with relative calm, predictability, and hardly a hint of the ‘performance anxiety’ haunting democratically elected leaders…)

The other certainty we have is this: the day after, September 26, is Ichiryumanbaibi 一粒万倍日: This translates to “One Grain, Ten-Thousand Fold Day.” It is a highly lucky day from the old Japanese directional calendar, signifying that small seeds planted today will grow into massive rewards. Whether this means the summit will be a “nothing burger” or will actually yield a substantive shift in US-China relations I do not know. But chances are high PM Takaichi will use this ‘good day’ to open the next session of Parliament. She needs all the good fortune she can get to succeed in proving her ambitious economic policy agenda can actually become reality. With or without a “U.S.—China” deal, the pressure to perform in on for Takaichi. It may well be that a ‘deal’ will prove to Takaichi’s advantage...

Thank you for reading. As always, comments welcome. Many cheers from blue-sky-steaming-hot Tokyo ;-j

Like ❤️ this post and Trump won’t throw you under a bus..…

There are few Japanese with better credentials to discuss financial markets. It is no exaggeration to say that, over the past 30 years or so, Oki has been one of the key actors shaping the evolution of Japanese capital markets, both by having, ‘skin in the game’ and by being a public thinker & policy shaper: Oki is a highly successful financial entrepreneur (after Goldman Sachs, he founded Monex Group in 2004, TSE listed); is an engaged investor (he is the CIO of the Japan Catalyst Fund, the pioneering Japan-based activist fund); is a policy maker (he was a TSE Board Director and is a key member of the “Follow-up Kaigi” that pushed TSE-led governance reform); and recently, he founded and endowed the University of Tokyo Center for Applied Capital Market Research (UTCMR). Most importantly to me, he has always been a great boss, thoughtful mentor and enthusiastic sponsor.

Enjoy. As always, comments welcome. Many cheers from tropical storm-battered Kauaii ;-j

Like ❤️ this post or markets won’t fund your next venture…

AI & capital markets: from evaluation to creation

by Matsumoto Oki

1. Will AI Change the Role of Capital Markets?

The rapid advancement of AI is transforming virtually every aspect of society. Investment, business management, and capital markets are no exception, and all are likely to undergo significant change. AI is already outperforming humans in many areas, including corporate analysis, market analysis, and the organization and comparison of information used in investment decisions.

Yet I do not believe that the fundamental change brought about by AI lies in analytical capability itself.

What AI has changed is scarcity.

AI has changed the structure of scarcity in society. Things that were once scarce are becoming less so, while things whose scarcity was less apparent are becoming relatively more valuable. This shift in scarcity is making the role that capital markets are fundamentally meant to play more important than ever.

In this essay, I would like to use this shift in scarcity as a starting point to consider a fundamental question: What are capital markets ultimately for?

2. Evaluation and Creation

There are two kinds of activity in society.

One is to understand, compare, and evaluate value that already exists. The other is to create value that does not yet exist.

Evaluation is the activity of understanding and comparing existing value and determining what that value is. Creation is the activity of producing value that will be evaluated in the future. Put differently, evaluation deals with what already exists, while creation deals with what does not yet exist.

Analyzing an existing company, for example, requires a different capability from creating a company that does not yet exist.

These two activities are not in conflict. On the contrary, they complement each other. Evaluation sharpens creation. Creation gives evaluation its purpose. Evaluation selects among acts of creation, while creation changes what there is to evaluate.

Society has developed through the repeated interaction of these two activities. New value is created, that value is evaluated, and that evaluation encourages the next round of creation.

Capital markets likewise perform both functions. Markets evaluate companies, facilitate price discovery, and send signals that guide the allocation of resources.But they do more than that. They also supply capital so that new companies, new technologies, and new forms of value can emerge.

In other words, capital markets are both an Evaluation Market and a Creation Market. They are a social mechanism that connects evaluation with creation.

AI, however, has begun to change the structure of scarcity across these two activities. By making evaluation less scarce and dramatically lowering its cost, AI has increased the relative importance of creation.

This change requires us to reconsider the role of capital markets themselves. I believe that, precisely because we are entering the age of AI, creation will become increasingly important to society.

3. AI Has Changed the Cost of Evaluation

AI has brought profound change not only to the realm of Information, but also to the realm of Intelligence.

It is important here to distinguish between the two.

In Japan, the CIA is commonly translated as the “Central Information Agency.” Its actual name, however, is the Central Intelligence Agency. It is not Information. It is Intelligence. That distinction matters to the argument of this essay.

Information is a collection of individual facts and pieces of information. Intelligence, by contrast, is what emerges when those pieces of Information are connected, structured, and transformed into meaningful insight.

AI has greatly reduced the scarcity involved in gathering, analyzing, comparing, summarizing, and evaluating publicly available information. Put differently, AI has dramatically lowered the cost of understanding, comparing, and evaluating value that already exists.

And AI is doing more than simply collecting Information. It is also dramatically lowering the cost of connecting and structuring that Information and transforming it into Intelligence.

The important point, however, is not that evaluation has become unnecessary. It is that evaluation has become less scarce.

In 2020, when launching an engagement fund, I wrote that the competitive advantage derived from analyzing publicly available corporate information faster and more accurately than others would diminish, while the importance of engagement with companies would increase.

At the time, I was thinking primarily about investment methodology. Looking back now, however, I see that this change was not merely about how we invest. It was a starting point for reconsidering the role of capital markets themselves.

AI has not made evaluation unnecessary. It is reducing—and may eventually eliminate—the competitive advantage derived from evaluation.

So, in an age when evaluation is becoming less scarce, what will truly remain scarce?

4. What Does It Mean to Create?

The future cannot be created through analysis alone.

Creation is not about predicting the future. It is about trying to create value that does not yet exist.

Creation can take many forms: starting a company, conducting research, making art, managing a business, or investing. What these activities have in common is that they all involve trying to bring something into society that is not there today.

This is fundamentally different from evaluation.

Evaluation begins with something that already exists. Creation does not. There is nothing yet to evaluate in full, no established answer to discover, and no correct path to follow. Analytical ability alone is therefore not enough.

This is where Judgment becomes necessary.

By Judgment, I mean something broader than what the Japanese words for “judgment” or “decision” would normally imply. It is the ability to move forward in the face of uncertainty—to take a step, act, learn from the results, adjust, and act again. Judgment is not a single decision. It is a continuous and dynamic process.

Creation is not achieved by finding the right answer once. It requires action and adjustment, repeatedly increasing the likelihood that new value will emerge.

What matters in creation, therefore, is not having the right answer from the outset.

Creation is not about calculating the probability of success. It is about increasing the probability of success itself through action.

Nor does creation arise from knowledge alone. Creation arises from curiosity.

It is the curiosity to create something that has never existed before, or to try a method that has never been tried before, that leads people to step into an uncertain future. It draws us toward what is new and gives us a natural forward-leaning orientation toward the future. And it requires the ability to keep moving forward without fearing failure, correcting course again and again.

Judgment is the ability to turn curiosity and will into action, take responsibility for the results, and continue to adjust.

5. Money and Capital

Creation requires people. But people alone are not enough. Creation also requires capital.

What, then, is capital?

We often use Money and Capital as though they mean the same thing. Fundamentally, however, they are different.

Money is used for exchange and consumption. Consumption means enjoying value that someone else has already created.

Capital plays a different role. Capital supports value creation. It provides the resources needed to pursue the creation of new value in the future.

The distinction lies in whether Money is accompanied by Judgment.

Money becomes Capital only when it is accompanied by the will to create and by Judgment.

In other words:

Capital is Money directed toward the creation of new value in the future.

The world is awash in Money. Yet Capital is scarce precisely where new value is being pursued—in AI, semiconductors, data centers, energy, robotics, and other areas of innovation.

By a shortage of Capital, I do not simply mean that there is not enough money available. I mean that there is not enough funding willing to embrace uncertainty, commit for the time required, and support the creation of new value.

Money may be abundant, but this kind of Capital is being competed for. Its value is rising.

If Capital is scarce, then deciding where that Capital should go becomes critically important to society.

This is where the essence of capital markets lies.

Capital markets are a social mechanism that transforms Money into Capital and allocates that Capital to value creation.

6. Capital Markets in the Age of AI

AI has greatly reduced the scarcity of Information and Intelligence and dramatically lowered the cost of evaluation.

But this does not mean that capital markets are becoming unnecessary.

Quite the opposite.

As evaluation becomes less scarce, creation becomes relatively more important.

At least for now, AI does not itself possess curiosity or will, nor does it take responsibility for outcomes as it moves toward creation. The scarcity of Creation and Judgment therefore will not decline as quickly or as directly as the scarcity of evaluation.

Creation is indispensable to the development of society. Even in the age of AI, creation will remain scarce.

And creation requires Capital.

Capital markets transform Money into Capital and allocate that Capital to value creation. This is precisely why the role of capital markets becomes even more important in the age of AI.

AI does not make capital markets unnecessary.

Rather, AI has made the essential role of capital markets clearer than ever.

7. Conclusion

AI is profoundly changing human society. In this new era, how should capital markets evolve?

The challenge in the age of AI is not simply to make evaluation even more efficient. We must also ask what kinds of creation society needs, entrust Capital to those efforts, and build an environment in which creation can emerge and grow.

Capital markets must preserve their role as markets for evaluation while shifting their center of gravity increasingly toward their role as markets that support creation.

Thank you for reading.

Matsumoto Oki - August

Like ❤️ this post or markets won’t fund your next venture…

Oki Matsumoto

Chairman of the Board, Monex Group, Inc.

Joined Salomon Brothers in 1987 and Goldman Sachs in 1990. Became a partner at Goldman Sachs in 1994 at the age of 30. Founded Monex in 1999 in partnership with Sony, and established Monex Group in 2004, which is listed on the Tokyo Stock Exchange.

The group operates online brokerage and asset management businesses in Japan and the United States, together with Web3-related services. It is a leading firm in engagement-focused investment management for listed companies in Japan through the Japan Catalyst Fund. It also owns Coincheck Group, a Nasdaq-listed subsidiary, further strengthening its presence in the digital asset sector. Served as an outside director of the Tokyo Stock Exchange for five years and has been actively involved in initiatives to reform and strengthen Japan’s capital markets. Also serves as an outside director of Mastercard and is a former Vice Chair of Human Rights Watch.

In 2023, founded the University of Tokyo Center for Applied Capital Market Research (UTCMR) and the Ruby Foundation.

Like ❤️ this post or markets won’t fund your next venture…

Like ❤️ this post to get inside the China-India-Japan power triangle…

The China Variable: India, Japan, and the decade ahead

By Harry Wilby

The first instalment of this series argued that the India-Japan relationship is a rare thing: a partnership with no original sin, no territorial quarrel, no historical grievance, and 1,400 years of contact without a single episode of major enmity. That is the romance of it. The second, The Japan-India Corridor Trade, turned to the money, arguing that the most compelling use of Japanese capital in the corridor is not another year of the carry trade into Washington and Canberra but a strategic equity position in India’s public sector banks, underwritten by a yen-rupee cross that has barely moved in thirteen years. That is the commerce of it. This piece concerns the realism. For the deeper foundation of the relationship is not what unites India and Japan to each other. It is what confronts them both from the same direction.

Each has, as its single most consequential neighbour, a country that has demonstrated its willingness to convert economic dependence into political leverage, to contest borders by force or by cartography, and to treat the sovereignty of its neighbours as provisional. Each has been on the receiving end of Chinese coercion within the past five years. And each has responded not by seeking open confrontation, which neither can afford, but by pursuing a quieter strategy of managed distance: reducing its exposure, diversifying its dependencies, and hardening its position while keeping the channels of dialogue conspicuously open.

Let me be clear about the spirit of what follows, because it is not a polemic. Nothing in this analysis proceeds from hostility to China, and the reader should resist any such framing. Judged purely as a practitioner of realist statecraft, Beijing has been consistently ahead of the curve: it identified the strategic value of supply-chain dominance decades before its trading partners understood their exposure, it built the world’s most formidable industrial base while its rivals debated the merits of doing so, and it has applied its leverage with a precision and patience that any student of power must acknowledge, whatever one thinks of the ends. The failures examined in this piece are not Chinese failures. They belong to New Delhi and Tokyo, and to the broader democratic world whose assumptions they shared. China played its hand well. The question this piece asks is whether India and Japan, having finally recognised the game, can now play theirs.

The argument, then, is that this shared posture of managed distance is the true load-bearing wall of the India-Japan relationship, and that the coming decade will determine whether it can be forged into something deliberate and joint. It is worth stating plainly at the outset what the relationship is not. India and Japan are not allies against China. They are two sovereign states pursuing parallel strategies of de-risking that happen, increasingly, to converge. The distinction is not pedantry. It defines precisely what the partnership can do, what it cannot, and where it will generate friction of its own.

Two Asymmetric Relationships

Let us begin with the numbers rather than the rhetoric, because the numbers are more honest. China is Japan’s largest trading partner. Bilateral trade reached roughly $322 billion in 2025, with China accounting for approximately 22 per cent of both Japanese exports and imports. This is not a relationship that can be exited. It can only be managed, hedged, and slowly rebalanced.

And yet, since November 2025, it has been in political freefall. Prime Minister Takaichi’s remarks on a possible Japanese military response to a Taiwan contingency triggered the sharpest deterioration in a decade. Beijing banned Japanese seafood imports, restricted flights and tourism, cancelled cultural exchanges, imposed dual-use export controls, and sanctioned some forty Japanese firms. Chinese coast guard vessels were present in the contiguous zone around the Senkaku Islands on 361 of 365 days in 2024, the highest frequency on record, and maintained near-continuous presence through 2025. Japan’s Defence White Paper has for four consecutive years described China as an “unprecedented and greatest strategic challenge.” A Yomiuri Shimbun poll in March 2026 found that 93 per cent of Japanese citizens regard China as a threat to national security. This is not a relationship in a difficult patch. It is one in which the strategic and the commercial have decoupled entirely, each pointing in an opposite direction.

India’s China problem is different in texture but identical in structure. The clash in the Galwan Valley in June 2020, the deadliest border incident in forty-five years, permanently altered the political and military foundations of the relationship. Five years on, what has emerged is not reconciliation but, in the apt phrase of one Indian commentator, management under pressure. The meeting between Prime Minister Modi and President Xi at the Shanghai Cooperation Organisation summit in Tianjin in August 2025, the first formal engagement of its kind since 2018, was widely described as a thaw. So it was. But the Line of Actual Control is now a permanently militarised front, patrolled and fortified along its length. China continues to rename locations in Arunachal Pradesh, a territory it claims in full. And during Operation Sindoor in May 2025, Beijing furnished Pakistan with military, intelligence, and political support against India, a fact the subsequent diplomatic warming has papered over but not erased.

A note of realism is required here, and it is one that Indian strategic commentary too often avoids. India and China are not like-for-like military competitors, and the pretence that they are serves nobody. China’s defence budget is roughly three times India’s. Its navy is the largest in the world by hull count. Its progress in what its own doctrine calls intelligentised warfare, the integration of artificial intelligence, cyber, space, and electronic warfare into a single operational system, has no Indian equivalent. Pravin Sawhney made precisely this argument in The Last War, published in 2022: that India’s military remains structured, trained, and procured to fight Pakistan, while China has moved to an entirely different way of war, and that an India-China conflict would therefore not be a contest between comparable forces but a collision between different generations of military thought. It is a measure of the problem that, four years on, very little in Sawhney’s assessment requires revision despites India’s economic growth of recent years. The honest yardstick for Indian military planning remains Pakistan, a dangerous, proximate, and Chinese-armed adversary against which India’s conventional superiority is real but bounded. Against China itself, India’s strategy is not parity but denial: to make the costs of any incursion exceed its value. This asymmetry is precisely why the Japanese defence-industrial relationship matters more to New Delhi than the headline figures suggest.

India’s thaw is genuine, but it is tactical rather than sentimental, driven by a mutual recognition that a frozen relationship is ruinously expensive for both parties. China is India’s largest trading partner, with bilateral goods trade running at roughly $118 billion a year, and the relationship is profoundly lopsided, with the deficit above $100 billion in China’s favour. The dependence, in other words, runs in one direction while the opportunity runs in the other. China, whose own growth has stalled and whose established export markets are closing behind tariff walls, needs the world’s fastest-growing major consumer market more with each passing year. India needs the technology, the rare earths, and the industrial components that it cannot yet source or make elsewhere. Each side knows precisely what the other holds. Japan’s relationship, by contrast, has deteriorated precisely because Takaichi’s government has chosen strategic clarity over the studied ambiguity of her predecessors, a choice with initially impeccable but short-termist domestic logic, given her cabinet’s approval rating of nearly 70 per cent in the weeks after the remarks, but one that leaves the commercial relationship dangling over a void. India is thawing what it froze. Japan is freezing what it long kept warm. The two countries are, in effect, passing each other in opposite directions on the same road, and finding that they recognise one another.

Recognition and Response

There is a charge, made often and not without merit, that India and Japan were both slow to grasp the nature of the challenge China posed, and that everything now being undertaken with such urgency is merely the belated correction of a failure of foresight. The charge deserves a proper hearing, because the honest answer sharpens rather than blunts the analysis. The distinction that matters, I would argue, is between recognition and response. On the first, both countries were late. On the second, both are arriving, if anything, at close to the right moment.

Let us consider the recognition failure first, because it is real. Japan received the clearest early warning of any advanced economy and received it early. In 2010, following the collision of a Chinese trawler with a Japanese coast guard vessel near the Senkakus, Beijing imposed an informal embargo on rare earth exports to Japan. This was the single most instructive event in the modern economic history of Chinese statecraft: a demonstration, fully fifteen years before most of the West absorbed the lesson, that China would weaponise supply-chain dependence for political ends. Japan responded well to the narrow problem. It cut its rare earth dependence on China from roughly 90 per cent toward 60 per cent through the Lynas partnership in Australia, stockpiling, and recycling. But it did not generalise the lesson. Japanese direct investment into China continued to climb through the 2010s, the broader manufacturing dependence deepened, and the old doctrine of seikei bunri (政経分離), the separation of politics from economics, persisted in corporate Japan long after the Japanese state had privately concluded that no such separation was any longer possible.

India’s recognition failure has a different character but the same shape. For two decades New Delhi ran a China policy built on the premise that leader-level rapport could substitute for a settled border and a balanced trade account. The premise had a name and a venue. After the Doklam standoff of 2017 brought the two armies eyeball to eyeball for seventy-three days, Modi and Xi met at Wuhan in April 2018 for the first of two so-called informal summits, an innovation in which the two leaders, without aides or agendas, would walk by the lake and reset the relationship through personal understanding. The second followed at Mamallapuram, near Chennai, in October 2019, and produced the language of the “Chennai Connect.” The Wuhan spirit, as the doctrine came to be known, held that strategic communication at the very top would filter downward and prevent incidents at the border. Eight months after Mamallapuram, Chinese troops moved into the Galwan Valley. The doctrine did not survive the contact. Meanwhile the border had been left under-fortified and under-built while China constructed roads, airstrips, and forward positions at a pace India did not match, and the trade deficit was permitted to swell past $100 billion. In both capitals, then, the intellectual error was the same, and it was the same error made across the entire democratic world: the assumption that a China growing richer would become a status-quo power rather than a revisionist one. India and Japan simply had less excuse than most, being closest to the problem in geography and in history, and having received the earliest and most explicit warnings.

But the charge of being behind the curve elides a harder truth about constraint. Neither country could have responded meaningfully much earlier than it did, because the capacity to respond did not yet exist. Japan spent the 2010s with China as its largest export market during a decade of chronic domestic stagnation. To have written off that exposure in 2013 would have meant accepting certain and severe near-term pain against a threat that had not yet fully materialised, a trade that few managements in any country would make. India’s constraint was starker still. One cannot de-risk from Chinese active pharmaceutical ingredients, electronics, and solar components when no domestic or allied substitute exists at the necessary scale and price. India’s dependence was less a policy failure than a fact of its stage of development. The ability to substitute is being built now, through precisely the Japanese and Western capital flows described in the previous piece, because it could not have been built before. A manufacturing base must precede the repatriation of a supply chain, and India is only now acquiring one.

This is why the more precise verdict is that both nations were behind the curve on recognition and roughly on time on response. The window for an effective India-Japan counter-strategy required three conditions to align: Japanese corporate willingness to redeploy capital, which arrived only with the governance reforms and the end of the lazy balance sheet after 2023; Indian capacity to absorb that capital, which arrived only with the post-Galwan manufacturing push; and Chinese conduct sufficiently assertive to sustain the political will for the shift in both electorates, which the events after Galwan and after Takaichi’s remarks have supplied in abundance. Those three conditions did not converge until somewhere between 2023 and 2025. Had the partnership been attempted earlier, the Japanese capital would not have moved, the Indian capacity would have been absent, and the political cover thinner. The two countries are not late to the meeting. The curve, at last, has bent toward them. The risk they now carry is not historical but prospective, and it is the subject of the remainder of this piece: that the timeline on which they can substitute away from China runs slower than the timeline on which Beijing may choose to act.

The Coercion Playbook

If we set the two experiences side by side, a single instrument comes into focus, applied with variations to each. Against Japan: the rare earth embargo of 2010, the seafood bans after the Fukushima wastewater release in 2023 and again after Takaichi’s remarks in 2025, the dual-use export controls and the sanctioning of forty firms in early 2026. Against India: the curbs on rare earth magnets and fertilisers, the near-total technological estrangement enforced through app bans and investment screening after 2020, the priority security clearances imposed on Chinese business visas. The method is consistent. Identify the dependency, then apply selective and reversible pressure calibrated to alter behaviour without provoking a rupture that would damage Beijing as much as its target.

The lesson both countries have drawn from this is structural rather than moral, and it is the same lesson: the coercive leverage available to China is a direct function of the depth of the dependence one permits. Reduce the dependence and one reduces the leverage. The policy responses have therefore converged on an identical logic, though they were designed independently and bear different names. For Japan it is de-risking and supply-chain diversification, expressed in the sevenfold rise in transport-sector investment into India and the conscious retreat from China-centric manufacturing described earlier in this series. For India it is Atmanirbhar Bharat, the Production Linked Incentive scheme, and the deliberate courtship of Japanese, American, and European capital as a substitute for Chinese technology and components. Neither country coordinated its response with the other. They arrived at the same conclusion because they were reasoning from the same premise about the same neighbour.

The Paradox of Decoupling

The most revealing fact about both relationships is that the political estrangement and the economic entanglement are moving, at this very moment, in opposite directions. The rhetoric of decoupling and the data of capital flows do not merely diverge. They contradict one another outright.

The investment data must be read on two clocks at once. On the longer one, Japanese capital has genuinely receded from China: JETRO’s own surveys single out the post-pandemic decline in Japanese direct investment as conspicuous among the major economies, its figures show Japanese greenfield investment into China roughly halving between 2020 and 2024, and the number of Japanese nationals resident in the country has fallen below 100,000 from a peak of some 150,000 in 2011. On the shorter clock, the direction reversed at the least convenient moment. On the Chinese commerce ministry’s measure, Japanese direct investment into China rose 55.5 per cent year on year in the first three quarters of 2025, off that depressed base, and within a total foreign-investment pool that shrank 9.5 per cent over the year, its third consecutive annual decline. A partial reflux inside a shrinking pond, in other words, but a reflux nonetheless, and one timed to the political nadir: the marginal yen was returning to China during the precise period in which the relationship was collapsing to its lowest point in a decade. The official data for 2026 have since gone quiet in an instructive way. China’s total utilised foreign investment was still contracting in early 2026, and where the ministry’s half-year release named its fast-growing source countries, Japan was conspicuously absent; the ministry offered instead a 5.3 per cent rise in newly established foreign-invested firms, a count of companies where a value of capital would normally sit.

The likelier explanation is not that the Japanese money has stopped moving, but that it has stopped being visible. What is emerging instead, as the Lowy Institute has observed, is not decoupling but its disguise, and the evidence for it is written in the investment statistics of third countries. In 2025, Swiss investment into China jumped 66.8 per cent. British investment rose 15.9 per cent. Investment from the United Arab Emirates grew 27.3 per cent. These are anomalous surges from economies with no obvious domestic reason to be accelerating into China at the very moment Western boards were being told to de-risk, and the explanation lies in what the capital is carrying. The template was established by American investors, who have already begun entering China’s pharmaceutical sector through structures domiciled in Saudi Arabia. The infrastructure for a Japanese equivalent is now in place along three routes. In Switzerland, the China-Switzerland free trade agreement is being upgraded to cover digital trade and artificial intelligence, positioning the country to become what analysts have called a technology custody centre, under which a firm may establish its Asian research and development headquarters as a Swiss entity before forming a joint venture with Chinese partners, so that the investment acquires the legal appearance of Swiss neutrality. In Riyadh, Japanese companies are among the more than 700 multinationals that have established regional headquarters under Saudi Arabia’s Vision 2030 programme, structures which, as Saudi investment into China grows, can provide indirect exposure to opportunities under Beijing’s new Five-Year Plan depending on how ownership is arranged. United Kingdom vehicles serve the same purpose along a third route. No Japanese company will confirm any of this on the record, and none needs to. That is the design. What matters is not where the capital originates but how it is legally and statistically classified, and in each case the underlying exposure persists beneath a flag of convenience. This is nintai (忍耐), the capacity to endure pressure while preserving flexibility, and it may well become a template for how much of the world learns to engage with China. It is also a candid admission that Japanese industry, for all the official language of de-risking, cannot yet survive a genuine separation.

India presents the same paradox inverted. It imports well over $100 billion in Chinese goods each year, active pharmaceutical ingredients, electronics, solar cells, rare earth materials, while pursuing a suite of policies explicitly intended to reduce that very dependence. The trade agreements concluded with the United Kingdom and the European Union in 2025 are, in part, an effort to construct alternative supply chains. The PLI scheme is, in part, an effort to reduce the reliance on Chinese intermediate goods. But the realistic timeline for meaningful substitution is measured in ten to fifteen years, not two or three. It is worth pausing on that figure, because it is not arbitrary. Ten to fifteen years is, by most conventional measures, roughly the development distance between India and China themselves: India’s per capita income today stands approximately where China’s stood in the late 2000s, its manufacturing share of GDP where China’s was a generation ago. The substitution timeline and the development gap are the same number because they are the same fact. And it is here that the character of Japanese capital becomes strategically significant rather than merely convenient. Japanese investment is patient by constitution, deployed on decade-long horizons with engineers and supplier networks attached, and it is therefore the single form of foreign capital whose natural tempo aligns with the fifteen-year task India has set itself. American private equity wants its exit in five years. Japanese industrial capital, as Suzuki has demonstrated across four decades in India, is content to wait for the country to grow into it.

It is here that the argument of the first piece and the argument of this one join. The India-Japan economic relationship is, among its other functions, a mechanism for accelerating this substitution on both sides of it at once. India supplies the market, the labour, and the demographic runway. Japan supplies the capital, the process technology, and the quality discipline. The deeper the bilateral integration runs, the faster each partner can erode the Chinese leverage point that constrains it. The partnership is not merely commercial. It is, properly understood, the joint construction of an exit that neither country can yet afford to take alone.

Parallel Buildups, A Shared Horizon

The hardening is not only economic. Japan’s rearmament is the most consequential shift in its strategic posture since 1945. Defence spending rose from 5.4 trillion yen in 2022 to 8.7 trillion yen in 2025, an increase from roughly $35 billion to $56 billion in the space of three years. Type 12 long-range missiles, a counterstrike capability that directly constrains Chinese operational freedom in any Taiwan contingency, are being deployed to Kumamoto on Kyushu. The coast guard base at Ishigaki, the largest in Japan, patrols the Senkaku approaches with 600 personnel. The provocations that have driven this are relentless and escalating: two Chinese aircraft carriers operating simultaneously near Japan’s southwestern islands for the first time in mid-2025, Chinese fighter jets approaching Japanese military aircraft to within thirty metres, joint Chinese-Russian bomber patrols through the straits around Okinawa. The Takaichi cabinet’s decision to review the National Security Strategy in 2026 will accelerate all of it.

India’s military response to Galwan has followed a parallel logic, within the constraints described earlier. Border infrastructure has been built at a pace never before attempted, forward deployments have been made permanent, and the Line of Actual Control has been quietly deformalised from a line of restraint into a line of confrontation held by deterrence. Operation Sindoor in May 2025 demonstrated a new Indian willingness to use force against cross-border threats regardless of Chinese diplomatic displeasure. And Beijing’s decision to back Pakistan materially during that operation hardened Indian threat perceptions in a way that the diplomatic thaw of the following months has softened at the surface but not resolved beneath it.

It is against this backdrop that the decision of April 2026, examined in the previous piece, acquires its full significance. When Japan scrapped the blanket prohibition on lethal weapons exports and placed India among the seventeen trusted partner nations to which such transfers are now permitted, it was not simply opening a new market for its defence industry. It was inserting itself, deliberately, into India’s defence-industrial supply chain, in a strategic context where both governments understand without needing to say so that their threat calculus points in the same direction. The co-development of the UNICORN naval mast, completed in 2024, was the modest first instance, and at the Delhi summit this July the two countries signed their first joint defence co-development project as Quad partners. The new framework opens far larger possibilities: the co-production of anti-ship missiles, of surveillance and early-warning platforms, eventually of air defence systems, every one of them with an obvious application to the contingency both governments are quietly preparing for and neither will name in public.

The clearest map of where this collaboration is heading is Japan’s own new industrial strategy. In late 2025, the Takaichi government designated seventeen strategic sectors for prioritised investment under its Growth Strategy Headquarters, backing them with a combined public and private investment target of 370 trillion yen, some $2.3 trillion, by the mid-2030s, with each sector assigned to a responsible cabinet minister. Semiconductors alone are earmarked for 68 trillion yen, biopharmaceuticals and regenerative medicine for over 20 trillion yen. Set those seventeen sectors against India’s existing industrial landscape and something striking emerges: for almost every Japanese strategic priority there is an obvious Indian counterpart, an existing company, cluster, or region where the capability, the workforce, or the market already exists. The table below is illustrative rather than official, a first sketch of the match-making exercise that ministries and banks on both sides are now conducting in earnest. It is to show the sheer size of the potential in collaboration across the seventeen sectors and that if sufficient nous and will are exercised – Japan can forge a pan-Indian hedge strategy without getting itself into a formal strategic alliance.

The Questions Neither Country Can Avoid

Managed distance is a strategy, not a solution, and it leaves certain questions permanently open. Three of them will define the relationship over the coming decade, and honesty requires stating them without the false comfort of a resolution, because none is available.

The Taiwan asymmetry. Japan has moved from ambiguity to something close to clarity on Taiwan under Takaichi. India has not, and will not. New Delhi’s doctrine of strategic autonomy makes any explicit commitment to Taiwan’s security politically impossible, and India maintains the One China policy as formal doctrine. This produces a structural asymmetry at the heart of the partnership. Japan is now, by its own choosing, on one side of the defining question of Asian security. India is deliberately on no side of it. Yet it would be a mistake, and a characteristically Western one, to read this as Indian weakness. On the question of autonomy itself, India is arguably in the stronger position of the two. It has continued to buy Russian oil at scale through every phase of Western sanctions pressure and absorbed 50 per cent American tariffs rather than yield the point. It procured the Russian S-400 system in the teeth of US sanctions law and received a waiver rather than a penalty. It sits simultaneously in the Quad and the SCO, hosts Western leaders and Russian ones in the same season, and treats each relationship as severable from the rest. Japan, bound by treaty, hosting fifty thousand American troops, can do none of these things. And India believes it holds the moral high ground in the bargain when dealing with the West. As External Affairs Minister Jaishankar pointedly observed in conversation with the Financial Times’ Gideon Rachman, the weapons used to attack Indians over the decades have overwhelmingly been Western ones, supplied to Pakistan by the very powers now lecturing New Delhi on the company it keeps. The lesson India draws is not anti-Western. It is that dependence on any single guarantor is the vulnerability, and autonomy the insurance. The question for the decade is whether Japan’s clarity and India’s autonomy can coexist within one partnership, or whether the two countries must simply agree never to make Taiwan a bilateral matter, and confine their cooperation to the domains where their interests are already aligned.

The rare earth chokepoint.

Both countries remain acutely exposed to a dependency that China has already shown, against Japan in 2010 and against much of the world since, that it will exploit. China controls roughly 60 per cent of global rare earth mining and around 85 per cent of processing capacity, and since January 2026 has applied export controls on rare earths aimed squarely at Japan’s defence supply chain. Japan has made real progress in reducing its exposure through recycling, diversification, and research into deep-sea extraction. India holds reserves of some 6.9 million tonnes, among the largest in the world, that remain largely unexploited. The bilateral framework now includes cooperation on critical minerals, and the July 2026 Delhi summit placed a critical-minerals framework within its five-basket economic security package. The open question is whether that cooperation is moving quickly enough to matter on the compressed timescale on which the coercion playbook operates.

The substitution lag.

Both governments wish to reduce their dependence on China. Neither can do so at speed without incurring severe economic pain. The India-Japan relationship is, in part, a hedge against that pain, but it cannot replace China at current scale within a ten-year horizon. This must be stated plainly, because the alternative is to mistake aspiration for achievement. De-risking is the policy. Decoupling is the aspiration that both capitals privately know they cannot yet afford. The gap between the two is where the strategic risk of the coming decade actually lives.

Four Scenarios for the Decade

Prediction is a mug’s game, and the honest task is not to forecast an outcome but to map the decision points along which the relationship will travel. Four broad paths present themselves, summarised below, together with the wildcards that could redraw the map entirely. The four are exhaustive by construction and their probabilities sum to one; the wildcards are not scenarios but shocks, any of which would redistribute the mass across all four at once.

1) Convergence, or full speed ahead.

In the optimistic case the bilateral does the work itself, and the fate of the Quad is close to irrelevant to it. The Quad is a consultative convenience subject to the electoral weather in four capitals at once; nothing that requires all four to move can be the engine of anything. Convergence, if it comes, will be bilateral and unglamorous. It looks like the seventeen strategic sectors being worked through one by one rather than admired as a table, the defence co-development framework producing a second, third and tenth project in the wake of the first, critical-mineral processing joint ventures reaching commercial scale in Indian states rather than in communiqués, and Japanese industrial capital arriving in the size and at the tempo the fifteen-year substitution task actually requires. External pressure on both countries continues, and paradoxically supplies the political cover each government needs to deepen the relationship beyond what its domestic constituencies would otherwise tolerate. By 2035, on this path, the partnership has acquired a security architecture to match its economic one, critical-mineral supply chains have been substantially diversified, and India has emerged as a credible alternative destination for a decade of Japanese manufacturing capital — and it will have acquired all of it whether or not the Quad ever becomes more than a photograph.

2) Steady, planning on time.

In the base case, and the most probable one, the relationship deepens along the trajectory it is already on, at broadly the pace its planners currently assume. The integration of small and medium enterprises described in the previous piece proceeds steadily. Defence co-production advances slowly, unevenly, and roughly on schedule. What does not arrive is depth: strategic divergence, over Taiwan, over the handling of China, over India’s insistence on autonomy, prevents the partnership from acquiring the security architecture that Convergence would give it, and both countries continue to manage their Chinese relationships independently, treating the bilateral as a valuable backstop rather than a primary strategic framework. This is not failure. It is the quiet, incremental thickening of ties that never quite becomes an alliance, delivered on time, and it may be entirely sufficient.

3) Sedation.

The malign twin of the base case deserves separation from it, because for several years the two are indistinguishable and they end in different places. Beijing does not need a border settlement to arrest India’s de-risking; it needs only a thaw warm enough to sap the urgency. The markers are already flashing: New Delhi’s amendment of Press Note 3 in March 2026 to relax the screening of Chinese investment, the first Indian business delegation to China in more than five years the following month, the resumed direct flights, the gradual licensing of rare earth magnets, and the full meeting granted to Jaishankar in Manila while Japan’s foreign minister was given a greeting in a corridor. None of this resolves anything at the border, and none of it needs to. On this path the substitution programme does not fail so much as decelerate, quietly, as the domestic constituency for bearing its costs thins and each individual relaxation looks eminently reasonable on its own terms. India arrives at 2035 more dependent on Chinese inputs than its own plans assumed, having never taken a decision anyone would recognise at the time as a mistake, and Japanese capital finds the corridor it was promised narrower than advertised. Sedation would erode this partnership more surely than any confrontation, precisely because nobody would notice it happening. It is separated out here, and given a quarter of the probability mass, because a scenario that is invisible while it operates is exactly the kind that a scenario table exists to make visible.

4) Rupture.

In the tail risk, a Taiwan contingency forces the choice that the entire architecture is designed to avoid. The headline probability below is better read as two stacked judgements than as one: the probability that a forcing contingency occurs at all within the decade, multiplied by the probability that India, under the combined leverage of a trade relationship worth more than $100 billion and a border that can be heated at will, is pulled from neutrality into something Tokyo experiences as defection. My own view is that the second, conditional judgement is the one doing the work, and it is the more defensible of the two: if the contingency comes, the pressure on New Delhi will be considerable. Ten per cent is the product of the two, and the reader is invited to vary either: roughly a one-in-five chance of a forcing contingency before 2035, and something close to even odds on Indian defection should it arrive. I have marked the figure down from an earlier estimate not because the conditional judgement has softened, but because a decade is a long time in which to keep a war from starting, and the first term deserves more humility than the tail risks of this sort usually receive. Yet a distinction is needed here that the word rupture obscures. If the partnership was never built on Taiwan alignment, as this piece has argued, then a contingency met with Indian neutrality and Japanese action is a stress the architecture might pass by design: Japanese disappointment, American pressure on India, but the economic and industrial core intact. The genuinely ruinous variant is narrower and more deliberate: a contingency in which Beijing simultaneously heats the Line of Actual Control, forcing India to turn inward at the precise moment Japan most needs the corridor open. That version fractures not merely expectations but the machinery itself. This is the scenario the Quad exists to foreclose, and the one that no volume of investment roadmaps or ministerial communiqués can wholly rule out. It is the reason the substitution lag matters, and the reason the pace of the coming decade is not an academic question. One further caution concerns the indicators, because the crude metrics have begun to mislead: PLA sortie counts around Taiwan reverted to their pre-2024 baseline in early 2026 even as the coercion migrated into greyer forms, the detention of Taiwanese nationals on the mainland, pressure on the Luzon Strait approaches, lawfare. The tell is no longer in the air-defence identification zone.

5) The fourth wildcard. 

To the wildcards in the table a fourth must now be added, and its absence from an earlier draft of this piece was conspicuous given how much credit the analysis extends to Beijing’s competence: a Chinese internal shock. Every scenario above assumes a unitary and capable China. The removal of two Central Military Commission members in January 2026 and an ideological rectification campaign launched personally by Xi suggest churn inside the PLA that could cut either way, degrading the capacity to act abroad or strengthening the incentive to act before the house is fully in order. Add an economy whose stall this piece elsewhere treats as a premise, and a succession question that no Leninist system has yet answered gracefully, and the fourth wildcard writes itself: the map redrawn not by anything India or Japan does, but by China ceasing to be the steady actor the map assumes.

The Geometry of Partnership

India and Japan are not building an alliance. They are building the infrastructure, economic first, industrial and technological next, and slowly and cautiously military, that would make an alliance possible should the decade’s events come to demand one. The distinction between optionality and commitment is the key that unlocks what this relationship actually is. It is a hedge being constructed in daylight, by two countries that have learned, from direct and recent experience, what the alternative to hedging costs.

The paradox at the centre of it all is that China itself is the relationship’s most dependable architect, and Beijing’s own conduct makes clear that it understands this perfectly well. China has never been comfortable seeing India and Japan together, for the obvious reason: separately, each is a manageable relationship, one to be alternately warmed and pressured as circumstance requires; together, they are the two largest economies of non-Chinese Asia constructing a supply-chain, capital, and increasingly defence architecture that runs around rather than through the Middle Kingdom. The reaction to Prime Minister Takaichi’s visit to Delhi this July was instructive on precisely this point. As roughly $13 billion in fresh corporate commitments, some 120 agreements, and a first Quad defence co-development project were being signed at Hyderabad House, Beijing’s press studiedly declined to cover the summit as an India story at all, and the foreign ministry accused Tokyo of preaching openness while harbouring confrontation. The restraint toward India, coupled with the vitriol toward Japan, gave the game away: Beijing is working to keep the thaw with New Delhi alive precisely so that the Delhi-Tokyo axis does not harden. If confirmation were needed, the last week of July supplied it in a single building. At the ASEAN foreign ministers’ gathering in Manila, Wang Yi sat down with Jaishankar for a meeting parsed on both sides as a measured warming, India pressing its standing terms on market access, balanced trade, and predictable supply chains. In the same venue, in the same week, Japan’s foreign minister could obtain from Wang only a brief, unscheduled encounter inside the conference hall, the first contact between the two countries’ top diplomats since November, and by Motegi’s own careful account little more than an exchange of greetings; Beijing has rebuffed formal meetings at every senior level since Takaichi’s remarks, and Takaichi herself reportedly does not intend to seek out Xi at the APEC summit in Shenzhen this November. The two roads described earlier in this piece, along which India and Japan are passing each other in opposite directions, ran that week through a single conference centre in Manila, and Beijing stood at the junction directing the traffic: a meeting for the country it wishes to keep thawing, a corridor nod for the one it wishes to keep frozen. Which points to the deeper irony. Every escalation against either country drives them closer together, and a warming India-Japan relationship is therefore, from Beijing’s own perspective, counterproductive to manufacture. The more pressure it applies, the more it builds the very coalition it seeks to prevent. A strategist as capable as China cannot fail to see the trap. Whether it can stop walking into it is another matter, for the domestic incentives that reward assertiveness abroad show no sign of weakening.

Whether India and Japan were behind the curve is, in the end, the wrong question, or at least a question about the past. They were slow to recognise what China would become, as nearly everyone was. They have been roughly punctual in responding, once the means to respond came within reach. The question that now matters is entirely prospective. It is whether two nations that have arrived, at last and together, at the right strategy can execute it faster than the neighbour who gave them cause to adopt it. On the answer to that question a great deal more than the bilateral relationship will turn.

Thank for reading - Harry Wilby.

Like ❤️ this post to get inside the China-India-Japan power triangle…

Further Reading

For those who wish to go deeper on any of the threads above, a selection of the primary sources and data behind this piece are grouped by theme below.

On the coercion playbook and the rare earth chokepoint

● IEA – “Global Critical Minerals Outlook 2026” — the clearest published account of where the chokepoints actually sit. China’s share of rare earth refining has fallen from above 90 per cent in 2023 to 85 per cent in 2025, and is projected to reach 70 per cent by 2035; the IEA nonetheless estimates that full implementation of the October 2025 export controls would place some $6.5 trillion of annual downstream production outside China at risk.

On Japan’s industrial strategy

● Nikkei Asia – “Japan maps $2.3tn investment plan across 17 strategic sectors” — the source behind Table 1, including the ¥68 trillion earmarked for semiconductors and the fiscal 2040 horizon against which the whole programme should be read.

On the rotation of Japanese capital

● JBIC – “FY2025 (37th) Survey Report on Overseas Business Operations by Japanese Companies (GLOBE)”— the survey series behind Figure 3. India ranked first among promising medium-term destinations for a fourth consecutive year, named by more than 60 per cent of respondents, while the ASEAN vote share fell.

On the military picture

● Japan Ministry of Defense – “Defense of Japan” (annual white paper) — the primary text for the language on China as an unprecedented and greatest strategic challenge, and for the Senkaku incursion data cited above. Worth reading consecutive editions side by side; the drift in tone is the story.

● Pravin Sawhney – The Last War: How AI Will Shape India’s Final Showdown With China (Aleph, 2022) — the argument discussed above, that India is structured, trained and procured to fight the wrong adversary. Four years on, disconcertingly little of it requires revision.

see also Harry’s previous contributions

Japan & India - The oldest new partnership

The Japan-India Corridor Trade

and Harry Wilby’s new Harry's Substack

About Harry Wilby:

Harry Wilby is currently head International for a Japanese group covering healthcare, semiconductor research and investment management.

Prior to his move to Japan, he started his career with Coutts & Company before moving into politics as Chief of Staff to a Conservative member of Parliament in the House of Commons.

He is a non-executive director of one of India’s largest home healthcare companies and Vice Chairman of the Economics & Current Affairs group of the Reform Club in London.

Like ❤️ this post to get inside the China-India-Japan power triangle…

So let’s get real: in this article, my friend and fellow Japan investor Andrew McDermott offers insights into how exactly Japan’s corporate leaders operate, adapt to financial-actor pressure, lead in unity, and create resilient competitiveness. He digs into the Toshiba-Kioxia-Bain Capital case to uncover how Japan Inc.’s leaders create both economic value and a resilient future for the nation. This is a story often lost in the never-ending noise of event-driven market capitalism….enjoy, comment welcome; today from a very “Atsui desu ne” Tokyo with many cheers ;-j

Like ❤️ this post and you’ll help make capitalism great again….

The Hidden Benefits of Mochiai 3.0

by Andrew McDermott

Success has many fathers–Western proverb

It is better to say too little than to say too much–Japanese proverb

Mochiai: the colloquial Japanese term for Kabushiki Mochiai or “cross-shareholdings:” the practice in which related companies own shares in each other. The root characters are 持 and 合, which can also be translated as “hold” and “meet” in the sense of evenly matching, joining together, or forming a balance.

*******************

Congratulations to the investors and speculators in Kioxia. Your profits are your reward. The rest of us must decide what lessons to draw and how to apply them.

Kioxia’s market cap recently exceeded Toyota’s to rank as “Japan’s Number 1.” Toyota, the archetype of “old Japan Mochiai,“ has earned cumulative EBIT of ¥29T since 2018, earning more each year than the cumulative ¥1.2T EBIT earned by Kioxia over the same period. Has the torch been passed to a new generation? Has Bain, the architect of the Kioxia deal, found the key to Japan’s future success: financially “disciplined” pure-plays freed from the tyranny of crossholdings, ably led by financial engineers trained in US business schools? Or is there more to the story: a series of quiet capital transactions between Japanese corporations that have refined Japan’s competitive edge, saving Kioxia in the process?

Is the future Bain’s “Asia Fund VI” or a third iteration of Mochiai: a series of intra-corporate transactions that make financial and strategic sense without sacrificing national security or excessively rewarding financial engineers? Let’s dig in.

We are the heroes

Recently, we have heard a great deal from Bain about its Kioxia success and the implications for Japan and the world at large. The heroes of this story are clear: a team of financial engineers led by Mr. Sugimoto in Japan and Mr. Gross in Boston. They attribute success to “Bain Capital’s global technology investing footprint” that “was vital to understanding the business’s value proposition to customers and the nature and pace of its technology efforts.” Its weapons were not fear, surprise and ruthless efficiency, but “deep market knowledge, extensive local networks and [a] proven ability to drive operational improvement.” Conveniently for Bain, it completed its interviews and its exit a few days before the announcement of a loss of an intellectual property case in the US, a case that began and ended under Bain’s leadership and whose announcement wiped tens of billions of dollars off Kioxia’s market cap (but not Bain’s profits)^[1]. While Bain has been coy about the size of these profits., market observers speculate that the $2bln it staked in 2017 generated proceeds of $30-35bln, making it what the FT deems one of “history’s most lucrative” PE deals. This translates into ~$6bln of performance fees for Bain at an industry standard 20% of profits (exclusive of the 2% annual fee charged to clients and the ¥1bln/year charged to Kioxia itself to help “keep the lights on” at Bain). This heroic story comes at a convenient time for an industry whose press outside of Japan has been unflattering. Bain’s story has been well-told, and critics of the transaction (including yours truly) have been fed a steady diet of crow.

What are we, chopped liver?

But could there be more to the story than the heroics of thirty or so MBAs and Stacey Smith, a former Intel CFO who seems to be the only person Bain placed in a management role? We have heard nothing from the disparate group of METI bureaucrats, low-profile Japanese financiers and corporate engineer/executives who have, collectively, provided far more capital and taken far more Kioxia risk than Bain and its activist collaborators since the 2017 Toshiba recapitalization. This essay attempts to give this group a voice. It seems fair that this voice should also receive the gift of hindsight that has characterized the triumphal Bain interviews that have conveniently coincided with Bain’s complete exitfrom its Kioxia position this past month. While Bain is “all-out” of Kioxia, this team, like Warren Buffett, is committed to its Japanese investments for the long haul.

To simplify the conversation, I’ll create two avatars: an intrepid reporter we’ll call “Rick” and a personification of team “Mochiai 3.0.”

The obvious choice for this second role is Amuro Ray, the reluctant teenage engineering prodigy who leads the good guys against a robot army in the long-running Japanese Gundam series. We’ll give Ray some of the same interview questions that the FT and Nikkei have lobbed at Bain. Perhaps his answers will prompt dialogue amongst the investors who see PE and activism as the only way to play Japan…and the rest of the world.

The Greatest Story Never Told: How Amuro Ray saved Kioxia…and the World

Interviewer (Rick): Thank you, Mr. Ray, for taking time out of your busy day to talk about your role in the Kioxia transaction and in the others that you say are your bailiwick. Could you please start by giving us an overview of what you mean by “Mochiai 3.0.”

Ray: It’s quite simple: Mochiai 3.0 is the third iteration of crossholdings in Japan since 1945. The first was driven by the same engineering forces that had created the keiretsu before the war and that still hold together companies like Samsung and Amazon. The second was financially driven and led to the excesses of the bubble. The third is a return to the first: a series of capital transactions that grow out of operating partnerships and an awareness of national security risks and opportunities. They run the gamut from co-investments to joint ventures to long-term supply arrangements to technology sharing to cross-licensing to all the things that make conglomerates expand and contract. What’s important is that the decisions are

made by people with operating experience who also understand finance and strategy.

Rick: Can you give some “Mochiai 3.0” examples other than Toshiba Memory?

Ray: Just off the top of my head: the recent Berkshire/Tokio deal, the ongoing Rohm/MEI transaction, the Sumitomo/MP Materials/DOD deal, and, most relevant to our discussion, the Rapidus and JSAMsemiconductor investments that cover the high-end and low-end of the semi chain. And, of course, deals that don’t happen fall into the same category in a different way. Examples include the MBK/Makino Milling deal, and the various PRC-linked efforts to buy Toshiba assets. The “good” deals are part of the ongoing optimization of Japanese companies that has driven the explosion of profitability that Jesper’s chart below illustrates. Notably, and despite what you might read, this has happened with very little influence from private equity, or, for the most part, “activist investors.” It has been an organic reaction to opportunities, risks and technology changes encountered in the real world, not to asset allocation models. When done properly, it’s remarkably efficient. That’s why investors like the GPIF can manage so much money so well with low fees and a small staff: companies do the work for them, a fact that Warren Buffett appreciates.

But I should hasten to add that there’s nothing uniquely Japanese about Mochiai 3.0. Examples include Microsoft’s investment in Apple, Apple’s own investment in Kioxia, Amazon (and Softbank’s) investments in OpenAI, and a series of investments made by Intel in its early years. In fact, the best explanation of Mochiai 3.0 was actually given by my hero Les Vadasz, the fourth employee of Intel. He led the design team that developed Intel’s first CPU (ironically, with the help of Japanese engineers). He also founded Intel Capital. His philosophy captures the essence of Mochiai 3.0: “you judge your returnon how you met your strategic goals, and count the money later,” but “the legal, financial and strategic consistency was always there.”

Rick: What’s the opposite of Mochiai 3.0?

Ray: The idea that asset allocation by financial engineers can create value at the portfolio, company or national level without managers actually learning how to do the thing being managed. A good overview can be found here. It is the replacement of men like Bill Knudson and Fred Burg with finance specialists who, even when they are right, create high frictional costs. Investment bankers are valuable, and I’m sure the bankers and consultants who work at the various investment firms trying to reshape Japan are very good at their jobs. But, as America and the UK have shown us in recent years, a background in investment banking or consulting does little to prepare anyone for the exigences of running an actual business. In fact, too much financial expertise can be dangerous because, as Sir George Buckley wrote, “In science and engineering-based companies, engineers know the art of the product possible. Finance majors don’t.”

Sir George personifies the spirit of Mochiai 3.0. He’s an engineer with multiple patents to his name, experience as CEO of 3M and chair of Smiths, and an outspoken critic of the “GE approach” (which is essentially the PE approach) before GE’s failings became obvious. That’s why Nakanishisan asked him to be the first foreign board member of Hitachi, which is of course the best example of Mochiai 3.0.

Rick: Can you expound on how Mochiai 3.0 worked in practice at Toshiba?

Ray: Sure. For starters, we put most of the capital into the buyout on day one. Of the $18bln headline number, Bain itself only contributed $2bln. Toshiba and SK Hynix each contributed over $3bln with Hoya also making a significant contribution. Our hope was to manage Toshiba the same way we had at Hitachi by putting capable board members like Osamu Nagayama and George Olcott in place, but we ran into a roadblock erected by activists who almost derailed the project by replacing those board members with a slate of financiers. We took a different path to the same goal, bailing Bain out at least three times along the way. We did this despite the fact that, at the same time Bain was receiving subsidies to build out a supply chain independent of the PRC, Bain realized $4bln in proceeds from an investment in Chinese data centers.

Rick: Can you be more precise in what you did so we can understand the math?

Ray: Well, if I were trying to market our record, which I’m not, I’d point out the following:

● In 2019, we led a ¥1.3T refinancing. The total package consisted of ¥1T from SMBC, MUFG and Mizuho and ¥300bln from the government-backed Development Bank of Japan. Bain put no new capital into the deal.

● In 2023, the Japanese investment firm JIP put its own money alongside “Mochiai 3.0” investors to buy Toshiba after a tumultuous period of conflict with activist investors that Goldman Sachs had introduced. JIP’s 20 or so partners included Rohm, Orix, Chubu Electric, and Iwatani. The rationale given by MinebeaMitsumi for its participation typifies our spirit. JIP is notable for its low profile and its willingness to stay in the background while supporting operating executives…a key tenet of “Mochiai 3.0.” Again, Bain put no new capital into the deal, which relied heavily on Toshiba’s support.

● By 2024, Kioxia had violated covenants on debt that approached, if not exceeded, the amount that had started this entire process in 2017.

● Also in 2024, Kioxia received over $1bln in government subsidies.

● The 2023 JIP+”Mochiai” price for Toshiba, which included 40% of Kioxia at the time, was negotiated down to ¥1T. In the three years since JIP took over Toshiba, the existing management (which had been opposed by activist shareholders) has led Toshiba to a dramatic operating recovery, reporting approximately ¥400bln of EBIT in its last fiscal year.

Rick: What’s your bottom line?

Ray: You run your own numbers. This is just an estimate because Toshiba doesn’t disclose its balance sheet. We do know that it took on about ¥1.2T of debt in 2023 and that it has sold its Kioxia stake down from 40% pre-IPO to 16% today. However, if you take market estimates for sale proceeds plus ~¥6.8T of Kioxia at market prices in early July and you apply a 15x EBIT trailing multiple to the rest of Toshiba (low relative to comparables) and you assume that cash flow over the past two years has paid down ¥200bln of debt, you can get to an equity value of ¥12-13T pretty easily.

Rick: So you’re suggesting that a ¥1T investment by “Mochiai 3.0” made three years ago could be worth 12-13x its original cost? And are you implying that, if Bain’s equity in Kioxia had been treated the way Toshiba was in 2017 rather than being repeatedly bailed out by taxpayers, banks and other equity players, then the Bain equity stake would have been considerably diluted if not wiped out entirely?

Ray: You’re saying this, not me. All I can say is that this transaction, like all other Mochiai 3.0 transactions, had strategic as well as financial goals. Yeah, we have made a lot of money on this so far, but, as you’ve pointed out, we are still invested in various ways. There’s no exit for us here. As far as Bain’s (and Goldman’s) profits go, it was essential that they make a lot of money on this deal for reasons that have nothing to do with Kioxia per se.

Rick: Maybe this is a good time to back up and talk about the ends that the means of Mochiai 3.0 are supposed to serve.

Ray: That’s simple: national survival. Our prime directive for the last thousand years has been to preserve independence from China and Russia. We faced a delicate situation in the mid 2010s: US elites, South Korea and the Philippines were all drifting into China’s orbit even as we watched the degradation of the Seventh Fleet. We needed to do several things with the Toshiba transactions: win a few US elites to our side without compromising our manufacturing base, begin the hard work of reconciliation with South Korea and maximize the impact of our human capital on the areas that we (and China) knew would matter most in a decade. These included energy abundance, semiconductor process technology and AI-enabled manufacturing for both civilian and military purposes. The means have changed over the years, but the end remains the same: preserve our strategic autonomy, which can only be done by retaining the ability to make things that matter ourselves or with close allies.

Rick: You seem to have an affinity for Mr. Vadasz. Is there more to the story?

Ray: Yes there is. Mr. Vadasz is one of my personal heroes, and his story bears directly on our topic. Like his boss Andy Grove, Vadasz escaped from Communist Hungary. He competed directly with Japanese firms, including Toshiba, in the 90s. His explanation for their success surprised me. He did not credit subsidies or a willingness to sacrifice profits for market share. Instead, he told me that: “the Japanese taught us that quality didn’t have to be expensive.” Mr. Vadasz went on to mentor Pat Gelsinger, the CEO picked over Stacy Smith to run Intel.

This relates to Kioxia because Mr. Smith, as CFO of Intel, had overseen a dramatic change in Intel’s own balance sheet from net cash to net debt. His capital strategy prioritized return of capital and executive compensation over capital spending and coincided with a decline in Intel’s manufacturing leadership. What’s important for everyone to understand is that the other memory players, Samsung, SK Hynix, and Micron, carried substantial net cash throughout business cycles, a situation that persists today even as Kioxia’s secondary share sales have been used to fund Bain’s exit strategy rather than to shore up Kioxia’s balance sheet.

It is not surprising that Bain found such a kindred spirit in Mr. Smitn. After returning to the Intel board (while concurrently serving as chairman of Kioxia), Smith oversaw the firing of Mr. Gelsinger (even though his operating plan has, by common acclaim, saved Intel). It is worth reading more about Gelsinger and Smith and the Intel Board here and here and here, as Bain’s choice of Mr. Smith as its sole operating executive (rather than an engineer like Mr. Gelsinger) speaks volumes about the reason we had to step in multiple times to salvage the Kioxia deal.

This matter of capital structure is one that the media cheerleaders consistently underplay, probably because they simply don’t understand what is at stake. May I share something that Mr. Vadasz shared with me several years ago?

Rick: Please do.

Ray: I asked Mr. Vadasz what he thought about balance sheet strength in relation to semiconductor and other manufacturing companies. Here’s what he said:

In the old days the philosophy was driven by Gordon Moore, who really believed that people ought to be able to afford what they do. Anyway, we strongly believed that we should have a strong cash position. It was almost like a security blanket. Yet, we were a pretty egalitarian company. Most things we did were with no frills. We did not have assigned parking spots for executives. No separate eating places for executives, cubicles for all, including the CEO. No private jets.

Stock buy-backs never were big enough to jeopardize what we felt was an essential minimum. Frankly, I do not remember what we called a minimum at that time. Remember, that a wafer fab facility costs billions and leading edge tech companies need new facilities all the time.

One thing for sure: we were never, and I mean NEVER were guided by what the market felt was the right amount of cash to hold. It had to be comfortable from an operating point of view. All of us in top management roles would have defended this position, if needed.

A funny illustration of how extreme this went: in the early days we were proud of building and owning our own buildings. It took a lot of effort by one of the new CFOs to convince Gordon to sell the building, get the cash, and lease back the building. It was just not in his DNA. Anyway, we finally did it.

I do not know how to operate a company with the kind of leverage that some do. At times it feels like they are building a house of cards. If Japanese companies operate with more cash on hand, more power to them. It just feels intuitively obvious that they are more shock proof than the highly leveraged ones. The old school wasn’t that bad… we were never limited by cash, just by our ability to create growth.

Rick: Given the above, how would you assess Bain’s stewardship?

Ray: I wish I could be more enthusiastic, and I hope that I’m wrong. Perhaps Bain’s employees brought patents or operating expertise similar to what Pat Gelsinger brought Intel–real technical skills that will pay off in the years to come. What’s certain is that they have left Kioxia shockingly undercapitalized relative to peers.

The above table and the recent equity offerings by SK Hynix (~$26bln) and CXMT (planned ~$8bln) show that, under Bain’s leadership, Kioxia has disregarded the advice of Mr. Vadasz and the example set by peers. These firms, all of whom are led by experienced operators, understand the capital intensity, technical pace and cyclicality of this business. While Bain has been using this hot market to sell shares on its own behalf, these peers have been preparing for the next cycle by strengthening their balance sheets. The amount SK and CXMT are raising this month for operations approximates the amount Bain has taken for itself in equity sales.

It would be one thing if Bain’s exit had come after Kioxia had surpassed its competitors in the marketplace and had a balance sheet that was at least in line with, if not stronger than, its peers. The opposite is the case: Kioxia has lost share in its core business in each of the last four quarters, its technical edge in NAND is shrinking, and it has completely ceded the HBM market to peers, including an upstart Chinese competitor who has done what (supposedly) was impossible: start a NAND and HBM business from scratch.

Curiously, in its capacity as the controlling shareholder, Bain (somewhat reluctantly) agreed to an IPO price of ¥1,455. At this price, Bain allowed the company to sell 21.5mm new shares while selling only a few of its own shares. Yet, as the price increased above ¥75,000, Bain was a seller of its own position without allowing the company to raise capital for itself alongside its competitors.

Rick: This seems like a good time to talk about the SK relationship. Can you discuss?

Ray: At the company level, it was very complicated. SK is a strategic rival. Viewed narrowly, including them made no sense because SK could (and did) use its position to influence management decisions. However, in the context of Japan/Korea relations, we’re cautiously optimistic. Our human capital is limited. We have major projects at the high end (Rapidus) and the low end (JSAM). SK’s balance sheet is where ours needs to be. Our hope is that five years from now, we find a way to deepen the SK partnership, perhaps swapping NAND capacity for high-end technology developed by Rapidus and/or in conjunction with TSMC. This is one way for us to confront the PRC onslaught. It fits into the broader picture of increased military, energy and diplomatic partnerships we are forming with Korea and could be a critical component of making Tokyo a regional financial center.

Rick: It seems that making Tokyo a financial center modeled on NYC or London could paradoxically weaken the very industries you seek to promote. Charlie Munger once said: “Show me the incentives and I’ll show you the outcome.” He also pointed to the failure of Intel as a cautionary tale of incentives gone awry. Are you concerned that paying $5bln+ in fees to Goldman and Bain while your Mochiai players get a fraction of this while taking the lion’s share of the risk will lead to preverse outcomes? Will you start to get more bankers when you need more people like Les Vadasz, Pat Gelsinger, Fujio Masuoka and even Zhu Yiming?

Ray: It’s a real risk, but one we thought was worth taking. Of course we never imagined the fees would get this big, but we felt we had to throw these guys a bone. We made a strategic mistake in the 90s by taking for granted the affections of the financial and academic elites in America and focusing on winning the hearts and minds of middle America by investing nearly $1 trillion and creating 1 million jobs even as the finance guys sent 5 million jobs to China. We succeeded in this task, but were outmaneuvered by the PRC at the elite level. By 2010, a private equity banker could joke that “Japan is just an island we fly over on the way to China.” His NACUBO audience included most of the leading endowments in the USA. China’s $4T+ private equity market was of course always directed by the CCP, but it generated enormous fees for the PE and investment banking firms who controlled every lever of US government policy. They also gave generously to their alma maters, most of whom have developed partnerships with China’s leading engineering colleges and filled their endowments with China specialists. As good a deal as Kioxia has been for them, Bytedance remains the largest position for most endowments despite bi-partisan recognition of its role in the CCP’s arsenal.

In fact, even while Bain was taking taxpayer money in Tokyo to help fend off Chinese competition, it was simultaneously profiting from China’s AI strategy via its investment in Chindata. And the ties between PE, CCP tech prowess and US educational institutions remain powerful. Bain itself remains committed to China, as does Cornell, the alma mater of Bain’s China head. The Cornell China Advisory Board includes Bain’s China head and all the best customers for Chindata. This Board is a who’s who of China AI prowess, including several members of the Pentagon’s entity list. Cornell once boasted one of the world’s best Japanese/Chinese immersion programs (called FALCON). It closed this program, but opened a China Center generously funded by the dollars generated by Bain and others in China.

In the long term, we have got to figure out how to change these incentives. In the short term, it was important that this deal “work” to at least get us a seat at the table within international universities, from Oxford to Harvard to MIT to Princeton to Stanford to Yale to Notre Dame. Kioxia has made an impression, but CCP dollars continue to dwarf Japan’s in financial and human capital terms at most schools.

Back at home, we’ve taken steps to ensure that Mochiai 3.0 remains in control of critical assets while allowing PE firms to bid against each other for assets that don’t matter very much (much as America let Japanese firms bid over the odds for Pebble Beach and Rockefeller Center). This has predictably elicited calls of “backsliding,” but we think the problem will take care of itself as the returns come in from the deals we did not backstop, like Calsonic (twice bankrupt) and PHC Holdings (five CEOs, multiple scandals). When investors compare the risks and returns of these transactions to what “plain old Japanese public companies” offer at a fraction of the cost, we think there’s a good chance that a “new Tokyo” financial center model might emerge. The deals that work best tend to be those with in-place Japanese management, like the Hitachi spins to both public and private equity. A broader public market will absorb most of these companies directly via spin offs that don’t require a trip through the PE cleaners. This is what Sony did with Sony Financial and what Western Digital did with its own memory business (an inconvenient truth for Bain).

But a lot of this depends on two things: whether global investors ever embrace the concept of Mochiai 3.0 and whether we can reduce the stranglehold the Big Three brokers (our weakest link) have over the investment management industry. Progress on these two points must come from outside the industry. There are encouraging signs. The FSA understands some of the issues and Berkshire Hathaway has provided a clear example of the benefits of joining Mochiai 3.0

The “Tokyo model,” if adopted, will be one that recognizes and promotes the idea that the asset management industry is an important supporting actor in any economy, but cannot ever be the creator of value. Keeping this balance is important. In the long-run, as both Palmer Luckey and Chris Miller (author of Chip Wars) argue, our marginal “incentive” dollars will be best spent not on investment fees but on educating more engineers ourselves and resurrecting the “defector visa program” to get some of China’s best players on our team. Imagine if we offered $6bln to the top 30 engineers at CXMT rather than to the top 30 partners at Bain? If this sounds crazy, it’s not. This is the playbook the CCP is running right now, and it’s the same one that helped us win the Cold War. There are over 2 million Chinese living in Japan, including some of the most innovative tech founders. Let’s get more.

Rick: Is there anything else you’d like to say to those, including Japan’s own investment banks, who are arguing that Japan needs a lot more private equity activism and a lot less “Mochiai” of any flavor?

Ray: Well, I suppose I’d like to close with my own story. Like Tony Stark or Palmer Luckey or Bill Knudson or Soichiro Honda, I was raised in an environment conducive to making things. Right now, there’s a fearful symmetry between the financial engineering talent flowing from the US to Japan and the actual engineering talent flowing in the other direction. The US, while sending legions of investors intent on “fixing Japan,” is asking Japan not just to pay for rebuilding America, but to show America how. Supposedly “inefficient” Japanese companies are sending engineers to train Americans in everything from making steel to nuclear power plants to shipbuilding to machine tools to quantum computing to robots. The decline in America’s ability to make things has been catastrophic, not just for America, but for us. Compounding this problem, there has been a generational collapse in the US/Japan education exchange even as US elite educational and financial institutions continue to spend energycourting China. It’s very curious to see that China is also trying to attract our engineers while seeming to have more than enough bankers.

We need more people who know how (and want to) make things outside the CCP. My hope is that our story might convince more young people to follow the path of the Quad Scholars, and Lotus scholars towards making “stuff that works.” If we don’t do this, we lose. I’m haunted by these two quotes:

The lesson from history and industry is clear: leadership by engineers and builders produces lasting strategic strength; leadership by financiers alone optimises for short-term gains at the expense of long-term readiness. David Murrin

We’re throwing more and more of our resources, including the cream of our youth, into financial activities remote from the production of goods and services, into activities that generate high private rewards disproportionate to their social productivity. Nobel Prize-winning economist James Tobin quoted in: When the Machine Stopped: A Cautionary Tale from Industrial America

But I want to end on a high note. In the final analysis, the quality of our people, not our technology, will win this battle. If we don’t promote human flourishing and celebrate the redemption story that is the real message of Asia since 1945, then it doesn’t matter how many memory chips we make. Ray Dalio’s China dream will come true and Pax Nipponica will die on the vine. But if we can build on the human connections fostered by groups like the Bridging Foundation and modeled by the Navy interpreters and their teachers in World War II, we’ll win this walking away. I’ll close with a more optimistic quote from the former head of the University of Chicago whose spirit, I’m happy to say, lives on at schools like Vanderbilt today:

Now the only defense that any nation can have is the character and intelligence of its people. The adequacy of that defense will depend upon the strength of the conviction that the nation is worth defending. We have repeated to ourselves so much of late the slogan “America must be strong,” that we have forgotten what strength is. We appear to believe that strength consists of masses of men and machines. I do not deny that they have their role. But surely the essential ingredients of strength are trained intelligence, love of country, the understanding of its ideals, and such devotion to those ideals that they become a part of the thought and life of every citizen. Robert Hutchins, The Great Conversation.

Rick: Thank you, Ray, for all you’ve done. Perhaps your story will lead to a more balanced assessment of how Japan’s “Capitalism that works“ can be improved without being broken.

Ray: You’re welcome, and thank you for asking the right questions.

Thank you for reading.

The opinions expressed are my own. They are not intended as investment advice. I currently own and may in the future own positions in securities mentioned in this article.

Andrew McDermott Nashville, July 2026

Like ❤️ this post and you’ll help make capitalism great again….

Here a link to Andrew’s previous guest contribution What if Japan is winning? Buffett & Japan which include his bio & photo

^{Quick addendum}

On Friday, July 17, Kioxia’s stock plunged 16.1% to ¥52,110 on the Tokyo Stock Exchange. This single-day rout wiped out approximately ¥10 trillion (roughly $64 billion to $65 billion USD) from Kioxia’s market capitalization on that day alone.

The bottom line is that the decline in market cap on July 17 of $64bln is ~2x Bain’s estimated profits on the deal. Bain did not have to disclose any risk factors while selling its shares on the market (though a good attorney may find it worth his or her while to make the case anyway). If Kioxia had done a secondary, it probably would have had to disclose the details of this case and might have been advised not to do a secondary until it was complete. The actual liability here is not yet known, as it is a running total. $250mm since 2021 is $50mm a year, capitalized at 20x pretax=$1bln, so the market has perhaps overreacted to the financial news itself. But the market might be reading into this news a view that Kioxia’s technical lead over peers is even narrower than assumed. That would be a logical assumption, given that no one of the stature of Dr. Naruke was added to the management team by Bain after his untimely 2020 passing, which, interestingly, was a year before the lawsuit was brought by Viasat. Of course we’ll never know the details, but it seems unlikely that such a technical problem would have passed Dr. Naruke’s sight without his taking a more than passing interest in the details of the technology. With all that said, this isn’t the first time there’s been an IP lawsuit involving Toshiba. It lost a flash case in 2005 against what is now Micron for even larger damages (enormous if adjusted to today’s prices). But it didn’t sell equity in the midst of the lawsuit. That’s the key difference here.

Like ❤️ this post and you’ll help make capitalism great again….

The right recipe for a more aggressive BoJ

いま思い出す三重野康氏の決意

With the yen recently falling to new lows, a key question is what will force the Bank of Japan to become more aggressive. It is unlikely to be the weak yen or even rising consumer prices. Instead, home affordability and residential property inflation — and their impact on social stability — are more likely to trigger a faster pace of rate hikes.

The BOJ has a history of acting as a “bubble buster.” A few months before Yasushi Mieno became governor in December 1989, he warned that asset inflation was creating dangerous social imbalances. A new graduate joining a top Japanese company, he argued, could no longer afford a home within a reasonable commuting distance. That, he believed, was not just unsustainable but undesirable.

He acted on that view. The BOJ raised the official discount rate from 3.75% to 6% in just nine months. Ten-year Japanese government bond yields climbed to 8.3% by September 1990 — months after the Nikkei peaked just below 40,000.

Mieno is often criticized for doing too little, too late to counter the collapse that followed. But his lasting legacy is that he did what central bankers are supposed to do: remove stimulus when excess builds. His approach echoed that of former U.S. Federal Reserve Chairman Paul Volcker, who tightened policy to curb inflation. Mieno, however, moved to contain asset inflation — a far less orthodox justification at the time.

The key question today is whether Japan is again approaching a similar point. Are rising property prices putting homeownership out of reach for the next generation? And could that threaten social cohesion?

By some measures, affordability is already stretched. A new graduate at a top firm now needs roughly 23 years of annual income to purchase a typical 70-square-meter apartment in Tokyo — about the same as at the peak of the asset bubble in 1990. Before the bubble of the 1980s, the figure was closer to five to seven years.

Mortgage costs also matter. On that front, conditions are somewhat less extreme but still concerning. Financing such an apartment with a 15-year mortgage at an 80% loan-to-value ratio would require about 47% of starting income to service the loan. That is far below the roughly 160% seen at the 1990 peak, but sharply higher than about 20% just five years ago. It is also comparable to levels seen in the late 1980s, before the bubble burst.

Some argue that rising borrowing costs are a reason for the BOJ to move cautiously. That may underestimate policymakers’ priorities. If housing affordability becomes a broader social concern, authorities may not hesitate to tighten policy despite the risks.

To be sure, BOJ Gov. Kazuo Ueda is not Mieno. More importantly, Japan’s policy priorities have shifted. The focus is now on strengthening economic security, resilience and domestic investment. Moderate inflation can support those goals by easing debt burdens, boosting tax revenues and encouraging risk-taking.

Indeed, inflation has taken on a strategic role. Every increase in inflation raised government tax revenues, thus boosting fiscal capacity. In that sense, inflation is no longer purely a problem to be solved but a tool to be managed.

Ideally, improved housing affordability would come from stronger wage growth rather than falling asset prices. Successive governments have urged companies to raise wages, with limited results. Prime Minister Sanae Takaichi faces the same challenge but is quickly running our of time: to get home affordability back to where is was pre-bubble — when the baby boomers bought their homes — wages would have to rise by more than 50%.

The turning point will likely come in the public debate. As concerns grow about inequality between those who own assets and those who do not, pressure on policymakers will intensify. Interestingly, in the latest high-profile Nikkei quarterly economists roundtable, one of the top economists highlighted growing risks of a K-shaped economic starting to develop. A shift in rhetoric toward social fairness and intergenerational equity could signal a change in policy.

Japan is unlikely to raise interest rates simply to defend the yen. But it may act decisively if housing affordability begins to threaten social stability. When that moment arrives, the Bank of Japan could move more quickly and forcefully than markets expect.

Thank you for reading.

The original post with charts and date is here

Make no mistake: Takanomics is poised to be more inflationary than Abenomics; is destined to empower the BoJ to hike more aggressively; and, more fundamentally, Takaichi’s all-out push to restore METI’s industrial- and national economic security priorities over MoF’s fiscal prudence rhymes more with the “Fukoko Kyohei - Strong Country, Strong Army” philosophy embraced by the elites after the Meiji Restoration than with anything that guided Japan’s economic policy over the past 40 years. The “Takaichi Trap” is to underestimate her chances of success in re-building “Team Japan Inc” and to misread the implications for financial markets.

The key strategic realities of Takaichi’s economic policy speak for themselves:

* the size of resource mobilization:

Y370 trillion of public-private partnership investments is more than three-times bigger (in terms of GDP impact) than the industrial policy initiatives launched under Prime Minister Tanaka Kakuei’s 1972 “Remodeling of the Japanese Archipelago”. Tanaka’s plan came to less than 20% of starting point GDP; Takaichi’s plan is more than 60% of today’s GDP. Takaichi’s philosophy has always been “go big or go home…..”.

* the duration of public policy commitment:

Before Takaichi, there were basically only two areas in the national budget that had guaranteed funding committed for more than one-year - public education (three years) and national defense (five years). Everything else was subject to annual budget fights and lobbying-the-MoF to secure continued commitment; and if you could not secure continuation funding in the main budget, there was always a supplementary budget to re-insert your pet-projects onto the public funds ledger….. Rightly so, Takaichi wants to get away from Japan’s “budget adhocism” and replace it with strategic high-trust, long-duration funding via public-private partnerships: 17 focus sectors and 8 cross-sector target areas committed to from here to 2040.

* the focus on public- private partnership funding and “crowding in” of private risk capital:

Of the Y370 trillion, I expect approximately 10% to come from on-balance national government debt, 60% from private corporations, asset owners and investment managers, and 30% coordinated and syndicated by off balance sheet public policy financing firms like DBJ, JIC etc — basically the established-during-Meiji-but-privatized-by-PMKoizumi-in-the-early 2000s ex-FILP Fiscal Investment & Loan institutional stewards of off-balance sheet public finance (which used to be funded by the Postal Savings system, but now have to raise capital in public markets).

If I’m right and Takaichi can re-build “Team Japan Inc”, fears of unfunded government overspend are vastly exaggerated, while the realities of relentlessly building runaway inflation pressures are conveniently ignored. Caveat emptor…

And yes, the corporate governance focus is poised to shift dramatically, away from turning “lazy balance sheets” into higher dividends or share-buybacks towards raising debt- and equity capital to fund the private sectors’ contribution to the ambitious investment-for-growth push. Clear speak: Japan’s cost of capital is poised to rise, which in turn will speed-up industrial consolidation and corporate restructuring.

* the conviction that technocrats’ guidance and top-down industrial policy is essential to mobilize and guide Japan’s private sector flow of savings into investments:

Over the past 30 years, Japan’s industrial policy prioritized deregulation, privatization and financialization while fiscal policy prioritized tactical support packages for zombie companies, protection of vested-interest players from the disruption forced by deregulation and technological progress, as well as an ever-growing expenditure drain from rising entitlement claims in general, surging medical- and pension costs in particular.

Clear speak: over the past thirty years, the government “consumed” and supported the weak, while the strong and well capitalized part of the private sector was left to invest on its own terms. The result was an ever growing proportion of Japanese savings channeled into overseas rather than domestic investments: between 1995 and 2025, the share of total profits generated by listed companies from overseas sales surged from less than 20% to over 60% — a smart and rational rise in Japan’s return on investment engineered by strong company CEOs realizing that genuine “lazier faire” growth investment opportunities abroad were a better bet than the vested-interest entangled “lazier faire cosplay” offered in Japan. To wit: Japan’s two richest men made their fortunes from overseas investments, predominantly China and the US, rather than from their domestic production strategies — Fast Retailing’s Yanai-san and Softbank’s Son-san.

Team Takaichi is convinced this can and must be reversed by a re-focusing of CEOs minds towards Japan’s pre-1990s high-trust public-private partnership investment-for-growth model: Takanomics is a commitment to create domestic winners with a long-duration, domestic-focus industrial policy- and high-trust stable financing strategy. Takaichi’s goals are neither tactical, nor cyclical; they are structural, urgent, long-duration and openly nationalistic.

Importantly, the fact that there are 17 strategic areas does not indicate a lack of focus by Team Takaichi, but preents each and every company with an opportunity to join “Team Japan”. No Japan CEO -whether he/she leads an industrial, commercial, services, consumer, high-tech, low-tech, financial company in literally any sector- cannot find a future-growth-strategy possibility that aligns with his companies’ and Takaichi’s priorities. Something for everybody, no one excluded, no excuses, come join “Team Japan”.

In coming months, I shall not be surprised to see Team Takaichi starting to publicly shame CEOs who will not participate and commit to her new national agenda - just as the Japanese Stock Exchange started to threaten to shame CEOs who refuse to present concrete strategies to raise capital efficiency and raise shareholder value above at least 1-times book value (the “Yamaji Initiative” launched by then JPX Group CEO Yamaji in March 2023).

* a commitment to promote holistic- and balanced economic development, with a strong focus on human capital development, social resilience and regional diversification

Takaichi’s vision is not a winner-takes-all and socially divisive “tech-will-solve-all-our-problems” utopia, but clearly focused on creating a human-centric new economic structure. Her team is dead-set on wanting to avoid the extreme lop-sidedness of both US and Chinese recent growth dynamics: AI and AI infrastructure is an important part of Takanomics, but it is by no means the primary and only focus. Regional diversification and empowerment of local public policy decision makers is, for example, a core focus of the implementation strategy.

* and, last but not least, an (in my view very refreshing) cockiness…

…that Japan is not constrained by demographics, lack of natural resources or domestic capital, but instead perfectly capable of “pushing out her production possibility frontier”, of creating economic abundance, prosperity and yes, greater self-sufficiency.

In a remarkable shift in leadership style, Takaichi’s economic policy is not stuck in a vague and high-minded discussion group looking for a “New Capitalism” a-la PM Kishida — in fact she much prefers to decide and act over “let’s discuss and build consensus”. Her capitalism is ruthlessly focused on creating a united “Team Japan” where public- private partnerships inspire a new future-positive “can do” leadership mindset committed to forcing the next evolution of Japan’s economic-, industrial-, and social structure. To do so, Team Takaichi wants to restoring the kind of economic policy and governance that, well, produced the economic miracle in the 1960s, 70s and 1980s.

So far, so good.

What could go wrong?

Unlike Team Abe, Team Takaichi trusts elite technocrats more than she trusts entrepreneurs, risk takers and markets. Note that in the first annual top-bureaucrat promotion cycle under her watch, not a single senior elite technocrat promotion was vetoed by her Prime Minister Office. In contrast, Team Abe typically blocked about 20-30% of senior ministerial promotion proposals, replacing them with their own preferred candidates instead. (with one notable exception: there are credible suggestions that she threatened to replace the current MoF vice-Minister if MoF would try to sabotage her food consumption tax cut proposal…MoF caved, she got what she wanted, and MoF got everything else it wanted).

Meanwhile, there are indeed first concrete signs that the progress made over the past twenty years on incentivizing private entrepreneurship, best-in-class corporate governance & capital stewardship and independent fiduciary responsibility may have started to be reversed. This is where the real ideological clash between “Abenomics” and “Takanomics” comes through.

Specifically:

• Despite paying lip-service to the importance of entrepreneurship, start-ups and venture capital, Takaichi’s tax reform council has presented a proposal to raise the “minimum tax” effective January 1, 2027. The draft bill is to halve the special deduction amount from Y330 million to Y165 million and raise the minimum tax rate from the current 22.5 to 30%.

  Clear speak: the tax burden for successful founders and angel investors will surge. This obviously runs counter to the “we want Japanese unicorns and successful startups” mantra; and is most likely to force a new wave of “hollowing out” - ambitious founders setting up shop in Singapore or elsewhere where tax policy backs up a public policy commitment to entrepreneurship by creating tax incentivizes, not disincentives for successful entrepreneurs. It will be important to see whether this Takaichi council tax proposal will be overturned in this autumn’s concrete budget and tax plan. for 2027. For details, see here - JVCA report

• The backlash against shareholder activism and private equity is perhaps most pronounced and concrete in the new METI draft proposals for the next round of corporate governance reform: company directors should now be empowered to reject takeover proposals on the basis of their own assessment of potential national economic security concerns. At face value, this would be giving an ultimate poison pill to directors. More importantly, it demonstrates a complete misinterpretation of what constitutes a directors fiduciary responsibility: a director must focus on acting in the best interest of minority- and other shareholders, and on who is the best owner and best enforcer of a corporate strategy designed to create wealth for all stakeholders. National economic security is NOT a directors responsibility.

  Of course, a robust national economic security check is absolutely essential in the event of an ownership change; but that assessment is the responsibility of the government, not independent board directors. National economic security priorities may and will change over time - but that’s the domain of the nation’s policy stewards, not of a corporate board member. As I said, delegating that power to board directors is handing them a poison pill from heaven.

And then the big one:

Why does the MoF Minister question the best performing public pension manager in the world ?

Last week, Takaichi’s Finance Minister (who is also her most trusted adviser and confidante) openly urged the public pension GPIF to consider changing its asset allocation: “GPIF should buy more JGBs”.

This is a spectacular attack on all the pro-market and capital stewardship reforms promoted and enacted by Prime Minister Abe: before Abe, the GPIF was a fundamentally sleepy, dominated by Marxist economists asset allocation utility beholden to the MoF, the Keidanren (Japan’s big-business lobby), and the LDP. Backed by Abe’s leadership and personnel appointments, GPIF transformed to a best-in-class public fund manager. The whole point of Abe’s GPIF reform was to make independent the stewards of public pension assets from the whims and pressures of in-today, out-tomorrow political priorities. Here, Abe’s goal was for the GPIF to become the best-in-class role model for Japan’s private sector asset managers and stewards of capital.

And wow, has GPIF delivered as the institutions evolved over the past 15 years into arguably the best performing pubic fund manager in the world.

The numbers speak for themselves:

over the past 24 years, GPIF has significantly outperformed all global public pensions funds. In comparison to CALPERS, for example, GPIF has generated a surplus of 2.09% compared to a deficit of 3.73% generated by CALPERS. Impressively, GPIF has done so despite running more than three-times AUM, $1,600 billion vs $500 billion; and -remarkably- doing so with a team less than ten-times smaller, 187 GPIF professionals versus 2,843 at CALPERS. It pays less than 2 basis points (!) in fees, compared to CALPERS’s 49 bars points….

Clearly the GPIFs performance deserves a Nobel Prize for applied finance and capital stewardship.

Nothing succeeds like success….and success implies higher, not lower interest rates

By criticizing the GPIFs asset allocation, MoF Minister Katayama exposes the inherent discomfort financial markets have with Takaichi’s economic and fiscal policy. At best, Katayama exposes her own disbelief in the success of Takaichi’s policies; at worst, Katayama reveals a fundamental disrespect for independent capital stewardship, professional fiduciary responsibility and, well, capital markets:

• bond yields are rising precisely because markets believe in the success of Takaichi’s pro-growth policies: as the potential growth rates rises, so does the absolute level of interest rates. To wit: A Japan with a potential growth rate of 1% and an inflation target of 2% has a “neutral” policy rate of around 2.5-3.5%. If the potential growth rate were 2% and the inflation target still 2%, neutral would be around 3.5-4.5%. This is per (an admittedly crude but fundamentally correct) Taylor rule calculation.

• And yes, the corresponding 10-year JGB yield would be at least 175-225 basis-points above the neutral policy rate, ie just about double the current 2.9%. This is the reality stewards of capital are facing if indeed Takanomics’s “Japan is Back” in the growth game comes through. As such, it would be utterly irresponsible for the GPIF to overweight JGBs at current levels. Never mind that Minister Katayama also urged retail investors to to buy JGBs….

• The only reason to go overweight JGBs is if you believe that Takaichi’s policies will fail to boost Japan’s potential growth and capital returns; that the Y370 trillion will create nothing but wasted excess capacity, falling enterprise values, and rising non-performing debt - ie produce the next deflationary cycle rather than an inflationary one. If indeed the growth potential falls, this will pull down bond yields.

• Make no mistake: Minister Katayama’s call on the GPIF to buy more JGBs stands in direct contrast to PM Abe’s and BoJ Governor Kuroda’s call on the GPIF in 2023/14 to raise both non-Yen and domestic equity allocations and cut JGB exposure: at the time, trust in the success of Abenomics was the best aligned- and correct strategy to make money and raise the fund’s performance. Against this, Katayama today is effectively asking GPIF to not trust Team Takaichi’s growth strategy.

Avoiding the real Takaichi trap: not bond vigilantes but external directors focused on ROI

Importantly, MoF Minister Katayama’s pressure on the GPIF distracts from a very real trap Team Takaichi must work harder to avoid. The trap is not set by the “bond vigilantes” the MoF’s bursaries are worried about; it is set by the newly empowered, independent board directors and capital stewards now running corporate Japan: will they approve new growth investments primarily motivated by national industrial policy dictate now that, after hard-fought corporate governance reforms, they have been empowered and incentivized to only go for new investment projects that offer a higher-than-current ROI, return on investment?

Clear speak: Team Takaichi’s biggest challenge from here is to built trust and demonstrate, project by project, that her vision of a new industrial structure is indeed a structure likely to deliver higher returns than the one Japan currently has. I’m convinced she can deliver, but to do so Team Takaichi must be more upfront, professional and honest about the economic and capital market consequences of the strategy.

What about the BoJ?

To be sure, BoJ Governor Ueda holds key responsibility too. His reluctance, so far, to fully acknowledge the sustainability of the pro-growth and inflationary thrust unleashed by the rise in Japan’s corporate metabolism, has consistently delivered a further steepening of the yield curve after every singly rate increase. Yes, he is “behind the curve” and now that Takaichi’s fiscal- and industrial policy thrust is getting real, he’s poised fall even further behind. Unless, of course, he demonstrates trust in Takanomics and speeds-up the rate normalization process. Make no mistake: the longer he waits to raise rates now, the greater his signaling of distrust in the ability of Team Takaichi to deliver.

Governor Ueda knows better than anyone the reverse gravity axiom of financial economics: a higher growth potential forces higher, not lower interest rates. Interestingly, one of the BoJ board members have been encouraged to public float the idea of completing the “normalization” process in one full swoop, departing from the reluctant gradualism enacted until now. And he is right, in my view: now that the output gap is closed and that Japan is committed to an unprecedented public-private partnership for resource mobilization, why wait to get to neutral?

Takaichi should be urging Governor Ueda to hike rates because it would be the strongest initial vote of confidence in her Takanomics she can hope for. It would also, in my view, serve as a positive halo instilling confidence amongst private sector leaders that indeed Japan is back on track for sustainable growth and a coming up-shift in her potential growth rate.

Thank you for reading. As always, comments welcome….best & many cheers of hot & humid Shibuya-ku ;-j

I am honored to present you with this guest contribution by Dr Peter Gruss. He has been my mentor and friend for more than a decade now. Peter is arguably the most experienced global leader in the science-academia-deep-tech-innovation-national-policy-making ecosystem. He is uniquely relevant to Japan because he has actually been leading from within the trenches here in Japan, first as President of Japan’s leading science university. OIST, the Okinawa Institute of Science & Technology (consistently ranked in the top-ten global science research universities by Nature Magazine); and now as a member of Tokyo University’s Policy Council. His unique “skin-in-the-game insights” make it very clear that money is, yes, a necessary condition, but not a sufficient one to realize Takakich’s dream. True institutional reform is needed to overcome Japan’s R&D conversion problem…..Enjoy and, as always, comments welcome. Many cheers from rainy Kauaii ;-j

Japan’s Metascience Reform Agenda: Turning Public R&D into Frontier Science and Innovation

by Dr Peter Gruss - President Emeritus of OIST & the Max Planck Society, and current University of Tokyo Policy Council Member

Executive Summary

Japan is a high-R&D country with a public-research conversion problem. Its total R&D effort is large, but its system is heavily business-led, while its position in globally top-cited research and science-linked patenting is weaker than one would expect from the size and sophistication of the economy. The reform question is therefore not only whether Japan should spend more. It is whether Japan’s public research system - JSPS/KAKENHI, JST, RIKEN, AMED, NEDO, AIST, MEXT, METI, and national universities - is organized to convert public funding into frontier science, high-value patents, startups, standards, and industrial capabilities. This paper argues for a Japanese metascience agenda: a systematic effort to study and improve how science is funded, reviewed, managed, opened, replicated, and translated.

1. Why Public R&D Matters

Public research funding is not merely a subsidy for universities or laboratories. It is one of the core engines of national innovation. Publicly funded research produces the scientific foundations on which later technologies, patents, firms, and industries are built. This is especially true for early-stage and high-risk research, where private firms often underinvest because the benefits are uncertain, long term, and difficult to capture exclusively. The economic case for public R&D is therefore not only that it produces papers. It generates spillovers: trained people, new methods, datasets, instruments, standards, patents, startups, and industrial capabilities.

International data show the scale of the issue. In 2022, the United States spent roughly $923.2 billion on R&D, Japan about $200.8 billion, and Germany about $174.9 billion in current PPP-adjusted dollars. Japan is therefore not a marginal science economy. It remains one of the largest R&D systems in the world. But the structure of that system differs from Germany and the United States. Japan’s official FY2022 survey reported total R&D expenditure of about ¥20.70 trillion, with businesses accounting for 73.1% of total R&D. The U.S. system is also strongly business-led, with business performing roughly 78% of R&D. Germany’s business share is commonly reported in the mid-to-high 60s, around 67%.

Japan has a large industrial R&D machine, but its public and academic research base appears less effective at converting national R&D strength into globally leading science. Germany’s public research landscape is institutionally deep, including Max Planck, Fraunhofer, Helmholtz, Leibniz, DFG, universities, and federal-Länder co-financing. The United States combines enormous business R&D with very large federal mission and health research budgets. Japan’s public research system must become stronger, more open, and more experimental if it is to feed the next generation of science-based innovation.

The additional U.S. advantage: large-scale science philanthropy

The comparison based on government and business R&D still understates the resources available to the U.S. research system. The United States also has a substantial philanthropic layer that finances long-horizon basic research, high-risk investigators, new institutes, shared datasets, and research tools. This funding is not a substitute for federal support: it is much smaller, more concentrated, and often targeted to particular fields. Its importance lies in flexibility. Philanthropic funders can make long commitments, support people rather than narrowly specified projects, and create new organizational models more quickly than government.

The scale is significant. HHMI reported $806.6 million in medical-research program expenses in fiscal year 2024. In Cambridge, the Broad family provided $700 million cumulatively to establish and endow the Broad Institute, while the Stanley family’s support for psychiatric research at Broad has exceeded $1 billion. In Seattle, Paul Allen’s cumulative commitment to the Allen Institute had reached $500 million by 2012. The Chan Zuckerberg Initiative committed $3 billion over ten years to biomedical science and technology. Other major contributors include the Simons Foundation, the Gordon and Betty Moore Foundation, Schmidt Sciences, and disease-focused foundations.

These figures should not be added mechanically to annual federal R&D totals: some are yearly expenditures, others are multi-year or cumulative gifts, and many institutes also receive government grants. Nevertheless, they demonstrate a structural U.S. advantage. Public funding supplies scale and continuity; philanthropy adds patient, flexible capital and institutional experimentation. Japan should therefore strengthen public basic-research funding while also creating tax, governance, and matching-fund incentives for larger private foundations, endowed research institutes, and long-term gifts to universities and national research organizations.

2. Japan’s Efficiency Problem

Japan’s challenge is not only input volume; it is output quality and conversion efficiency. NISTEP’s 2024 indicators show that Japan ranked fifth in total papers by fractional count, but only thirteenth in adjusted top 10% papers and twelfth in adjusted top 1% papers. Top-cited papers are not perfect measures of scientific excellence, but they are a useful warning signal. A country producing many papers but fewer globally leading papers may be spreading effort across too many incremental projects, underfunding high-risk work, disadvantaging younger researchers, or relying on review systems that reward feasibility more than originality.

The innovation side raises a similar concern. NISTEP reports that Japan ranks highly in patent families that cite scientific papers, but only 6.7% of Japanese patent families cite academic papers. NISTEP also notes that this is below the average for Europe and North America, which is above 20%. The defensible statement is that Japan has a weak science-to-technology linkage compared with the broader Europe/North America benchmark.

The link between excellent science and valuable invention is not speculative. A large-scale study matching 4.8 million patent families to 43 million scientific publication records found that patents linked to high-quality science are about twice as valuable as those linked to low-quality science. For Japan, the goal should be to raise the conversion rate from public R&D funding to top 10% and top 1% papers, and from excellent science to high-value patents, standards, startups, and industrial platforms. Here are some thoughts how to improve the Japanese R&D funding system:

3. Reform JSPS/KAKENHI: Create a Metascience Lab

The Japan Society for the Promotion of Science should establish an internal KAKENHI Metascience Lab. KAKENHI is Japan’s broadest investigator-led academic funding mechanism, so it is the best place to study whether the grant system selects originality or rewards safe incremental work. The lab should have secure access to proposal texts, reviewer scores, panel decisions, award histories, applicant career data, publications, citations, datasets, patents, and later funding outcomes.

The lab should answer concrete questions. Are early-career researchers disadvantaged in review? Which review criteria predict long-term scientific impact? Are interdisciplinary proposals penalized because they do not fit existing panels? Do repeat awardees dominate flows of funding? Does KAKENHI underfund high-novelty proposals because preliminary data and feasibility are overweighted? How much time do researchers lose preparing unsuccessful applications?

Five pilots should begin immediately: young investigator independence grants of five to seven years; partial lotteries among proposals that pass a high-quality threshold; a high-risk KAKENHI track where novelty is scored separately from feasibility; two-stage applications to reduce burden; and reviewer calibration using historical outcomes to identify bias against early-career, interdisciplinary, or high-risk proposals.

Japan should also make greater use of non-Japanese reviewers, particularly for large, interdisciplinary, high-risk, and internationally oriented proposals. Carefully selected overseas experts would broaden the range of scientific judgment, reduce dependence on domestic networks and established schools, and help benchmark Japanese proposals against the global frontier. International reviewers should complement, not replace, Japanese expertise, and conflicts of interest, confidentiality, language, and review timelines should be managed through clear rules and professional support.

4. Use JST as the Platform for Funding-Model Experimentation

The Japan Science and Technology Agency should become the main testing ground for strategic and mission-oriented funding reform. JST already manages CREST, PRESTO-style programs, Moonshot programs, strategic basic research, technology transfer, and team-based funding. It is therefore the right institution to test how program design affects risk, speed, and translation.

JST should pilot ARPA-style program-manager authority in selected programs. Program managers should have discretion to start, stop, expand, redirect, or combine projects as technical evidence changes. This model is suitable for engineering-heavy, platform-building, and mission-oriented work, but curiosity-driven basic research should not be forced into inappropriate short-term milestones. JST should also test open-topic strategic calls, where researchers propose unexpected routes to national challenges rather than responding only to narrow themes.

JST should fund Focused Research Organization pilots: time-limited, full-time teams building public-good tools, datasets, and platforms too large for one lab and too pre-commercial for a startup. International challenge programs with Germany, the UK, South Korea, Singapore, and the EU would allow Japan to compare funding designs across systems and learn faster than it can alone.

5. Make RIKEN the Frontier-Science Testbed

RIKEN should be Japan’s central laboratory for testing long-horizon, high-autonomy science. Its key metascience question is simple: does long-term institutional funding produce more frontier research than short-cycle competitive project funding? RIKEN has the scale, prestige, facilities, and national legitimacy to answer that question.

RIKEN should pilot eight- to ten-year flexible funding for selected research leaders and emerging younger leaders. It should expand independent young PI groups with their own budgets, space, hiring authority, and technical staff. It should build cross-center platforms in AI for science, structural biology, quantum technology, computational science, bioengineering, and advanced measurement. It should recognize research products beyond papers - datasets, models, software, protocols, materials, cell lines, and instruments - as formal outputs. It should also host embedded international labs with partners such as Max Planck, Helmholtz, CNRS, ETH-domain institutions, and leading Asian institutes.

6. Improve Reliability and Translation Through AMED

Biomedical research is an area where reliability failures are especially expensive. AMED should lead Japan’s metascience agenda for biomedical reproducibility, clinical translation, and patient-level data governance. It should fund independent replication of influential preclinical studies before large translational investments are made. It should require registered reports in selected high-cost biomedical areas, especially where flexible analysis choices or publication bias can distort decisions.

AMED should also run translational failure analyses. Japan needs to know why promising discoveries fail to become clinical products: weak target validation, inadequate trial design, poor data standards, fragmented patient cohorts, IP problems, insufficient venture funding, or weak links between discovery laboratories and hospitals. A formal AMED-RIKEN bridge could connect RIKEN discovery research with AMED translational programs, with shared data standards and stage-gated evaluation.

7. Use NEDO and AIST for Industrial Translation Experiments

NEDO and AIST should lead reform in industrial technology, energy, manufacturing, robotics, semiconductors, batteries, and climate technology. NEDO should test open-topic industrial technology calls that allow firms, startups, universities, and institutes to propose unconventional solutions to national challenges. It should use milestone-based public-private funding where technical progress can be measured, and it should track whether grants increase venture financing, patents, standards participation, procurement, and industrial adoption.

AIST should benchmark itself against Germany’s Fraunhofer Society and test which contract-research models create the greatest spillovers. Japan should experiment with IP models - exclusive licensing, non-exclusive licensing, patent pools, open standards, and public-good licensing - and evaluate downstream effects. AIST should also create mobility fellowships allowing researchers to spend one or two years in startups or industrial labs and return without penalty.

8. Reform National Universities

National universities should become active participants in metascience reform. Japan should make a clear institutional shift: an assistant professor should not be the assistant to a professor. Early-career researchers should have their own budgets, space, hiring authority, and the right to pursue independent research agendas. MEXT should require independent young PI tracks with startup packages, protected research time, and transparent promotion criteria.

University governance also needs reform. Japan should create full supervisory boards for national universities with real strategic authority, external expertise, and international participation. These boards should include distinguished scientists, technology leaders, entrepreneurs, international academics, and public-interest representatives. They should evaluate whether universities are producing frontier research, supporting young investigators, attracting global talent, reducing bureaucracy, and contributing to national innovation.

Internationalization must become central to research reform. After the bachelor’s level, Japan should expand English-language graduate teaching and research training in selected programs, especially in science, engineering, medicine, AI, materials, robotics, energy, and life sciences. This does not mean abandoning Japanese. It means making Japan’s research system easier for international graduate students, postdocs, and faculty to enter.

9. Reduce Administrative Burden and Build R&D Data Infrastructure

Japan should set a national target to reduce avoidable research administration by 20% within five years. MEXT should coordinate this across JSPS, JST, AMED, NEDO, RIKEN, AIST, and universities. Reforms should include shorter proposals, fewer duplicative reports, harmonized data-management plans, common CV formats, shared grant portals, simplified procurement, better research-manager career tracks, and more professional support staff for laboratories.

Finally, Japan needs a secure national R&D data infrastructure. It should link grant applications, reviewer scores, funding decisions, publications, patents, datasets, clinical trials, startups, licensing, standards, procurement, career outcomes, and international collaboration. The infrastructure must be privacy-preserving and allow approved researchers to study the system without exposing confidential proposal-level data. Without this backbone, Japan will not know which reforms work. With it, Japan can manage science policy as a learning system.

Conclusion

Japan does not face a simple spending problem. It faces a public-research efficiency and translation problem. The country spends heavily on R&D overall, but its system is strongly business-led, its share of globally top-cited science is weaker than its publication volume suggests, and the connection between scientific papers and patents is weaker than it should be. The answer is not to copy another country. Japan should build its own metascience system: evidence-driven, institutionally specific, and focused on higher conversion from public funding to excellent science and from excellent science to high-value innovation.

The agenda is practical. JSPS should study and reform KAKENHI. JST should test new funding models. RIKEN should test long-horizon autonomy. AMED should improve biomedical reliability. NEDO and AIST should test industrial translation. FRO-Japan should build tools and platforms that traditional labs cannot. Universities should give young researchers real independence, reform governance, and internationalize graduate training. MEXT should reduce burden and create an R&D data infrastructure. If Japan implements these reforms, it can turn metascience from an abstract field into a national strategy for scientific renewal and economic resilience.

References and Data Sources

NSF/NCSES, Science & Engineering Indicators 2025, Global R&D and International Comparisons, including 2022 current PPP R&D estimates.

Statistics Bureau of Japan, Survey of Research and Development, FY2022; summarized in UK Science and Innovation Network, Japan.

NISTEP, Japanese Science and Technology Indicators 2024, including Japan’s rankings for total papers, adjusted top 10% papers, adjusted top 1% papers, and patent families citing scientific papers.

OECD Main Science and Technology Indicators and OECD Research and Development Statistics, including business-sector R&D performance and cross-country definitions.

Poege, F., Harhoff, D., Gaessler, F., and Baruffaldi, S. (2019). Science quality and the value of inventions. Science Advances.

· Howard Hughes Medical Institute, FY2024 Audited Financial Statements: $806.6 million in medical-research program expenses.

· Broad Institute: Broad family gifts totaling $700 million; Stanley family philanthropic support exceeding $1 billion by 2026.

· Allen Institute: Paul G. Allen cumulative commitment of $500 million by 2012.

· Chan Zuckerberg Initiative: $3 billion ten-year commitment to science announced in 2016.hhhh

Dr Peter Gruss - brief biography

Dr. Peter Gruss is a German developmental biologist renowned for his pioneering work in gene regulation and embryonic development. He earned his PhD from Ruprecht-Karls-Universität Heidelberg in 1977, followed by postdoctoral training at the NIH in Bethesda, where he co-discovered enhancers — gene-activating elements that operate in a tissue-specific manner. In 1986, he was named Director of the Max Planck Institute for Biophysical Chemistry, and has held the status of honorary professor at the University of Göttingen since 1990.

He served as President of the Max Planck Society from 2002 to 2014, during which time his influence extended well beyond the laboratory into corporate boardrooms and government. On the corporate side, Gruss served on the Supervisory Board of Siemens AG from 2008 to 2014, and following his resignation from that board, was appointed Chairman of the Siemens Technology & Innovation Council (STIC) in early 2015. He also served on the Supervisory Boards of Munich RE and Actelion Pharmaceuticals, as well as on the Advisory Boards of Deloitte and Allianz. He was appointed as a member of the “Innovation Dialogue” of the Federal Chancellery by Chancellor Angela Merkel — a direct advisory role at the highest level of German government on science and technology policy.

In terms of scientific leadership bodies, Gruss served as President of the International Society of Developmental Biology from 1993 to 1997, and as President of the EMBL Council from 2000 to 2002. He has been a member of the Senates of the Alliance of Scientific Organizations in Germany, the German Research Foundation (DFG), the German National Academy of Sciences Leopoldina, and acatech, the German Academy of Science and Engineering. He also served on the Scientific and Academic Advisory Committee and the International Board of the Weizmann Institute of Science, and on the Academic Advisory Council of the Stiftung Charité.

His international academy memberships include the American Academy of Arts and Sciences, the Göttingen Academy of Sciences, the European Molecular Biology Organization, and the German National Academy of Sciences Leopoldina. He is an honorary member of the Japan Academy and the National Academy of Sciences of the Republic of Korea, and a foreign member of the Polish Academy of Sciences. In January 2017, Gruss became President of the Okinawa Institute of Science and Technology (OIST), and was later honored with Japan’s Order of the Rising Sun, Gold and Silver Star, for his exceptional contributions to Japanese science and education.

The Corridor Trade - why Japan’s banks should look to Delhi, not Washington or Canberra

By Harry Wilby

Sanae Takaichi landed in New Delhi on Wednesday for her first visit to India as prime minister, and her first visit to the country at all. Over three days, from 1 to 3 July, she is co-chairing the 16th India-Japan Annual Summit with Narendra Modi, a meeting billed by both governments as a review of the full spectrum of the Special Strategic and Global Partnership the two countries struck in 2014. The published agenda is broad by design; semiconductors and critical minerals sit at the top of it, part of a shared push to build supply chains that do not run through China. Alongside that sits maritime security, defence technology cooperation, and a proposed “Industrial Value Chain” linking the Bay of Bengal to India’s Northeast.

Economic security is the phrase both delegations keep returning to, and it covers a lot of ground, from a possible declaration on artificial intelligence cooperation to a large green ammonia project in Odisha, expanded biogas collaboration, and a regional resilience initiative called POWERR Asia. Takaichi will also attend the India-Japan Business Forum while she is in Delhi, and the expected outcome documents include a Joint Statement on the Summit itself, a separate agreement on energy resilience, and memoranda of understanding across AI, pharmaceuticals, batteries, and critical minerals.

Buried inside that list, and getting far less attention than semiconductors or critical minerals, is a currency story that matters more to how Japanese capital should think about India over the next decade than almost anything else on the agenda. Nikkei Asia reported two days before Takaichi’s arrival that Japan and India are moving toward a local-currency settlement scheme allowing direct yen-rupee transactions, bypassing the dollar entirely. That detail, and a parallel, quieter shift in Indian banking regulation, together make the case for a trade Japanese megabanks are not yet running at any scale. Not another year adding to the well-worn carry trade into US Treasuries and Australian government debt, but a direct, strategic equity position in India’s state-owned banks.

For two years, Japanese institutional money has flowed in one broad direction abroad. Out of a yen earning next to nothing at home, and into US Treasuries, American corporate credit, and Australian government bonds and infrastructure. It has been an easy trade to justify. Borrow cheap yen, buy an asset yielding several points more in dollars or Australian dollars, and pocket the spread. It is also, on close inspection, a trade that is running out of road. A quieter and considerably more interesting opportunity is opening in New Delhi, and it deserves more attention from Tokyo’s megabanks than it is currently getting.

What is afoot in the market?

India’s Department of Financial Services is running an inter-ministerial review of the foreign direct investment ceiling in public sector banks. Financial Services Secretary M. Nagaraju has confirmed the government is weighing a move from 20 percent to 49 percent, bringing the ceiling for state-run lenders into closer alignment with the 74 percent already permitted in private banks. The government’s stated red line is that sovereign ownership stays at or above 51 percent. What remains genuinely unresolved is voting rights, since foreign holders in public sector banks have historically been capped in influence even when capped in equity. The review sits inside a wider reform push, dubbed “Manthan” internally, that also covers bank consolidation, capital strengthening, and the strategic sale of IDBI Bank, with a delivery window officials have pencilled in for 2026 to 2028. The ambition attached to all of it is large. Officials want to double the combined asset base of public sector banks over five years, from a starting point of roughly ₹261 lakh crore.

The precedent that should anchor how seriously this is taken is already sitting on the board. Sumitomo Mitsui Banking Corporation’s acquisition of 24.22 percent of Yes Bank, for ₹16,333 crore, happened inside the private bank ceiling of 74 percent. It is nonetheless the template for what a raised public sector ceiling would allow elsewhere. A Japanese megabank taking a strategic, board-relevant stake in an Indian lender, priced for the long run rather than for a quick flip. Move the public sector ceiling to 49 percent and the same playbook becomes available on a segment of the Indian banking market SMBC could not previously touch.

Five banks worth watching

Not every public sector bank technically eligible for a higher ceiling is worth a Japanese bank’s attention. Thin free float, negligible existing foreign ownership, and low index relevance rule several out before the conversation even starts. The market has, in effect, already done the shortlisting.

Nuvama’s screen of passive MSCI flows under a smaller, prior cap increase from 20 to 26 percent named six banks with real index and liquidity impact: State Bank of India, Punjab National Bank, Canara Bank, Union Bank, Bank of Baroda, and Indian Bank. SBI is worth setting aside on its own terms. It is sovereign-scale, almost certainly politically off-limits for a large strategic stake, and more useful as the ceiling case that explains why the other five matter. That leaves a clean list of five.

Bank of Baroda carries the strongest external credibility marker of the group. It has BBB-rated USD senior notes from both CareEdge and S&P, an active four billion dollar global medium-term note programme, and held a global investor engagement in June 2026 pitched directly at foreign fixed-income and equity audiences. It already behaves like an institution comfortable raising money from foreign capital markets, which narrows the governance gap a Japanese acquirer would otherwise need to close.

Canara Bank brings scale from its merger with the former Syndicate Bank, with provisional global business of close to ₹29 lakh crore in the first quarter of the current financial year, alongside strong asset quality by the numbers that matter. Net non-performing assets sit at 0.45 percent, and provision coverage is above 94 percent. Nikkei Asia’s own reporting on the FDI review noted that foreign holdings in Canara sit well below even the current 20 percent ceiling. That gap is the opportunity. A well-capitalised bank that is meaningfully under-owned by foreign capital, where a strategic entrant is not competing with an existing foreign shareholder base for allocation.

Punjab National Bank is the second-largest public sector bank by the sequencing of past mergers, trading on a modest price-to-earnings ratio of roughly 7.3 times, with government holding around 70 percent. The turnaround from its legacy non-performing asset problem is further advanced than the market appears to be pricing, and FII ownership sits around 6.4 percent, low enough that a strategic stake would not require displacing an existing foreign holder.

Union Bank of India shows up consistently alongside Canara in both the passive-flow coverage and the FDI cap reporting, and carries a similar profile. A large state-owned balance sheet, low current foreign ownership, and meaningful scale from consolidation.

Indian Bank is the more interesting outlier of the five. It is not yet inside the MSCI index at current caps, but has been flagged as a fresh inclusion candidate worth an estimated $177 million in passive inflows alone if the ceiling moves. For a strategic investor rather than a passive one, that is a signal worth reading carefully. A bank of real size that remains under-owned and under-covered by foreign capital is exactly the profile where a first mover gets priced before the crowd arrives.

Set side by side, the five make a reasonably clean comparison of where the opportunity actually sits.

What the table is meant to show is the shape of the opportunity set. None of the five is expensive by developed-market standards, none carries meaningful existing foreign strategic ownership, and asset quality across the group has improved to a point where the old argument against touching Indian public sector banks, namely balance sheets full of stressed loans, no longer holds up.

The case against Washington and Canberra

The right question is not which bank would make the best acquirer of a public sector bank stake. It is why Japanese banks should be routing capital into these assets at all, rather than into where the bulk of their outbound money is currently going. That is the actual decision sitting in front of a Japanese megabank’s international allocation committee, and it is worth arguing against directly.

The US and Australia trade is, at bottom, a rate-differential trade rather than a growth trade. Japanese institutional capital has piled into both markets because they offer materially higher policy rates than Japan does at home. Borrow cheap yen, earn the US Treasury or Australian government bond yield on the other side, and pocket the spread. It works exactly as long as the rate gap holds and the currency does not move against you badly enough to erase it. A stake in an Indian public sector bank is the opposite kind of asset. It is a bet on India’s credit-to-GDP expansion, from around 56 percent today toward a stated ambition of 150 percent, inside an economy still compounding at more than 6 percent real growth, set against a mature US economy and an Australian economy still tied closely to commodities and China. Japanese banks currently have almost none of their India exposure structured this way. It is overwhelmingly trade finance and project lending, not equity participation in the growth story itself. A public sector bank stake closes that gap.

There is also an execution-risk argument in Japan’s favour that neither the American nor the Australian trade can offer. SMBC’s move into Yes Bank was not a one-off. It sits inside a much broader corridor of India-Japan institutional plumbing, including JBIC and JICA co-financing, the India-Japan Industrial Competitiveness Partnership, and the 16th India-Japan Annual Summit, held in New Delhi this week, which has explicitly reaffirmed the bilateral relationship at head-of-government level. A Japanese bank buying into a public sector bank is not a standalone financial trade. It is underwritten by decades of sovereign-to-sovereign relationship capital that lowers political and regulatory tail risk in a way that adding further to an already crowded American or Australian carry trade simply does not. There is little differentiation, and increasingly thin marginal return, in being the tenth large Japanese balance sheet running the same trade everyone else in Tokyo is already running.

The comparison holds even where Japanese institutions have tried to get emerging-market growth exposure through American channels. The common route has been as a limited partner into funds such as KKR or Blackstone, both of which are now redeploying record volumes of dry powder. That capital arrives twice removed. Through a US-domiciled general partner, on that general partner’s fee and carry economics, inside a fund life that forces an exit event through an IPO or trade sale on the fund’s timetable rather than the asset’s. A direct stake in a public sector bank removes that layer entirely. No fee drag from a general partner, no forced-exit clock, and a return profile built on dividend income and book-value compounding that suits a bank’s own balance sheet far better than it suits a fund chasing an internal rate of return target. The Japanese bank captures the India growth premium directly, rather than paying an American intermediary for indirect access to it.

The Outlier That Matters

The currency piece is worth setting out at length, because it is the part of the case that is easiest to miss and does the most to make a decade-long strategic stake hold together as an idea, rather than simply sounding fluffy and attractive.

Start with the uncomfortable fact about the yen. It is in genuine structural trouble against almost every major currency except the rupee, and the long-run picture shows why that comparison matters. Over the thirteen years from 2013 to 2026, USD/JPY has moved from ¥89 to ¥158, a decline in the yen’s value against the dollar of roughly 78 percent. The path was not a straight line. Bank of Japan negative rates and yield-curve control held the pair range-bound through much of 2016 to 2021, before a sharper move began in 2022, when the Federal Reserve started hiking while the BOJ held its policy rate near zero, opening a gap between the two central banks that has driven most of the yen’s weakness since.

The rupee, over the same thirteen years, has followed a strikingly similar path, for almost entirely unrelated reasons. USD/INR has moved from ₹54 to ₹96 since 2013, a decline in the rupee’s value against the dollar of roughly 78 percent. The slide has its own named shocks along the way. A 2018 emerging-market selloff compounded by an oil price spike, the Covid-19 shock in 2020, and a visibly steepening slide through 2025 and into 2026 as the current account and portfolio flows have weighed on the currency.

Here is the point worth building the entire argument around. Run the two figures side by side and they are almost identical. The yen down 77.5 percent against the dollar since 2013, the rupee down 77.8 percent, a gap of three-tenths of one percentage point across thirteen years of trading. Cross-divide the two rates and the result is a JPY/INR pair that has spent those thirteen years oscillating inside a band of ¥1.41 to ¥1.94 per rupee, and sits today at ¥1.66, almost exactly where it started in 2013 at ¥1.64. Two currencies each individually down by roughly three-quarters against the dollar have, against each other, net to a move of little more than one percent over more than a decade.

That is not a coincidence worth waving away. It is a mechanism worth naming plainly, and thirteen years of data makes the case far more convincingly than a short window could. When both legs of a currency pair are weak against the same third currency for different structural reasons, and weak by similar proportional amounts, the cross rate absorbs shocks that would otherwise hit a single-currency trade hard. A Japanese bank buying dollar-denominated American or Australian assets today is buying into a currency at a point where the yen’s weakness is a pure cost. Every yen converted buys fewer dollars than it did two years ago, let alone thirteen, compounding the underperformance of the underlying rate trade. A Japanese bank buying a rupee-denominated stake in a public sector bank is instead putting yen into an asset priced in a currency that has depreciated in step with the yen rather than against it, not just recently but for more than a decade. The foreign exchange translation risk that would normally be the single largest variable in a multi-decade cross-border equity stake is structurally lower here than in almost any other major-currency pair available to a Japanese institutional allocator right now.

There is also a fresh and directly relevant development that strengthens this further. Nikkei Asia reported on 30 June 2026 that Japan and India are moving to establish a local-currency settlement scheme that would allow direct yen-rupee transactions, bypassing the US dollar altogether.

The proposal is expected to feature in the joint statement from this week’s Annual Summit in New Delhi, and would build on the two countries’ existing $75 billion bilateral currency swap line, extended through 2026. Bilateral trade between Japan and India ran at $27.47 billion in the last financial year, and every yen of that currently passes through a double conversion via the dollar on its way to becoming rupees, and back again on the way home. A direct settlement channel would strip that conversion cost and the associated exchange rate exposure out of ordinary trade flows between the two countries. For a Japanese bank weighing a strategic equity stake in an Indian lender, this matters beyond the immediate cost saving. It is a concrete, near-term signal that both governments intend to deepen the plumbing between the yen and the rupee specifically, at the same moment Tokyo has already lifted its ten-year investment commitment to India from an initial 5 trillion yen to 10 trillion yen. A bank building a long-term position in Indian financial services is not betting on a currency relationship that might tighten someday. It is betting on one both governments are actively building this year.

Put the two pieces together and the takeaway is straightforward. Most yen-funded trades available to a Japanese institution in 2026 require taking a view on the yen weakening against the destination currency, and hoping the rate differential outruns the currency loss. This one is closer to the yen weakening in parallel with the destination currency, a pattern with thirteen years of Federal Reserve data behind it rather than a recent quirk, and with the two governments now working to formalise a direct settlement channel between them. That is a meaningfully different risk profile for a stake meant to be held for a decade or more, and it deserves to sit at the centre of the case, not as a footnote to it.

None of this stays contained to the megabanks that actually buy the equity. A live settlement scheme and a real strategic stake generate second-order flow that a wider set of players in Tokyo and beyond can position for now, rather than waiting for the FDI ceiling to move. Someone has to structure and price the yen-rupee hedges once genuine two-way flow exists in the pair, and that is a market-making opportunity for global banks with real books in both currencies, not just the Japanese balance sheets holding the underlying stakes. The same applies to advisory and underwriting work around the deals themselves, and around the PSBs’ own foreign-currency fundraising, of the kind Bank of Baroda is already running. Beyond the banks, the roughly 1,400 Japanese companies already operating in India, and the wider wave of manufacturers moving into semiconductors and critical minerals on the back of this week’s Summit commitments, all need trade finance, treasury structuring, and eventually direct settlement advice once the dollar leg is no longer compulsory. A rising corridor tends to create more fee and flow opportunity around its edges than at its centre, and Tokyo-based banks without the balance sheet to take a principal stake in a public sector lender still have a genuine claim on that surrounding business, provided they position for it before the corridor is fully built rather than after.

What happens next

None of this is fully resolved yet, and there I take an honest approach about what remains open. The equity ceiling and the voting rights question are separate problems, and raising the cap to 49 percent does not by itself guarantee a foreign strategic holder meaningful influence over how a bank is run, given the government’s insistence on keeping ownership at or above 51 percent. The Manthan roadmap runs to 2028, not next quarter, and the IDBI Bank strategic sale is worth watching closely in the meantime as the interim test case for how much appetite the government genuinely has for foreign control, and how smoothly it can execute a sale of this kind in practice.

What is already in place is the market’s own shortlist of five investable banks, a working precedent in SMBC’s Yes Bank stake, a currency relationship that is behaving unlike almost anything else available to Japanese capital right now, and a settlement channel between the yen and the rupee that both governments are actively building. For Tokyo’s megabanks, that is a more compelling set of facts than another year of the same trade into Washington and Canberra.

Further Reading

For those who want to go deeper on any of the threads above, the primary sources and data behind this piece are grouped by theme below.

On the Summit and the visit

● Nikkei Asia – “Japan and India to take step toward direct yen-rupee settlements” — the original report on the local-currency settlement scheme, published two days before Takaichi’s arrival.

● The Tribune – “Semiconductors, AI, and Indo-Pacific security” — the fullest published rundown of the Summit agenda, including the Bay of Bengal–Northeast industrial corridor and the AI declaration.

On the FDI cap review

● Nikkei Asia – “India’s public banks FDI plan hinges on more than investment caps” — the clearest account of why voting rights, not just the equity ceiling, are the real sticking point.

● Indian Banking News – “Govt mulls raising FDI cap in nationalised banks to 49%” — Secretary Nagaraju’s original on-record comments, plus the SMBC/Yes Bank and Emirates NBD/RBL Bank precedents.

● Business Today – “FII limit: SBI, PNB, BOB, Canara, Union, Indian Bank may see $921 million MSCI inflows” — the Nuvama screen behind this piece’s five-bank shortlist.

For more by Harry Wilby on Japan-India deeper nexus see Japan-India

A first concrete challenge to Takaichi’s social conservatism will come from the Supreme Court, now poised to rule soon on whether the prohibition of same sex marriage is constitutional or not. The tension between popular opinion — latest surveys suggest two-thirds of all Japanese are in favor of same sex marriage — and the Prime Minister’s well know personal views is one issue; another one is the reality gap already in place with 93% (by population) of local legislatures already offering same-sex marriage certificates; yet another one is the Supreme Court itself facing the fact that five of Japan’s six High Courts did already rule in favor of marriage equality.

Philip Turner educated me on these coming challenges to the Takaichi agenda and very kindly agreed to write a piece for Japan Optimist. Philip is the former New Zealand Ambassador to Korea, was the China head of New Zealand’s largest company, Fonterra, in China, speaks fluent Japanese and is currently back in Tokyo researching for his PhD at Waseda University. I trust you’ll enjoy his insights and analysis. As always, comments welcome; and many cheers from full-on rainy season Tokyo ;-j

Japan faces a big call on same-sex marriage

by Philip Turner

As 40 million tourists a year attest, Japan is enjoying a wave of popularity as one of the world’s most admired societies - well-off, democratic, stable, welcoming and safe – not to mention its great food, manga and sumo.

Yet on LGBT issues Japan seems way behind the eight-ball. It remains the only G7 country not to accept same-sex marriage (though Italy only provides partnerships). Just last month even Catholic-majority Poland agreed to accept same-sex marriages conducted abroad. That leaves Japan, Korea and Turkey as the only large OECD countries not to do so.

But Japan may not be able to avoid this issue much longer. Late this year or early 2027, Japan’s Supreme Court is to rule on whether the prohibition of same-sex marriage is unconstitutional.

PM Takaichi has strong views, but even she may find it hard to get her way. For while her opposition to same-sex marriage (and to couples choosing separate surnames) reflects the LDP’s traditional stance, most of Japan has moved on, and left the LDP behind. For nearly a decade polls have shown a majority of Japanese in favour of marriage equality. The latest poll – of 47,000 people by Dentsu on line - this week showed 67% of Japanese in favour, a number higher than in many parts of Europe and the Americas where marriage equality is already established.

Seeing the vacuum in central government, local governments have stepped up. Since 2015 local authorities have been issuing certificates of their own recognizing same-sex partnership and providing some local rights - though they are not legally binding. Such certificates are now available in 93% of Japan’s local authorities (by population).

Ten years ago the LDP may have been confident that the courts would support its view. They are no longer. Starting in 2019 activists have taken six separate but identical lawsuits against the government in five different regions. They were widely expected to fail, given Japan’s record for judicial caution and deference to the political process. Yet five of the six High Courts to have ruled on the issue to date have found in favour of marriage equality – and in increasingly strident terms. The only High Court to give a different verdict – in Tokyo last November – may have done so in order to provide some wriggle room for the Supreme Court – and the Takaichi government. Yet the Tokyo court’s ruling was so legally unconvincing that experts think it has made it more difficult for the Supreme Court to oppose marriage equality in principle.

The Supreme Court is likely to rule late this year or early next. Constitutional rulings in Japan are rare, and when they happen are almost impossible for the Diet to ignore. Whether the Court sticks with the clear rulings of its own High Courts will be a major test of its judicial independence.

The Government’s response in turn will be a major test of the extent to which Takaichi and the LDP are able and willing to buck the views of their own population, local governments and the High Courts.

Perhaps the most likely outcome is a ruling that the current inability of same-sex couples to marry is indeed unconstitutional in principle, but that leaves it up to the Diet to decide on implementation – eg whether to go for full marriage or some form of same-sex partnership. That would be uncomfortable for Takaichi – forcing the government to take a decision on an issue that pitches her conservative base against the opinion of most voters. Rather than being settled quickly, the issue would be likely to hang around for a year or three and – from Takaichi’s perspective - risk overshadowing pressing security and economic issues.

Ironically therefore, Takaichi may privately welcome a strong ruling from the Court, even if it favours marriage equality. That would enable her to say that despite her personal views her hands are tied by the courts – and take the issue off her agenda. This was precisely the position taken the Taiwanese Democratic People’s Party Chairman Ker Chien-Ming I 2017. Responding to the ruling of the Judicial Yuan that led to Taiwan becoming the first government in Asia to adopt same-sex marriage, he said: “although I personally oppose same-sex marriage, we still must contend with the Constitution. We must bow to it. No politicians, including the president, should stand on the opposite side of the law.”

How has Japan landed in this curious position where it enjoys a reputation for social tolerance and good governance yet is out of line with all of its OECD peers?

That is the subject of research I am conducting at Waseda University. My initial conclusions are threefold.

First the nature of public opinion matters.

While favourable, it is of low-intensity and (at least so far) not a sufficiently galvanizing issue to influence politics. Most Japanese are relaxed about same-sex marriage – or simply don’t care. Of the 67% in favour, only 20% are strongly in favour, while 48% say only that they “rather agree”. Even supportive LDP politicians lament that the issue does not drive votes in elections.

Second is the structure of Japanese politics.

Low intensity opinion enables the LDP to ignore this issue (and many others on which it is out of touch with Japanese voters), and focus political debate on what it sees as the ‘big’ issues of security and economics. The LDP’s one-party dominance and fund-raising capability is virtually unique among major democracies. This acts to block popular views on social and other issues from getting the political attention they deserve.

Third, Japan’s more relaxed (or less uptight) social attitudes may - ironically – have held up legal progress.

Unlike the US and Europe, male homosexuality was barely ever criminalized in Japan. While the US, Germany and UK were hysterically persecuting gays and lesbians during the 20^th century – from Oscar Wilde and the Prince of Eulenberg to Joe McCarthy and the Lavendar scare - Japan’s government was largely uninterested in the issue. Gays and lesbians were certainly not accepted publicly, but there was a greater degree of freedom particularly ‘underground’ in bars and clubs, where police rarely intervened. No overt oppression meant no overt rebellion – no ‘Stonewall moment’ of assertion of LGBT rights - to galvanise social movements and pressure governments to change. For nearly all of Japan’s history, before and after Meiji, same-sex sexual activity was seen as a private matter, not one for the state to get involved in – unless it involved non-sexual obligations to the state, family and duty. That preference for privacy partly explains the low visibility of the LGBT community today, where fear of social ostracism and ‘sticking out’ keep many in the closet – and enable the LDP to pretend there is no issue.

Finally, there is an interesting difference in the way LGBT groups in Japan frame the issue of marriage equality compared with US, European or even Taiwanese groups.

In the West, perhaps reflecting the stronger background of persecution, LGBT groups have been ‘rights-driven’, demanding individual human rights and equality in the tradition of the Enlightenment – and doing so aggressively and publicly.

In Japan, while there is plenty of similar advocacy, the approach that seems more effective with politicians and the public is less public, less aggressive, and more empathetic – framing the issue as one of community inclusion and fairness rather than individual entitlement. Unlike the US, Europe, Taiwan or Korea, you do not see major demonstrations in favour of marriage equality in Japan - but nor do you see counter-demonstrations. As one Japanese activist told me:

There are few straight people who would deny LGBT people the opportunity to create a ‘home’ if they seek one….Saying that some LGBT people want to get married, be happy and form a family – that’s all – that has the biggest appeal.

Thank you for reading.

Philip Turner - Tokyo June 2026

Philip Turner - Biography

Philip Turner is a former New Zealand diplomat and business leader, now working and researching in Tokyo. From 2018 to 2023 he served as New Zealand Ambassador to South and North Korea, based in Seoul. Before that he spent 18 years with New Zealand’s largest company, Fonterra Cooperative, in roles in Japan, China, Europe and New Zealand. In 2009-2013 he was President of Fonterra China, based in Shanghai. Earlier he served as a New Zealand diplomat in Tokyo and Brussels. He speaks fluent Japanese and French and earned an MA First Class in history from the University of Auckland.

Now back in Tokyo, he works as a Beachheads Advisor for New Zealand Trade and Enterprise, teaches business and international relations at Lakeland University in Tokyo, and is completing a PhD thesis at Waseda University. He is a Senior Fellow of the Centre for Strategic Studies at Victoria University Wellington, Committee of the Australia New Zealand Chamber of Commerce in Japan. Philip serves as on the Board of TELL, Tokyo English Language Lifeline, a mental health NPO.

Remember BoJ Governor Mieno…

The most impressive and consequential policy speech I ever witnessed was given by the then newly appointed BoJ Governor Mieno on December 19, 1989:

“Thank you for entrusting in me to the important position of central bank governor. Bad things are happening in our country: A new graduate of the best university entering the best Japanese company can no longer dream of ever being able to afford buying a home within a two-hour commute to his company. This is bad, this is a bubble, and I will burst it”. (or words to that effect, from my diary).

And burst the bubble he did. In less than nine months, he raised the official discount rate from 3.75% to 6%. 10-year JGBs peaked at 8.3% at the end of September 1990 - a full nine months after the Nikkei had peaked at just below 40,000. And yes, within ten years after Governor Mieno’s promise to bring back the dream of homeownership to the next generation, Japan had destroyed more balance sheet wealth than she had lost during the Pacific War.

Governor Mieno is often remembered for doing “too little, too late” to counter asset deflation; yet his primary legacy is that he actually did what only the very best central bakers do: “take the punchbowl away when the party got out of hands”. Importantly, his hero, Fed chair Paul Volker, had done so to crush consumer price inflation - a perfectly orthodox reason for a central banker. In contrast, Governor Mieno himself did so explicitly to crush asset inflation - a very unorthodox reason - if not outright anathema - to most anglo-American experts. And yes, Japan’s ruling elite stood firmly behind him when he did so.

Clear speak: Asset price inflation worship has clear limits in a culture where the elites’ obligations to the nation are grounded in a loathing of avarice, selfishness and plutocracy. Don’t get me wrong: it is not that Japanese elites are not ‘greedy’; but being humble and exemplary carries an even higher premium…..if (when?) Japan wins the World Cup, the then obviously best and most aggressive team in the world will still clean up their locker rooms by themselves, serving as inspiration for their fans to clean up the stadium…to inspire the world, Pax Nipponica.

Be this as it may.

Let’s focus on the affordability metrics - is the current rise in asset prices in general, the real estate market in particular pricing out the next generation’s dream of home-ownership? How close are we to ‘bubble trouble’ triggering the elites obsession with social harmony?

Taking a clue from the Mieno speech: a new graduate hire at Japan’s top firm now can buy a typical 70 square meter apartment in Tokyo with 23-years worth of his/her annual income - basically exactly what it took at the bubble peak in 1990. Before the 1980s bubble, it took 5-7 years….23-years now, just as bad as it was when Governor Mieno started his attack on the bubble.

Of course, in the real world affordability is also determined by mortgage costs. Here the affordability metrics are slightly better, but not by very much:

Taking the same typical 70-square meter Tokyo apartment and financing it with a 15-year mortgage and the typical 80% loan to value, now costs you 47% of your starting income. Yes, well below the 160% (!) required at the 1990 bubble peak; but still up from barely 20% five years ago. In fact, today’s 47% of income going to service your mortgage is exactly where we were in 1987…which then was also up almost double from where it had been five years before. Here the chart again:

Many forecasters try and argue that this deterioration of mortgage financing cost forced by rising property prices is one reason for the BoJ to go slow. This is a potentially dangerous misunderstanding of the elites’ priorities. They will, in my view, not hesitate to “take the punch bowl away” when social harmony comes under stress with the next generation complaining about not being able to buy their dream.

BUT: 2026 national priorities are very different from what they were in 1989

To be sure, Governor Ueda is no Mieno. More importantly, Japanese elites’ anger at the bubble’s bad influence on social harmony was very broad based and deep in the late-1980s. This is not the case now, so the pressure for the BoJ to act more aggressively is not there.

Specifically, a year before Mieno’s appointment, the Recruit Scandal broke in June 1988 — the start-up wunderkind and ‘move fast and break things’ face of the then ‘new Japan’ Ezoe Hiromasa, founder of Human Resources conglomerate Recruit, had offered deeply discounted pre-IPO shares of his real estate subsidiary Recruit Cosmos to 76 elite politicians. By May 1989 Finance Minister Miyazawa and Prime Minister Takeshita and his cabinet resigned in disgrace.

Today, the elites priorities are first and foremost focused on mobilizing domestic resources to ensure greater national security, sovereignty and resilience against geoeconomic shocks and potentially unreliable allies. This is best achieved under inflation — free capital for the levered, for the risk-takers & builders, and good for the treaury because inflation boosts tax revenues. Make no mistake: Inflation is now in Japan’s national interest. Let China deflate while Japan inflates.

Importantly, the elites are convinced that both public sector regulatory & oversight reforms and private sector governance reforms have significantly reduced the risks of greed and bubble excesses. No Recruit Scandal likely.

Still: watch out for a change in rhetoric. Japan will never, in my view, raise interest rates to defend the Yen from depreciating; but they will raise rates when Prime Minister Takaichi pivots to ensure the young generation can realize its dream of homeownership. The time is not now, but it will come before long.

Meanwhile, BoJ Governor Ueda will continue to gradually raise rates - his goal now is to find the “neutral” policy rate before he leaves office. Modest inflation, yes; a bubble that his successor will be forced to burst, no. A clean locker room and a clean stadium…

thank you for reading. As always, comments welcome. Many cheers from is-it-rainy-season-yet? Tokyo ;-j

Where will Japan capital markets go from here? Has there been too much openness? Is Japan at risk from excessive “financialization”? Has the investor base changed for better or for worse, and are minority shareholder’s rights protected? Do Japan’s capital markets still allow for “best in class” innovation and long-term stable funding? What policies should PM Takaichi advance to ensure Japan’s capital markets will serve best the demands of the aging society at home and the new geoeconomic realities abroad?

Hosted by Asia Society Japan on May 21, join me for a panel discussion with longstanding practitioners, Oki Matsumoto—founder of Japan’s first retail-investor activist fund and the Tokyo University Center for Capital Markets; Andrew McDermott—over two decades of Japan investment experience, having led over 60 activist campaigns in Japan and the world; and Asumi Ota—partner of Japan-focused venture capital fund D4V.

To view the recording please click: JapanCapital Markets -where next?

or on the YouTube channel here

At the start, I give a 10 minute overview on how Japan’s capital markets have changed over the past decades.

The charts I presented follow below :

My friend Harry Wilby has hands-on experience in both India and Japan and I trust his insights will raise your curiosity to start thinking beyond the Japan-US-China triangle. Enjoy, and as always comments welcome. Many cheers ;-j

The Oldest New Partnership — India, Japan and the Architecture of the Next Decade

by Harry Wilby

When Jesper asked for a guest article on the relationship between India and Japan, the straight-forward approach would have been to focus on the two countries joint charge towards economic interdependence over the past twenty years, comment fondly on the swathe of memorandums that have been signed to encourage investment between the two economies and call it a day.

That would do a disservice to a relationship that is rarely covered to the depths that it deserves. As such, I will first provide the uniquely historical diplomatic backdrop of India-Japan relations in the post-war period to the present day, how this has fostered development economically before spotlighting the areas of meaningful exchange taking the relationship beyond courtesy, towards consequence – made more ever important by geopolitical necessity.

A Dissent that Echoes

Most bilateral relationships are founded on interest. The relationship between India and Japan was founded, at its deepest level, on something rather rarer: principle.

This principle is long-standing, impressively so. The oldest recorded cultural and diplomatic interaction between the two countries was in 752 AD when the Indian Buddhist monk Bodhisena served as the chief consecrator of the Great Buddha at Tōdai-ji in Nara- historically worth noting, but a little long in the tooth for this piece and I am no historian of 8^th century Buddhism.

For the contemporary relationship’s inception – allow me to take you back to the former Imperial Japanese Army H Building in Ichigaya in 1946. The International Military Tribunal for the Far East — convened by the victorious Allied powers to try Japan’s wartime leadership — has assembled eleven judges from eleven nations. The proceedings will run for thirty-one months, hear testimony from 419 witnesses, and culminate in seven death sentences. When the verdicts came, eight justices backed the majority conclusions. Amongst the oppositive voices was India’s representative on the Tribunal, Justice Radhabinod Pal of the Calcutta High Court —— whose dissent ran to more than 1,230 pages and voted for the acquittal of all defendants on all counts.

Pal’s deliberations were not rooted in a reflexive sympathy of a fellow Asian nation for a defeated neighbour. He argued that aggressive war and conspiracy to wage it were not illegal under international law at the time the acts were committed, and that therefore all defendants should be acquitted. His objection was jurisprudential — a rejection of ex post facto law and what he termed, with some precision, victor’s justice. He found common ground with Japan on self-determination and anti-colonialism, yet he was equally clear-eyed about its conduct: in a speech at Hiroshima in 1952, he told his Japanese audience that any return to militarism “would be a defilement against the souls of the victims we have here.”

Japan has not forgotten. A monument to Justice Pal stands at the Yasukuni Shrine. His dissent struck a chord among the Japanese public and politicians that continues to reverberate to this day.

What followed from this act of moral independence set the template for everything that came after until Japan’s relative economic position eclipsed India’s in the immediate decades to come allowing it to repay the favour. India declined to sign the multilateral San Francisco Peace Treaty in 1951 — because it considered that honour and equality should be ensured for Japan — choosing instead to conclude a separate bilateral treaty. India then categorically waived all claims to reparation, a generosity that appears in no other treaty Japan concluded during this period. Even before the formalities were settled, responding to the request of Japanese school children whose three elephants has been ordered to be killed in 1943 for fears they would cause havoc if they broke free during air raids, Nehru had sent an Indian elephant, named after his daughter, Indira, to the Ueno Zoo in 1949 — a small, deliberately human gesture towards ‘the children of Japan’ still living in the shadow of defeat.

Nehru Quote - ‘’ I hope that when the children of India and the children of Japan will grow up, they will serve not only their great countries, but also the cause of peace and cooperation all over Asia and the world. So you must look upon this elephant, Indira by name, as a messenger of affection and goodwill from the children of India. The elephant is a noble animal. It is wise and patient, strong and yet, gentle. I hope all of us will also develop these qualities’’

Investment: From Yen Loans to Trillion-Yen Targets

As I noted within the introduction, the economic relationship that grew from this foundation was, for many decades, more courteous than consequential. However, the architecture of exchange was sound.

Following Prime Minister Kishi’s visit to New Delhi in 1957, Japan began providing yen loans to India in 1958 — the first such concessional loans the Japanese government had ever extended to any country. Japan has been India’s largest Official Development Assistance donor ever since, a distinction it has held without interruption for nearly seven decades. The flagship project of this long commitment — the Mumbai-Ahmedabad High-Speed Rail corridor, built on Shinkansen technology — is both an infrastructure investment and, in its way, a monument to the durability of the relationship. The exact terms? A highly concessional agreement covering 81% of the project’s initial capital, repayable over 50 years at 0.1% and with a 15-year moratorium tied to the procurement of core technologies from Japanese firms- a hallmark of the JICA disbursed loans that underpin the developmental relationship.

The acceleration within the private sector came in the 2000s – instigated in large part by the excellent working relationship held by the late Prime Minister Shinzo Abe and his Indian counterpart and ‘mentor’ Manmohan Singh. As of late 2024, 1,434 Japanese companies operate in India, with more than 5,200 business establishments concentrated in Delhi, Haryana, Tamil Nadu, Maharashtra, and Karnataka. The roster includes Maruti Suzuki, Toyota, Hitachi, Daikin, Yamaha, and SoftBank. These are not speculative positions. They are the productive commitments of firms that have spent decades learning the Indian market and intend to remain following years of intense groundwork by the Japanese government.

Cumulatively, Japanese investment in India from 2000 to mid-2025 totals approximately US$45 billion, making Japan the fifth-largest source of FDI into the country. The sectoral composition — automobiles, electrical equipment, telecommunications, chemicals, financial services, and pharmaceuticals — reflects a preference for the unglamorous long-term over the lucrative short-term. Japanese capital tends to arrive with engineers and vendor networks attached. It builds supply chains rather than merely financing them.

The most recent chapter rewrites the scale of ambition entirely. A 2022 target of US$33.8 billion in Japanese public and private investment was achieved in three years rather than the projected five.. When a target is set by two parties who have just demonstrated they can exceed it ahead of schedule, it commands a different sort of credibility.

The Macro Case: A Symbiosis, Not a Transaction

To understand why Japanese capital is moving into India at this pace and with this conviction, it helps to understand what is happening on the Japanese side of the ledger — because the India story and the Japan story are, increasingly, the same story told from opposite ends.

For the better part of three decades, Japanese corporations accumulated cash on their balance sheets at a rate unmatched by any other major economy. The median listed Japanese company holds cash and equivalents equivalent to roughly a third of its market capitalisation — a figure considered extraordinary anywhere else. The causes were structural: a deflationary environment that made hoarding rational, a corporate governance culture that prioritised stability over return on equity, and cross-shareholding arrangements that insulated management from shareholder pressure. The Tokyo Stock Exchange’s 2023 directive requiring listed companies to actively address valuations below book value was not subtle guidance. It was an ultimatum. Since then, the drawdown has accelerated.

India is where a significant portion of that ambition is being directed. The figures are compelling: a domestic economy growing at barely 1 per cent in real terms, an ageing population that structurally limits internal demand growth, and a corporate governance reform process that is pushing boards to demonstrate returns from deployment rather than accumulation. Against this backdrop, an economy expanding at 7 per cent annually, with a middle-class adding tens of millions of consumers each year and a manufacturing base actively courting Japanese industrial expertise, is not merely attractive. It is, for many Japanese firms, the most legible growth opportunity available.

The large bets are by now well documented. In automobiles alone, Toyota, Suzuki, and Honda have together committed over $11 billion to Indian manufacturing and export capacity — a figure that would have seemed improbable a decade ago, and which reflects both the scale of the opportunity and the conscious withdrawal from China, where Japanese transport sector investment fell 83 per cent between 2021 and 2024 even as India-bound transport investment rose sevenfold. Suzuki, through Maruti, holds approximately 40 per cent of India’s car market and is targeting annual production of four million vehicles. Toyota is building a new facility in Maharashtra and expanding its hybrid supply chain. Honda is positioning India as the global export base for its Zero Series electric vehicles, with production beginning in 2027.

In financial services, the megabanks are following the manufacturers. Sumitomo Mitsui Financial Group acquired a 20 per cent stake in Yes Bank — the first major foray by a Japanese lender into Indian commercial banking — in a transaction that is expected to encourage peers at MUFG and Mizuho to consider comparable moves. Last year, MUFG’s chief executive, Hioronori Kamezawa, told investors plainly: “India is the next market for us to push in.” MUFG has already invested over $700 million in DMI Finance; SMFG spent $2 billion acquiring Fullerton India Credit in 2021; Mizuho has taken a stake in digital non-banking firm Kisetsu Saison Finance. The banks are not following opportunity; they are positioning ahead of it, in the expectation that India’s loan book — which has grown from 67 trillion rupees in 2014 to 160 trillion rupees in 2024 — has a long way further to run. Indian banks, for all their perceived risk are priced much lower than more frothy picks within the Nifty 50 and their comparatively supressed valuations are seen as the next opportunity.

Sure - candour requires noting the obvious friction. Manufacturing’s share of GDP remains at 13 to 14 per cent, well below the government’s 25 per cent target due in large part to the preponderance of the agricultural sector. State-level regulatory complexity — differentiated customs interpretations, certification procedures that can take months — and this has been the most persistent complaint among Japanese operators. A 2024 JETRO survey found 38 per cent of Japanese manufacturers cited approval timelines as their primary operational challenge not considering the stereotypical but often verifiable Indian approach to punctuality. The language gap is also real: India has approximately 20,000 functional Japanese speakers against more than one million Mandarin speakers.

Yet despite the barriers and paraphrasing the Indian Commerce Secretary on a recent visit to Tokyo ‘no markets are tough, but all markets are unique’ – inferring that where there is a will, there is a way - referencing the United States’ recent push into the Indian pharmaceutical industry and facilitating the compliance of over 750 FDA compliant pharmaceutical unions now in India.

The Next Stage: The SME Frontier

The story of the big boys in Japan is one thing, but looking ahead, the most revealing signal about where this relationship is heading comes not from the headline investment figures, but from the annual survey published by the Japan Bank for International Cooperation — a document that functions, in effect, as the collective business intelligence of Japanese manufacturing.

In the FY2025 JBIC survey — the 37th in an annual series dating to 1989 — India ranked first as the most promising business expansion destination for the fourth consecutive year, with over 60 per cent of Japanese manufacturing companies citing it as their top medium-term priority. The United States was second. China, which for years dominated these rankings, has fallen to sixth. In the parallel non-manufacturing survey, published for the second year running, India again ranked first — drawing votes from wholesale and construction sectors alongside the expected manufacturing base. Among the 80.3 per cent of Japanese companies in India that said they planned to expand operations within the next one to two years, the intention was not hypothetical: 77.7 per cent were already profitable, and 60 per cent had gained market share. These are the responses of businesses that have tested the market and are doubling down, not of optimists yet to be disillusioned.

But the JBIC data also identifies the structural fault line in the relationship’s next phase. India has been, to date, primarily a large-company story as noted in the prior paragraph. The survey is explicit: responses to strengthen and expand in India came “mainly from large companies,” while SME enthusiasm was roughly half that of their larger counterparts. The contrast with Thailand — where SME participation in the Japanese investment community actually exceeds that of large enterprises — illustrates the gap. Japan’s SME sector, which accounts for 76.5 per cent of the companies expanding globally, is largely absent from India. Only 15 per cent of Japanese firms currently operating in the country are classified as SMEs.

This is the frontier and the infrastructure to close that gap is now being built with some urgency. The India-Japan SME Forum convened in Tokyo in November 2025, co-hosted by JBIC, METI, the Japan Chamber of Commerce and Industry, and JETRO, was a direct product of the August 2025 Joint Vision. It brought together political and business figures from both sides with a specific brief: to translate the bilateral ambition into something accessible to a manufacturing company in Aichi or a precision-engineering firm in Osaka that has never had a presence outside Japan. The Japan-India Make-in-India Special Finance Facility — a $9.9 billion corpus offering concessional capital for manufacturing investments — is designed precisely to reduce the entry cost for firms that cannot absorb the upfront burden of establishing operations in an unfamiliar market. The National Single Window System, which reduced licence and clearance timelines from six to eight months to under thirty days, addresses the procedural complaint most consistently cited in JBIC’s ground-level interviews.

The physical infrastructure already exists as proof of concept. Twelve Japan Industrial Townships are now operational across India — at Neemrana in Rajasthan, Sri City in Andhra Pradesh, Jhajjar in Haryana, and nine other locations — offering plug-and-play manufacturing facilities, Japan Desks staffed with translation support, and state-level incentives including capital subsidies of up to 25 per cent of plant and machinery investment. Daikin, Isuzu, Kobelco, Yamaha Music, Hitachi Automotive, Panasonic, and Denso are among the firms that have used this infrastructure. The townships are not a concession to Japanese corporate sensibility; they are an acknowledgement that the early phase of any investment relationship requires friction reduction, and that the payoff — in technology transfer, employment, and supply-chain deepening — justifies the effort.

The trajectory that emerges from this data is not one of a mature relationship settling into steady state. It is one of a relationship whose large-company phase is now well established, and whose SME phase — which in comparable contexts has historically proved the deeper and more durable form of economic integration — is only now beginning. Japan has 3.2 million SMEs. Even a modest fraction finding their way to India would represent a qualitative shift in the texture of the bilateral economic relationship: from the headline commitments of boards and governments to the daily commercial interdependence of supplier relationships, component orders, and technical partnerships that actually constitute an integrated economy.

Japan’s only ‘Non-Problem’

So how do we square the circle? What are the implications behind the money? As I have alluded to, the economic developments are all very positive. However, politics always trumps economics – such are contemporary times, and such is history. To that extent, India’s relationship with Japan becomes vital.

Consider Japan’s neighbourhood. It has an active territorial dispute with China over the Senkaku Islands, contested by naval vessels and coast guard ships on an almost weekly basis. It has no peace treaty with Russia, eighty years after the war ended. Its relationship with South Korea, its nearest democratic neighbour, is burdened by unresolved colonial history that periodically renders normal diplomatic intercourse impossible and perhaps most consequentially, its alliance with the United States, the foundation of its security since 1952, is structurally asymmetric. Tokyo hosts fifty thousand American troops on its soil and its posture requires Washington’s approval. No Japanese prime minister can now be entirely confident that American security guarantees will survive a change of administration in the White House. Japan is a wealthy, stable democracy encircled by complications.

India is the exception to every one of these patterns – and the only one of consequence to move the needle. There is no territorial claim, no unresolved grievance, no population in either country that regards the other with suspicion or resentment – Japan and India have never been adversaries. Bilateral ties in the precise words of the Indian foreign ministry, singularly free of any kind of dispute: ideological, cultural or territorial*. For a nation in Japan’s strategic position, this is not a minor convenience – it is something close to a geopolitical gift.

This is not merely a pleasant historical accident. It has practical consequences for the quality of the relationship. Diplomacy conducted without the shadow of old grievance tends to be more honest and more efficient. Both sides can say clearly what they want. India wants capital, technology transfer, and the kind of infrastructure expertise that Japan has spent a century accumulating. Japan wants a large, democratic, rule-of-law manufacturing partner that is not China — and a strategic counterpart in the Indo-Pacific that shares its values without being a subordinate of Washington.

The formal elevation of ties has tracked this logic faithfully: from a Global Partnership in 2000 to a Strategic and Global Partnership in 2006 to a Special Strategic and Global Partnership in 2014. Prime Minister Modi’s August 2025 summit with Prime Minister Ishiba was his eighth visit to Japan since assuming office — a frequency of engagement that would be remarkable between formal allies, let alone between two countries without a mutual defence clause.

In August 2025, India and Japan announced a new ten-year investment roadmap targeting US$67.56 billion — 10 trillion yen — of Japanese private investment across semiconductors, defence, clean energy, and high-technology industries foreshadowing the most consequential recent signal in April 2026, when Prime Minister Takaichi’s cabinet voted to scrap the blanket prohibition on lethal weapons exports that had been a cornerstone of Japan’s postwar pacifist identity since 1947.

The revision to the Three Principles on Transfer of Defence Equipment removed the restriction limiting arms exports to five non-combat categories — rescue, transport, surveillance, warning, and minesweeping — and authorised the sale of lethal weapons to seventeen trusted partner nations. India was on the list. New Delhi’s response was unambiguous: the Ministry of External Affairs welcomed the decision within forty-eight hours, describing defence and security cooperation as an “important pillar” of the Special Strategic and Global Partnership, and reaffirming its commitment to expand practical cooperation in the national security interest. The co-development of the UNICORN naval mast, completed in 2024, had already demonstrated what the two defence-industrial bases could produce together. The new framework opens considerably larger possibilities — co-production of platforms, joint research on advanced systems, and technology sharing that Japan would previously have been constitutionally reluctant to offer any partner. That India was among the first to welcome a decision that drew sharp criticism from Beijing — and considerable domestic discomfort within Japan itself — is its own form of strategic statement. The latter is something that has mostly flown under the radar of most Western media outlets and signals both Japan’s new-found willingness to hedge its geopolitical stakes, as much as India’s continued precedent in doing so.

Conclusion

There is a temptation, when writing about bilateral relationships to reach for the word ‘’natural’’. It is usually lazy. Here, it is accurate. The arithmetic is straight forward, the trust has been building since 752AD and rather more urgently since a judge from Calcutta stood in a Tokyo courtroom in 1946 and said what no one else on that bench was willing to say.

For investors with a long horizon and a preference for partnerships that hold, this relationship is about as solid as they come.

Thank you for reading. Comments welcome.

Harry Wilby, Tokyo May 2026

About Harry Wilby:

Harry Wilby is currently head International for a Japanese group covering healthcare, semiconductor research and investment management.
Prior to his move to Japan, he started his career with Coutts & Company before moving into politics as Chief of Staff to a Conservative member of Parliament in the House of Commons.
He is a non-executive director of one of India’s largest home healthcare companies and Vice Chairman of the Economics & Current Affairs group of the Reform Club in London.

AI - putty-putty or hard-baked clay?

by Andrew Smithers

Introduction.

The world economy is currently fragile due to its imbalances, which include excessive share prices and, for several key countries, including France, Japan, the UK and the US, an unsustainable level of fiscal deficits. These are likely to be resolved by a financial crisis, whose trigger depends on two things:

(i) Which way AI affects the world economy.

(ii) The policy response.

A large decline in real share prices and a major recession are highly probable. Their triggers, depth and timing will become more predictable, as we learn whether AI’s technology is predominantly either “hard-baked clay” or “putty-putty” or some combination of the two. Different policy responses, to whichever form AI takes, will be needed to maintain low and stable levels of inflation and unemployment, while resolving the economy’s imbalances.

New technology is termed hard-baked clay when it is embedded in tangible equipment and its benefits can only be realised by additions to the stock of capital; it is known as putty-putty when it can be used to improve the productivity of the existing stock of capital. Robert Solow termed these ‘embodied’ and ‘disembodied’^[1] though the terms most used today are ‘hard-baked clay’ and ‘putty-putty’, see Substitution and Fixed Proportions in The Theory of Capital by Robert M. Solow (1962) Review of Economic Studies Vol. 29 No. 3.

In either form, AI’s arrival will enhance the trend growth rate of the world’s economy. Short-term growth depends, however, on the level of current demand; output will fall short of its potential if unemployment rises above the non-accelerating inflationary rate of unemployment (NAIRU).

Putty-Putty.

If AI is predominantly putty-putty, employment is initially likely to weaken relative to output capacity, as companies can maintain output with fewer employees. Unless governments or central banks boost demand, companies will sack workers and output will fall as unemployment rises, so that profit margins and share prices will decline. To avoid a recession, the policy response would normally be some combination of fiscal and monetary stimuli. But today’s fragile economy is abnormal, because the usual tools for stabilising it are either unavailable or may not work. Reducing short-term interest rates will not support share prices if the decline is offset by a steepening yield curve as the cut encourages further rises in expectations for inflation, and supporting demand by increasing fiscal deficits could precipitate the bond market collapse, which the current level of the deficits already threatens to produce.

Hard-baked Clay.

If AI is mostly hard-baked clay, the level of tangible investment will rise as the expected return on it increases. Companies finance about two thirds of this with equity and one third with debt. The need for both will rise; companies will spend less on buybacks and takeovers and the stock market will fall.

Inflation will rise unless savings rise to match the increased investment. In aggregate, households or governments will have to save more to provide the debtfinance needed. Over time, the additional savings needed to finance the rise in tangible investment will follow from the economy’s accelerated growth, but new tangible investment takes time to boost output, while immediately increasing demand. We will need some combination of smaller budget deficits and more household savings, either in response to higher interest rates or a financial crisis.

Both.

If the immediate increase in potential supply from putty-putty advances in AI technology are accompanied by an immediate rise in demand, due to increased tangible investment driven by new hard-baked clay technology, the trend rate of growth is enhanced, while no changes in interest rates or fiscal deficits are needed to maintain demand at the previous level of the NAIRU. But this is not sufficient to avoid a rise in inflation as the NAIRU is likely to fall due to an increase in frictional unemployment.

In equilibrium evenly balanced rises in AI’s two forms will accelerate growth with unchanged fiscal and monetary policies, but the immediate impact will be disruptive. A major shift in employment will be needed from sources of output benefiting from putty-putty change, first to the production of tangible plant and equipment and then to their operation. This will not be instantaneous, and will involve much disruption, which will only be resolved after a considerable time lag. When faster growth requires more tangible investment, a switch from the output of consumer goods and services to the output of investment goods is also needed, and must be matched by changes in financial flows, which policy adjustments must facilitate.

Corporate Savings and Cash Flow.

An important complication arises from the difference between changes in corporate savings, as shown in national accounts, and in the cash flow. Around two thirds of the increased investment by companies will need to be financed by equity, which will mainly be provided by reductions in buybacks and debt-financed takeovers. This will not show up as a rise in savings in national accounts, in which they are categorised as capital rather than income transfers. The reduction in buybacks will, however, lead to a falling stock market and a consequential rise in the required level of savings.

Household Finances.

Household savings tend to rotate around a stable level, which provide for a reasonable standard of living in retirement and as a precaution against the sudden needs that arise from illness or unemployment, and for short-term bouts of spending on holidays and Christmas. The household sector’s financial assets consist of cash, bonds and equities. Only bonds and equities are suitable for pension saving, as returns on cash are low and liquidity is not needed once adequate provision for it has been made, but only cash is suitable for other types of savings. In equilibrium households hold the amount of cash they need to match their requirements for liquidity, and the remainder is available to finance their consumption in retirement (their pension assets) and will sensibly be invested in bonds or equities. ”^[1]

If household liquidity and the perceived needs for it are unchanged, households will invest their other financial assets in equities and bonds. Their relative prices will vary with swings in households’ hopes and fears for profits and inflation but are moderated by the offsetting responses of corporate leverage to changes in interest rates and profit margins. Changes in liquidity or its perceived need will, however, alter the total value of bonds and equities that households wish to own.

Interest Cover.

Companies, in aggregate, seek to maintain a stable level of interest cover, which is the ratio between their profits and interest payments.^[2] They also prefer to borrow long-dated bonds rather than short-term debt, as this reduces their exposure to fluctuations in inflation. If bond yields fall or profit margins rise, they will tend to increase their leverage. When the economy is growing with low and stable levels of unemployment and inflation, it is stabilised by central banks who raise interest rates to offset inflation and lower them to stimulate growth. Provided that the yield curve is stable, changes in short-term rates will be matched by changes in bond yields, but the yield curve changes with inflation and becomes unstable if inflationary expectations alter.

When inflationary expectations are well anchored, and fears of unemployment are low, households will generally be happy to hold stable ratios of cash, bonds and equities. While temporary fluctuations in optimism about profits will encourage households to hold more equities, this will also tend to push up demand and be offset by changes in short-term interest rates. The offsetting response by companies tend to stabilise the preferred ratios of bonds and equities in household portfolios.

Household Liquidity.

Cash differs from bonds and equities in that its return is low and its nominal value does not fluctuate. It is therefore the sensible form to hold as a precaution against unemployment, but not for retirement savings. Provided expectations for inflation and worries about unemployment are contained, households’ portfolio preferences (their preferred ratios of cash, bonds and equities) tend to be stable relative to national income.^[3] The two key causes of instability are changes in inflation and its expectations and in the liquidity of households or their perceived need for liquidity.

Household liquidity is altered by governments’ funding policies and the perceived need for liquidity is mainly affected by changes in fear, notably that of unemployment, and tends to rise in bear markets. As there is no parallel tendency for fear to fall in bull markets, it explains why equities fall more sharply in bear markets than they rise in bull markets.^[4]

The Policy Challenge.

Successful policy, defined as adequate growth combined with low and stable levels of unemployment and inflation, will be difficult to achieve in the face of the unknown impact of AI and the current economic imbalances. I expect it to fail, because there are more sources of disequilibria than there are policy instruments available to balance them. Their current number is therefore inadequate, according to the cybernetics law called the principle of requisite variety. This states that “Anything which aims to be a ‘regulator’ of a system needs to have at least as much variety as that system.”^[5] Its use in economics was first proposed by Jan Tinbergen and is thus known as the Tinbergen rule.

I noted in the introductory paragraph the imbalances of excess share prices and the unsustainable level of fiscal deficits. The policy instruments currently available to governments and central banks are changes in interest rates and fiscal deficits. Keynes showed that reducing interest rates fails to stimulate demand in liquidity traps. Unless supported by increased fiscal deficits, cuts in short-term interest rates have persistently failed to support demand since 2000, which is why national debt in several countries has reached unsustainable levels. It appears, therefore, that we have suffered this century from a structural liquidity trap and cannot therefore expect demand to rise in response to declining short-term interest rates. It also seems that national debt ratios can no longer be increased without causing a financial crisis and it may be already necessary to reduce them.

Policy Responses to AI.

If AI is predominantly putty-putty, policy will need to stimulate short-term demand which, in today’s abnormal conditions, neither monetary nor fiscal stimuli can be relied upon to achieve. Cuts in short-term interest rates may be offset by a steepening yield curve and hikes in fiscal deficits will increase the existing risk of a financial crisis. The use of either fiscal or monetary policy threatens to raise inflationary expectations which, due to the Iran war, are already far from quiescent.

If AI has a significant element of hard-baked clay, the rise in savings needed to finance the rise in tangible investment, (which will precede any increase in the output and income that it will produce), will reduce corporate buybacks and debt-financed takeovers, so that share prices will decline. At the same time savings will rise and demand will weaken.

Tax Restructuring – a Third Policy Instrument.

Policy based on classical, pre-Keynesian economics, assumed that growth, combined with low and stable levels of unemployment and inflation, could be achieved by changes in short-term interest rates. Keynes showed that in liquidity traps, variations in fiscal policy were also needed. In France, Japan, the UK and the US national debt ratios have reached levels at which fiscal stimuli are no longer an available policy tool. A third policy tool is thus now needed which will stimulate demand without raising fiscal deficits. This could be provided by tax restructuring, which leaves the fiscal deficit unchanged, but stimulates demand by reducing the net revenue from corporation tax and raising that from other forms of taxation. The net impact of these changes is to boost investment even more than it cuts consumption.

Three Provisos.

I am expecting policy to fail, but expectations are not forecasts. The least unlikely ways in which we could maintain growth and avoid high and volatile levels of inflation and unemployment are:

(i) The introduction of a third policy instrument in the form of tax restructuring. I think this is unlikely as the Stock Market Model (SMM) of economics on which it is based differs significantly from the Consensus Model (CM) on which current policy is based.

(ii) It is possible that the current level of share prices can be maintained for many years ahead, by relying on short-term debt rather than bond issuance to finance the prevailing fiscal deficits, without raising inflation.

(iii) The US stock market ceases to be extremely overvalued, through a rise in real corporate net worth, rather than a fall in real or nominal share prices. The putty-putty element in AI would need to be so strong that the rise in NDP from the existing capital stock would be sufficient to raise the real value of that stock by around a factor of around two. ^[6] As the produced capital/NDP ratio is mean reverting around 4 times, this would require a rise in NDP of about 50%.

All of these are possible, but none seem to me to be likely.

Conclusions.

(i) We are likely to experience another financial crisis within the next few years.

(ii) The monetary and fiscal policy tools used to boost demand after the last financial crisis in 2008 are, today, likely to either fail or precipitate a crisis.

(iii) While we cannot predict the timing, or even the certainty of the next crisis, it is highly probable. The fall in the stock market and the consequent recession are likely to be much more severe than last time.

(iv) It is often claimed that “markets do not like uncertainty”, but today uncertainty provides their key support.

(v) The triggers for the next recession are likely to be falling profit margins or rising bond yields.

(vi) Rising bond yields are likely if governments seek to fund current deficits or because expectations for higher inflation rise.

(vii) Inflationary expectations are likely to rise if governments rely on short-term debt in preference to funding deficits, which will trigger a financial crisis.

Andrew Smithers

May 1, 2026.

Andrew’s bio as well as another guest contribution - The World's Liquidity Trap

^[1] How Share Prices Fluctuate by Andrew Smithers (2024) World Economics Vol. 25 No. 4.

^[2] See Figure 1 The Economics of The Stock Market by Andrew Smithers (2022) Oxford University Press.

^[3] NDP, which is GDP net of depreciation.

^[4] See Figure 6 How Share Prices Fluctuate op. cit.

^[5] The Unaccountability Machine by Dan Davies (2024) Profile Books.

^[6] In equilibrium the stock market value of quoted companies equals their net worth as set out in A General Equilibeium Approach to Monetary Theory by James Tobin (1969) Journal of Money, Credit, and Banking. Vol. 1 No. 1. The Federal Reserve’s Z1 Table B. 103 shows this ratio at the end of 2025 as 2.47.

Clearly, the narrative in the U.S. is beginning to shift. The implication for the global Japan narrative are significant. Can the U.S. move from ‘stronger-than-you bullying’ towards ‘admire-your-achienvemts partnership’? Imagine a world where American elites will unite and begin to openly advocate the positive examples of Japan’s ‘Capitalism that works’…..more than anything, this would be a key signal that the U.S.-Japan alliance is indeed evolving towards a new phase of genuine mutual respect. Andrew does not just dream, but frames the arguments expertly — enjoy & many cheers ;-j

Let’s get Asymmetrical - let me hear your College talk about Japan

By Andrew McDermott

Last month, as I prepared to journey to Tokyo to join the Asia Society’s panel on What’s Next for Japan’s Financial Markets?, I attended Vanderbilt’s conference on National Security in the age of Asymmetry. Listening to talks by national security experts, I was struck by the disconnect between what global investors seem to want for Japan (a financial system that looks more like America’s) and what the national security world wants for America (a financial system that looks more like Japan’s). The below quotes and commentary are exploratory. My tentative conclusion:

The PRC’s most powerful asymmetric weapon is the influence it wields through its generational displacement of Japan in our leading financial and educational institutions. Oddly, this has happened even as Japan has won the hearts and minds of average citizens. Most elite leaders don’t know what they don’t know. They are so fixated on China that they miss the alternative Japan provides: an alternative that combines market incentives and individual liberty with a recognition that supply chain security and technological security are national security. Japan’s successes, properly cultivated and communicated, could provide the antidote for what ails us. For this to happen, global investors and the schools that produce them need to change more than Japan’s markets need to change. That, at least, is the view of Warren Buffett, Les Vadasz and Palmer Luckey. What are they missing?

I’ll let the quotes speak for themselves, then add some proposals that will hopefully provoke discourse in Tokyo.

______________________________________________

The most powerful asymmetric weapon used by our adversaries is cognitive warfare, the reframing of narrative to support their national interest. Frederick Kagan, The American Enterprise Institute

We need to see investors thinking differently and willing to pay for resiliency… We need a new type of capital that has a 10 to 15 year horizon…We need more public/private partnerships. Sara O’ Rourke, JP Morgan Security and Resiliency Initiative (and McKinsey veteran)

The market does not price in national security. The US Government needs to have an office of national security. How are we going to win vs. China? We have to play our game with allies. Supply chain security…technological security is national security. Gina Raimondo, former Secretary of Commerce in conversation with General (Ret) Nakasone, former head of Cybercommand at Vanderbilt’s Summit on Asymmetric Warfare, 2026

We need a culture change in our industrial base that focuses on outcomes versus activities. We need more industrial collaboration and more government collaboration with the private sector. We need not just capabilities, but capacity. We need to raise the game not just of our defense industrial complex, but of our national industrial complex. I saw this first hand working in a machine shop. Gen. Dan Caine, Chairman of Joint Chiefs of Staff, in conversation with Chancellor Dan Diermeier (Vanderbilt Summit)

Despite bipartisan recognition in Washington DC today that the US partnership with Japan is uniquely vital for the United States’ efforts to address a wide array of pressing global challenges, at America’s “top 100” universities, faculty expertise and course offerings on contemporary US-Japan relations and Japanese foreign/security policy are on the verge of a generational collapse. Adam Liff, US-Japan Friendship Society

NB: compare Duke/China, Princeton/China, MIT/China, etc.

How capable is your education to produce future specialists? How popular in the US is physics, R&D Technology experts, chemicals …how many students do you have in your universities who are not legal guys, not law, not economics, but those who in a future conflict who will be able to create, operate and modernize future combat systems in 48 to 72 hours? So it is a complex question for those in charge of the campus and your educational system. Col. Oleksii Nozdrachov, Ukraine, Drone specialist

In science and engineering-based companies, engineers know the art of the product possible. Finance majors don’t. Sir George Buckley (former CEO of 3M, former chair of Smiths, first foreign board member of Hitachi)

The decline in Japan’s [US] presence extends beyond human exchange [which declined to lows in 2025]. Japan’s capacity to articulate and project its national positions remains limited. … In contrast, China and South Korea have strengthened their governmental communications capabilities, established their own media outlets and think tanks, and strategically provided funding to Washington-based policy institutions. Their messaging often contains criticism of Japan, and in some cases criticism of Japan appears to be an explicit component of their broader public diplomacy efforts. Kazuhiro Maeshima, JFIR 2026

I asked …if it is possible for Duke to take a big group of students to China without it being an organized propaganda trip. “No,” said [Prof.] Osborne,...We weren’t simply participants on a cultural exchange program; we were being showcased to project China’s cultural influence and international appeal. Account of Duke-DKU China Exchange Trip, 2025: How I Accidentally Became Part of China’s PR Campaign, The Assembly.

What should we teach our students?

Vanderbilt Chancellor Diermeir to Gen. Caine. His response is worth watching

There is [a] formerly secret and almost unknown, story of the Japanese American sensei at the US Navy Japanese Language School at the University of Colorado. These sensei, through the teaching of Japanese, made a large contribution to both the war effort and the peace through their teaching of the Japanese language and the actions of their students…If graduates contributed so greatly to the American academic, intelligence, and diplomatic understanding of Japan and Asia, were not the most important contributors those who taught them and turned their minds and understanding to matters Japanese? Are not the bridge-builders of that intellectual arch across the Pacific the sensei of the [WWII] US Navy Japanese Language School? David Hays, 2008. Cf: GoLaxy

MIT 2025 enrollment (undergrad, total):

Japan (4, 71), PRC+HK (69, 832), Russia (4, 33)
NB: Japan leads the G7 in math/science scores.

______________________________________________

It is a strategic relationship…we think of [our Japanese investments] as forever because it goes beyond the investment and is very much around the relationships we want to build there. We really hope to do big things with them globally. It’s super long term. Japan’s record has been extraordinary actually. They have different customs…that’s true around the world. We don’t have any intention in any way of trying to change what they do, because they do it very successfully. There have been moments of learning. Warren Buffett and Greg Abel on Berkshire’s Investments in Japan (2024, 2025, 2026)

The Japanese taught us that quality doesn’t have to be expensive. One thing for sure: we were never, and I mean NEVER were guided by what the market felt was the right amount of cash to hold. It had to be comfortable from an operating point of view. All of us in top management roles would have defended this position, if needed. I do not know how to operate a company with the kind of leverage that some do. At times it feels like they are building a house of cards. If Japanese companies operate with more cash on hand, more power to them. It just feels intuitively obvious that they are more shock proof than the highly leveraged ones. Les Vadasz, Intel Employee #4, builder of first microprocessor, founder of Intel Capital (email to author)

At Anduril’s Japan launch event last December, @PalmerLuckey unveiled a drone called Kizuna. American brand, American software. Every physical component: Japanese. James Riney, Coral Capital

______________________________________________

Paradox:

Almost everyone inside the financial markets wants Japan to act more like America. Almost everyone outside the financial markets wants America to act more like Japan. Almost everyone inside the financial markets continues to see China as a risk diversifier. Almost everyone outside the financial markets sees China as a risk multiplier.

Recent forums at Vanderbilt’s Institute for National Security, the Asia Society and the Capital Allocators mediaplex highlight this division. These worlds need to talk.

Asymmetry:

The PRC’s cognitive capture of leading international financial and educational markets has been its most potent asymmetric weapon. The leaders of our schools, their donors, and our financiers built careers on supporting China’s growth, ignoring or mischaracterizingJapan, and deindustrializing the USA. They based their actions on a flawed cognitive model that denied borders and worshiped apparent efficiency while penalizing redundancy and resilience. Japan alone did not take this path. Recognizing and improving upon Japan’s successes, not criticizing its failures, is the best path for all democracies.

Strategy:

Reframe the Japan narrative. The “capitalism that works“ in Japan can work elsewhere…and the “capitalism that doesn’t work” elsewhere will ruin Japan.

Finance used to represent less than 5% of our GDP and take about 5% of our elite human capital. Today, finance-related fields magnetize the majority of our most elite human capital. Japan’s best students still make things, and it shows up on the factory floor. Japan’s model works better for the same reason that America’s “worked” better when finance was in the back seat: you cannot finance yourself to prosperity or to national security.

Where to start?

In our schools…by partnering more with Japan than China, teaching less about financial engineering and more about how to make things and why our values matter. Prime the pump with a Marshall Plan to revitalize educational links among democracies. Complicate the PRC’s ability to leverage a few billion dollars of annual tuition into narrative control. Flip the script at MIT…and Tokyo University. Teach a more balanced Asia narrative and use it to attract the PRC students we do educate. Learn from Run Ri- the accelerating exodus from China to Japan.

And require more of Japan’s own investors: if they disagree with Buffett and the GPIF on the attractiveness of Japanese equities, have that discussion in public. Don’t let commission-driven intermediaries undermine Japan’s best companies by underwriting inferior rivals. Do encourage frank conversations between companies and domestic investors about how Japan’s markets can reflect underlying value.

What to stop doing:

Letting “global investors” call Japan’s tune…unless they work for Berkshire Hathaway or Coral Capital and want to partner with Japan. Global investors, a class that did not exist a generation ago, are uniquely ill-equipped to appreciate what Japan has done. For most, professional success was built on backing China directly or indirectly while denying that Japan has been mostly right. The PRC’s cognitive capture of this group skews its incentives. Yet this small cohort wields great power: the top 100 asset owners control over 50% of global assets, an influence magnified by the growth of passive investing to nearly 50% of global markets. If they dictate Japan’s future, “we’re cooked.” If they stand down and finance returns to a supporting role, we can rebuild a system able to resist and, hopefully, coexist with the PRC.

What else?

Continue recent progress in protecting critical national assets from purchase by PRC-linked financial firms. More MBK/Makino Milling and Rohm decisions, less KKR/Houdaille, KKR/Calsonic and Sextant/Magnequench. Avoid the trend of CFOs becoming CEOs. Resist the textbook financial preference for “pure plays” in favor of the real-world industrial preference for “whatever works.” Note that pure plays are not always best…”maker-led” conglomerates from Amazon to the old Westinghouse to BYD to Berkshire to Hitachi to the old ATT are innovation labs when properly led. Demonstrate the efficiency and efficacy of innovation within the public market, funded by industrial partnerships and M&A when necessary to generate appropriate scale.

Who?

Cultivate leaders like Hirokai Nakanishi and George Buckley and investors like Warren Buffett who know what they don’t know. Ignore “global investors” when they stray from their core competencies of appraisal and assisting price discovery. Don’t fetishize the “Silicon Valley model”: remember that much of it was/is built on Japan’s expertise. Get paid more for what Japan provides now rather than negotiating it away or paying it in fees to financial “helpers.” Share higher revenues with employees, nurturing Japan’s human capital and protecting Japan’s national interests.

Speak:

Face the demographic reality that a global Japan needs global leaders who can communicate fluidly in English or risk ceding the economics of the future to those who can. This necessitates a Swiss approach to language education. Look to the US Navy Language School for inspiration. Remember that in 1940, Harvard said the Navy approach could never work. Success came from unexpected places like Berkeley and Colorado. This success laid the groundwork for post-war partnership. Look to America’s interior for partners, starting with Tennessee, to forge a new reality…closer to the heart.

Reflect:

On how shareholders have changed over the past generation from mostly long-only, “democracy first” investors to a more complex mix. Consider “Mochai 2.0” transactions like Berkshire/Tokio, Berkshire/Shosha, Rapidus, Rohm/Melco/Toshiba/Denso. Compare these to high frequency traders, passive indexers, leveraged speculators and a consultant/investors with a PRC bias: who is best placed to tend the Japanese market with an eye to fecundity?

Note:

Japan’s successes where the others have failed despite spending much more, including hypersonic missiles, Navy frigates, Rapidus chips and key parts of nuclear, robotics, power grid, defense, aerospace and space industries supply chains. These successes have happened outside the US VC/PE ecosphere.

Remember:

The lesson from history and industry is clear: leadership by engineers and builders produces lasting strategic strength; leadership by financiers alone optimises for short-term gains at the expense of long-term readiness. David Murrin

Andrew McDermott, Nashville May, 2026

The opinions expressed are my own. They are not intended as investment advice. I currently own and may in the future own positions in securities mentioned in this article. You may contact Mission Value Partners LLC for a complete list of portfolio holdings. operations@missionvalue.com.

Here a link to Andrew’s previous guest contribution What if Japan is winning? Buffett & Japan which include his bio & photo

And here a link to our debate on “Japan Public Markets under Attack”

On domestic economic policy, however, it is difficult to find clear evidence of her leadership shaping the debate or driving decision-making. The fiscal 2026 budget passed largely unchanged from the version compiled under her predecessor. Meanwhile, new policy initiatives from the Cabinet have been notably absent. If anything, elite bureaucrats appear to have tightened their grip on industrial and financial policy since Takaichi took office.

On the overarching macro policy parameters, her stewardship so far is at best a continuation of technocrat-led `administrative and regulatory Kaizen`, at worst a de-facto reversal of `Abenomics`.

Specifically, fiscal policy is de-facto being tightened, with the public sector borrowing requirement budgeted to drop from approximately Y41 trillion in FY2025 (ended March 31, 2026) to Y31 trillion in FY2026 (started April 1). While this, of course, may change if Team Takaichi deems a supplementary budget expedient as the year unfolds, the initial fiscal thrust adopted is almost 1.5% of GDP less than what Japan got under her predecessor. In contrast, Abenomics started off with a positive fiscal boost of over 3% of GDP….

Meanwhile, monetary policy is now running with de-facto zero interference from the Prime Ministers office. If at all, Governor Ueda is facing an increasingly split policy board - an unprecedented three of nine board members voted for an urgent rate hike in the April board meeting. Under Abe’s appointee Kuroda, almost all decisions were unanimous, especially the radical ones introducing quantitative ease, ETF buying, Yield Curve Control etc.

Make no mistake: Abenomics 2.0 this is not….

….but yes, industrial revival through defense

Instead, Takaichi`s defining economic policy directive so far has been the radical easing of the export restrictions on lethal weapons and armaments, as well as a tireless campaign to promote both dual-use and single-use investments and production. Here Takaichi has succeeded where her mentor Abe had failed.

In my view, the amount of private sector savings mobilized to this end will not just exceed expectations, but actually unleash multipliers poised to become the primary driver of Japan`s economy from here. The leaders of corporate Japan have been given a new goal and, just as in the race to catch up to the West during the Meiji period, just as in the post-Pacific War re-build and `income doubling` years, CEOs are now focused and beginning to mobilize at scale.

Takaichi’s legacy - just defense, or real industrial resilience?

The question from here is whether Prime Minister Takaichi is happy with this legacy, or whether she has bigger ambitions. Will she be remembered as the Japanese leader who merely started re-armament? Or will she go beyond this and actually speed-up structural reform that makes Japan more resilient, more competitive, more investable, and more trustworthy?

Capital Markets Realities

To answer, let us focus here on the realities of Japanese capital markets:

Japan is a great paradox in the world of finance. Year-in and year-out, Japan creates huge domestic savings surpluses and has been one of the largest global creditor nations for generations. Yet this Japan savings surplus does not get deployed in Japan`s own `mother markets`. As a result, global investors are a significant force dictating the ups and downs of Japan`s equity and debt markets. Just as Japan is not self-sufficient for her energy or food supply, Japan is dependent on global investors for her capital markets.

For example, since January 1, global investors bought approximately Y4trn of Japanese equities, while domestic asset owners -institutional investors and individuals- sold approximately Y4trn. The market has been going up because Japanese corporations bought back slightly more than Y2trn of their own equities. (as of mid-April).

For global investors, it is obviously good to see corporate buybacks, evidence that financial capitalism has come to Japan. Finally Japanese CEOs are also focusing on capital returns and mindful of ‘lazy balance sheets’; but sooner or later investors will need to see more. After all, corporate boards and CEOs managing for shareholder returns, although clearly relatively new to Japan, is just common capitalist practice all over the world.

Make no mistake: corporate governance and the TSE`s `Yamaji doctrine` will soon seize to be able to attract more global capital – not because they are bad initiatives, but because their success will normalize Japan. Soon the corporate governance arbitrage -Japan catching up to global best practices- will go from ``wow, Japan is changing and I must buy to be part of that change` to `so what – of course CEOs work for shareholders but what are they doing to create future growth? Abenomics 2.0 is not enough``

Already the smartest global investors are asking me: what`s next? What will PM Takaichi`s vision and new economic growth policy be? More importantly, if I turn the question back to global investors –what do you want to see in Japan to invest more in Japanese equities? – I get one overwhelming response: Takaichi must speed-up the consolidation of Japan`s overly fragmented industrial structure, must end the support for `Zombie` companies and turbo-chgarge the creation of `National Champions`.

For global investors, there are two reasons for why a focus on `National Champions` should be a top-priority and urgent Japan policy priority: economies of scale and operational focus.

The argument for scale is straightforward. In the new geoeconomic realities, Japan does not need seven car companies, does Japan need roughly 4,000 stock market listed companies – comparable to the U.S.an economy more than five-times larger. To compete globally, Japan Inc needs scale, needs true National Champions.

The argument for corporate focus on core competence is obvious for global investors, but perhaps less discussed amongst policy makers. The data speaks for itself: of all Japanese listed companies, only one out of three (37% ) derives their revenues from one industrial or business sector. In contrast, in the U.S. 68% do, in it is Europe 65% and even in Asia exChina 55% do. (I am grateful for the always insightful Shrikant Kale, Jefferies` Asia & Japan strategist, for the analysis & calculations)

In other words, Japanese companies are not `pure plays`. Japan Inc is dominated by more-or-less diversified conglomerates, while American companies are `best in class` focused on core competence.

The severe business fragmentation imposes a heavy cost on Japanese companies, dragging down margins, profitability and valuations. Pure plays -companies engaged in only one core business – have an average Price-to-book of over 3-times, an ROE of over 12% and operating margins of 22%, compared with only 1.2x PB, 6% ROE and 7% margins for companies exposed to two or more sectors. Make no mistake: if PM Takaichi presents policies to speed-up the creation of National Champions focused on core competence and scale, Japan`s RoE could easily double from the current average of around 10% and possibly even exceed that of Wall Street (approx. 18% if we exclude the magnificent 7…current total SP500 RoE is 28%)

To accelerate this process, Takaichi should introduce tax incentives that favor strategic, corporate CEO-led mergers and acquisitions. For example, if a listed company acquires another using cash reserves or retained earnings, the combined entity could receive temporary tax relief.

By contrast, acquisitions driven primarily by private equity and financial engineering should not receive such incentives. This distinction would encourage productive investment over short-term financial extraction, helping to deploy idle corporate cash more effectively. Similarly, a CEO-led corporate spin-out to focus on `pure play` core competence should also receive preferential tax treatment.

The result would be a more efficient, resilient industrial structure—one that preserves Japan’s tradition of engineering excellence while strengthening global competitiveness. Make no mistake: this is exactly what global investors want to see – offer tax incentives that encourage Japan`s corporate CEOs to start investing their cash reserves in a more focused and bigger scale industrial structure. And yes, global investors would be very happy to see Japan CEOs starting to act on their own initiative and stop wasting minority shareholders capital on paying high fees to PE firms.

Takaichi has the potential to become a consequential leader. If she can use her moment to accelerate the creation of national champions, she may well be remembered as one of Japan’s most important modern prime ministers. Moreover, it would create her own legacy, distinct from her mentor`s `Abenomics`.

Thank you for reading. as always, comments welcome. Many cheers from the start of Golden Week in Tokyo. ;-j

A slightly different version of this was my regular NIKKEI column published earlier this month, see here - Nikkei

Japan talks turkey

by Andrew McDermott

President Trump: Thanks for the flowers. What we really want are ships.

PM Takaichi: You’ve already got them.

Trump: Thanks, this was easier than I thought. When?

Takaichi: Like I said, you’ve already got them.

Trump: Come again?

Takaichi: Let me elaborate and refresh your memory.

At a high level, many forces already attacking Iran are being “borrowed” from Japan. Let us remind you that we pay the US nearly $1.5bln a year for the privilege of hosting forces who, according to our 1960 Treaty, are supposed to be dedicated to the defense of Japan and the Indo-Pacific region.

Yet, even as China’s threat to the Indo-Pacific gathers force, you are drawing down defenses in Japan. Let’s get specific:

Most obvious is the deployment of the 31st Marine Expeditionary Force, the Tripoli and other support ships to the Persian Gulf from their Japan home ports. Next, but certainly no less important, is the exhaustion of significant magazine capacity in Iran, including missiles made by Japanese firms on your behalf. Finally, and most important, are the ships we don’t see. The US has spent literally tens of billions of dollars on failed or delayed frigate, carrier, submarine and missile programs while denying critical technology to Japan, especially in the F-35 program (we will pass over the fact that Canada and the UK are full F-35 partners).

As a result, we have double-spent to create alternatives that, thankfully for both of us, fill the gaps in the US arsenal at a critical time. As China races ahead in shipbuilding, the US has only one carrier in the Pacific (to China’s four). The two carriers in Iran are barely able to function. Most of the others are in drydock, and the Ford is off station for sewage (!) repairs. Were it not for the superior maintenance services provided by Japan and Korea, even more ships would be unavailable to the Navy.

Our $500mm Mogami class frigates are superior to anything you have on the drawing board, and we’ve built 11 of them. They are currently on station in the Pacific filling the role of your dozens of unbuilt ships, putting our sailors in harm’s way. Had your contractors spent just $10 bln of the over $250bln they spent on buybacks commissioning frigates from us, you’d have 20 more working ships with about the same naval force (because we require far fewer crew members per function). Another $10bln would have bought 10 Maya destroyers from us or Sejongs from Korea.

Fortunately for you, we, together with the Koreans and the Taiwanese, have built the ships and missiles that you could not or would not. We have preserved supply chain integrity that your MBA-equipped CEOs thought “inefficient.” And we have paid for over $25bln of equipment that is over five years late.

We all agree that China is the biggest threat, yet, because of your own decisions, you do not have the forces to defend us. We are shouldering this burden willingly without pointing fingers. Everyone makes mistakes. We’ve made more than our share. So let’s look ahead rather than back.

What we will not do:

Commit ships to escort duty in the Persian Gulf.

What we may do:

Join a multi-national force to enforce something similar to the Haas proposal:

“Open to all/closed for all.” Details matter on this idea.

Our price:

1. You immediately refund all the payments for weapons not yet delivered. We will renegotiate arms deals on a mutually agreeable basis that will include your fixing the Jones act and other legislation required to allow Japanese companies to directly build for the US Navy. We want our companies to have a chance at competing for joint contracts. We think this helps both of us.

2. If we put capital into LNG and shale projects in the US, we want preferential terms that guarantee us priority access over all other customers for supply and a 20% discount to MFN prices on all US energy supplies.

3. We want a guarantee that all US nuclear projects will have at least 50% Japanese content and/or that Japanese advanced nuclear designs will receive equal play in the US nuclear builds.

4. We want to work with you to enact legislation that prevents your investors from profiting at our expense when we follow your rules on PRC tariffs. It’s not fair that our companies comply with your industrial restrictions while your financial sector (especially, but not only, your private equity firms) profit by investing in our Chinese competitors.

That’s a start. We want this to work. Let’s work together to get to a better place on the other side.

The opinions expressed are my own. They are not intended as investment advice. I currently own and may in the future own positions in securities mentioned.

Andrew McDermott, Nashville March, 2026

Here a link to Andrew’s previous guest contribution What if Japan is winning? Buffett & Japan which include his bio & photo

And here a link to our debate on “Japan Public Markets under Attack”

My favorite economist is a Frenchman. This may come as a surprise. After all, I am German and in all things intellectual the German-French rivalry is a very serious one. Yet after decades of working as a financial economist and adviser to investors, corporate leaders and policy makers I am convinced no one can rival the wisdom of French economist Jean-Baptiste Say. My favorite quote: “In policy as well as in morality, the grand secret is not to constrain the actions, but to awaken the inclinations of mankind.”

My favorite economy is Japan. Again this comes as a surprise to many, particularly my Japanese friends. They say “How can you be optimistic on a country with a declining population, record fiscal deficit, and stuck in the middle of the US-China geoeconomic tensions?” And they are right on the first round implications of Japan’s demography and debt on the arithmetic of national income (=GDP) accounting – fewer people means less national income, and rising debt repayments means lower discretionary spending power. The arithmetic is clear, easy and real.

However, they are almost certainly wrong on the economics. They are missing the wisdom of Say’s insight “not to constrain but to awaken the inclinations of mankind”. Make no mistake: Japan`s structural realities are now a catalyst for real structural change, forcing a rising “Animal Spirits”, the term John M Keynes used to popularize Say’s original insight.

How so? Simply put:

Scarcity is the mother of invention.

Let look first at the demographics, then the debt. Human capital is by far the most important input and asset for any economic endeavour. Now even the large prestigious Japanese companies have to fight to attract and retain their employees. Japan’s labor market has become a `buyers market` where potential employees can now dictate their terms. More important than just higher wages, this forces a break with the traditional, proud but subbornly ridgid corporate culture: employees now know their scarcity value, want to create their own career, want to be paid for performance, and don’t want to be a traditional `salaryman`.

The fact that more and more companies are introducing meritocratic pay and competitive, rather than seniority-based promotion is arguable the most bullish development for Japan. Because of the labor scarcity a real productivity miracle can happen in Japan. The scarcity `awakens the inclination of Japanese employees` - they now have `animal spirits`.

Of course, this forces a revolution in corporate HR departments that the proud old guard may not be happy about, but now can no longer resist. At the same time I am certain Japan’s culture is resilient enough to ensure Japan’s new generation of star performers will never evolve into a ‘winner-takes-all’ and ‘make me-great-again’ plutocracy.

What about the national debt, how can that be a positive catalyst?

Because it now forces a long-overdue re-allocation of fiscal resources.

Until now, Japanese politicians could easily increase government spending seemingly without having to pay for it because interest rates were falling. Now interest rates are rising, so the resources available for the government to intervene in the private sector are shrinking.

Again, this new scarcity of funds will trigger creativity and `animal spirits`. Already a focus on evidence based policy making, stricter auditing of public funding, cutbacks on, for example, government lending programs is creating new business opportunities for the private sector. Funds will be shifted from costly support for ‘zombies’ towards impact incentives for ‘national & regionl champions’.

This is what PM Takaichi is all about: she will raise the efficiency of public spending, not the amount of it.

Which brings me to the final, and perhaps most important, reason to be optimistic on Japan: the new geoeconomic realities are now forcing an awakening of the inclinations and ambitions of the Japanese people.

As America and China become more ensnared in their rivalry, the risks are rising that Japan will become less relevant to the ambitions of the two superpowers. The only way to safeguard against this is for Japan to become more sovereign, more stronger, and more self-sufficient. This new `Gai-Atsu` foreign pressure is a very powerful wake-up call to `awaken the inclinations of mankind`.

So I am very optimistic on Japan precisely because the government has no more choice and now has to do what former Prime Minister Koizumi Yunichiro advocated almost two decades ago : `what the private sector can do, the private sector should do ( 民ができること民がやるべきです ). And because the most important asset for economic activity, human capital, is becoming more powerful and demanding real structural change.

Of course, Japan’s political leaders would do well to embrace the wisdom of Jean-Babtiste Say. Economic and global conditions have never been better to speed-up structural reform and create a new Japan. I very much trust Prime Minister Takaichi will indeed ‘awaken the inclinations’ of the Japanese people.

Thank you for reading - as always, comments welcome. From a first hint-of-springtime-in-the-air Tokyo, many cheers ;-j

Here the link to the NIKKEI article.

• the people are scared about geopolitics, resigned to inflation, and longing for a charismatic leader;

• the elites stopped trusting both America and China, but are pro-actively making deals with the former while re-actively trying to engage the latter;

• the economy is running well above potential, with structural- & supply-side reform now turbo-charged by officially endorsed financialization and state-sponsored projects serving national economic security; but notably absent in the LDP’s policy platform;

• and Prime Minister Takaichi determined to get a full-on mandate to govern from the Japanese people, rather than just the LDP. Make no mistake: she is as committed to democracy as she is to enforcing her Machiavellian will to power. Most importantly: with a win, she’ll finally have both the LDP elders and senior technocrats exactly where she’s always wanted them - in the palm of her hand, fully beholden to her.

The real question is not how big is her win, but what will she do with it?

(at the time of this writing, about 24 hours before the peoples’ ballots are counted, the nationwide polls as well as the election-district-by-election district predictions point to the LDP winning an added 60-120 seats - she was 35 seats short of a majority before she dissolved the 465 seat parliament; everyone is predicting a landslide, possibly even a super majority not seen since latePM Abe)

The wisdom of the crowds…

Importantly, this election was not about economic policy.

Yes, the people are losing purchasing power because of relentless inflation. But Takaichi and the LDP de-facto stopped promising a cut to zero in the VAT on food after it became clear that the people are not stupid: opinion poll after opinion poll confirmed 50-80% ‘oppose’ or ‘do not see the merit’ of “buying” at-best-temporary relief from inflation that costs an estimated Y5trn (0.8% of GDP) in lost tax revenues.

Yes, Japanese voters are, after all, budget-savvy housekeepers and good with a good grasp of finance. They abhor leverage and instinctively know that a tax cut today will, sooner or later force taxes to go up even higher. No politician can sell them a “free lunch”, particularly with the budget already barely sustainable to confront this aging societies biggest worries: social security cutbacks, healthcare out-of-pocket expenses rising, added outlays for the defense of the nation, and the rising interest expense all the experts are worrying about on TV and in podcasts, now that -for the first time in thirty years- interest rates are rising.

Takaichi listens to both the people and the fiscal stewards at the Ministry of Finance….so we know what will not be policy priority.

….the worry of markets

Fears of Takaichi’s fiscal recklessness and possible vote-buying populism did, however, help spark a sell-off in both Japan’s bond market and the Yen exchange rate.

The move was violent enough to prompt U.S. Treasury Secretary to publicly worry about possible contagion into US treasuries. This was backed-up-in-action by well-placed leaks about the Treasury conducting “rate checks”, a possible precursor to official intervention in foreign exchange markets.

In fact neither Japan nor the U.S. spent any money on intervention. This episode will go down in history as a Masterclass in verbal intervention orchestrated by the one G7 finance minister who has actually traded a billion dollar FX book - Treasury Secretary Bessent. Like it or not, when it come to finance America gets things done, thank you

In contrast, MoF Minister Katayama got nowhere trying to calm markets on her own. She worked overtime, relentlessly explaining theoretical constructs like Primary Balance or net-debt vs gross-debt at Davos, on Bloomberg, or in the Nikkei. But markets gave her no credit. The rot only stopped when the U.S. spoke up to defend its own interest.

(and yes, it is highly unlikely this Masterclass would have been delivered without the U.S. home-grown risk assessment of a possible ‘contagion’ spill into treasuries - if at all, the message sent was a warning to Team Takaichi to get its domestic policy mix in order).

What about reality?

Yet while speculation about “Japan’s Liz Truss Moment” —the British Prime Minister’s tax cut & spend budget forced a surge in bond yields that quickly forced the collapse of her government — has become a very real market obsession, Takaichi’s actual budget proposal tells a completely different story. What exactly is the new bond supply forced upon markets by Takaichi’s supposed fiscal recklessness?

• Y42 trillion is the total borrowing requirement, ie. new supply of bonds in the current fiscal year FY25 (which ends March 31, 2026). This is a little more than 6% of GDP.

• Y29 trillion is the total borrowing requirement in Takaichi’s budget proposal for FY26 (which ends March 31 2027).

• Even if —and in my view its quite a big if— the consumption tax on food were indeed cut to zero, and if all of this tax cut were to be funded by added bond issuance, the new bond supply would rise to Y34 trillion - still significantly less than last year’s Y42 trillion (less by more than 1% of GDP).

So clearly the market does not believe Takaichi is telling the truth. In my view she is.

Which gets us to the fundamental problems PM Takaichi faces: she must free herself from the “I am Abenomics 2.0” narrative so clearly associated with her.

This will not be easy, but with a little luck a decisive election victory will free her to revels her economic policy ambitions.

Can Takaichi free herself from the “Abenomics 2.0” curse?

Takaichi Sanae was chosen by the late Prime Minister Abe Shinzo to be his rightful heir. The reasons for this are rooted in, first and foremost, Abe’s judgment of her charisma & character, her can-do spirit, and most importantly her proven and honest commitment to the Japan-conservative and Japan-patriotic cause. Meaning: a focus on raising the nations’s sovereignty and yes, on protecting traditional Japanese values and culture as defined in, for example, the ideology promoted by the Nippon Kaigi more so than ‘imported’ intellectual constructs advocated by western-educated historians- or policy experts. Takaichi Sanae is the Made-in-Japan manifestation of the dominant Zeitgeist. President Trump is in awe of her and has given her his full endorsement.

Be this as it may — the point is this: Takaichi is the heir to “Abeism”, his ideology; but she is not the heir to “Abenomics”, his economic policy.

And she knows this. She understands full-well that ‘Abenomics’ was born out of a very real deflationary crisis: when Abe came back in 2012, Japan’s GDP had dropped to as much as 5% below its potential and further declines were likely. An all-out attack on deflation was desperately needed for national survival. Backed by the Nippon Kaigi and other conservative groups, Abe created first a team and then a plan for them to deliver -- “Buy my Abenomics”. He had literally nothing to lose, total freedom to act, and went all-out on monetary, fiscal and regulatory stimulus: The three arrows that, only when held together, cannot be broken.

In contrast, Takaichi faces an economy where the output gap is closed, where inflation is accelerating, and where demand is outpacing supply for most inputs essential to national vitality —labor, energy, food.

She knows that adding more demand through looser fiscal- or monetary policy would not just be counterproductive but outright dangerous for both her nation and her own survival: this first election she can win on charisma and novelty value. She’s still in her honeymoon. But with every next month of her tenure, the track-record of managing the economy in general, delivering a ‘feel good’ factor for her people in particular, becomes more important. She is a good student of history and knows there is nothing that destroys the peoples’ feel-good’ as fast and as certain as relentless inflation does.

No “Abenomics 2.0”

So no, there will be no “Abenomics 2.0”. There will be neither a first arrow, nor a second arrow — neither monetary nor fiscal policy will be pro-actively eased from here.

To wit:

Last year, as soon as she became LDP President, the commentariat was obsessing about how Takaichi was going to prevent BoJ Governor Ueda from continuing his mission of normalizing monetary policy and raising rates, only to see her going out of her way to thank him for doing exactly that, for raising rates after she’d been in office for barely two months. The consensus now calls for at least two more rates hikes coming this year. Moreover, the U.S. Treasury Secretary has made it very clear he thinks the BoJ is “behind the curve”. No “first arrow” will be fired

Similarly, this year, the current pre-election obsession with how she’ll inevitably force a more expansionary budget onto MoF will, in my view, end up being the next misguided prediction about her policy priorities: fiscal policy is poised to stay put; and MoF Minister Katayama may well be right in her call for a primary budget surplus by next year. Clearspeak - no “second arrow” coming either.

What about a “Third Arrow”?

In contrast, the “Third Arrow” keeps on accelerating towards its target — structural change. This is not because of Takaichi’s vision or policy proposals, but the result of the multitude of incremental but persistent rule-, regulatory- and “mind-set” changes implemented by Abenomics now compounded and finally coming together nicely: Japan has evolved from discussing capital efficiency, fiduciary responsibility, corporate governance, capital stewardship; from the 8% RoE target proposed by the Ito report in 2014 (double the until then prevalent 4%) to the Tokyo Stocker Exchange’s call for Price-to-Book above 1 targets demanded a couple of years ago; and revisions of the buyout, M&A and takeover rules by METI have shifted legal powers from insider executives to outsider capital owners.

The net result is a previously unthinkable amount of global capital committing to Japan activist or Private Equity strategies, as well as, importantly, Japan bankers now offering debt capital and credit lines for buyouts, takeovers, and startups.

Japan’s market for corporate control is literally on fire: last year more than 7% of listed companies received a takeover bid - unthinkable even a couple of years ago. Make no mistake: Japan’s industrial and economic structure is changing at warp-speed….

These development are clearly the compounding result of Abe’s Third Arrow focus on empowering financial markets. Financial asset owners, not operators, are starting to call the shots in Japan. Empowering the former is the very core of the national policy targets adopted two years ago: the asset-income doubling plan and the creation of an asset management superpower.

In contrast to her predecessors, Abe, Suga and Kishida, Prime Minister Takaichi has stayed more or less uncommitted to further this agenda. If at all, her basic distrust of American-style neo-liberalism and concerns about the excesses of financialization runs much deeper than it did for Abe and his Team.

For Abe the deflation crisis left no choice but to go out of his way to enlist market forces onto his side; for Takaichi, the “winner takes all” risks of inflation may well develop into a policy constraint at some time in the future. “Team Abe”, for example, was open to and regularly met with market players, finance expert academics and both local and global investors from all assets classes. In contrast, PM Takaichi has kept her doors basically shut to financial market professionals. She was being honest when she said on the campaign trail that she not not really know whether a strong yen or a weak yen is better for Japan, Both of her idols, Thacher and Abe, certainly knew where they wanted their national currency to go….

Clear speak - I expect Takaichi to stay relatively lackluster on delivering new pro-market, pro-finance regulatory initiatives. She won’t stand in the way of the TSE, the FSA or other elite technocrats developing their agenda to promote the “asset income doubling” targets; but she won’t lead and push like Team Abe did. For example, blockchain or crypto will follow the U.S. lead - but there won’t be a Japan-style “Genius Act”.

This does not mean, that the “third arrow” is dead; but Takaichi will re-direct it towards national economic security targets now that “free markets” are doing their work.

A re-directed “Third Arrow” — “National Champions” and “Regional Champions” to urgently promote national economic security

While impossible to discuss in an election, Takaichi knows full-well that Japan’s economic and industrial structure is too fragmented at home to be globally competitive. Japan does neither need seven car companies nor 25 semi-conductor trading companies nor one hundred regional banks nor, for that matter, more than 800 universities.

“Excess competition” offers tremendous charm and choice to customers — launching 1,300 new non-alcoholic soft drinks every years is an amazing show of innovation to entertain easily bored, ever curious and unforgivingly discerning Japanese customer - Sparkling Mayonnaise was my recent favorite; but “excess competition” feeding “excess innovation” and an “lets see what sticks” product cycle its almost certainly not the best way to deliver a reliable capital return or dividend for Japanese pensioners….

To the point: economies of scale and market dominance are key to competitiveness particularly for manufacturing companies exposed to global competition. Takaichi knows this very well, and is now taught by “Team Trump” more than by anyone else that Japan has got what it takes to be the engineering and industrial powerhouse that can help re-industrialize the United States. What Japan lacks is scale and genuine “National Champions”.

The idea of promoting both regional and national champions by state-sponsored M&A has been a longstanding dream of METI technocrats. Now the time has come.

Takaichi has made it very clear she favors greater regional empowering, even going so far as to agree to plan for a second capital city in Osaka. Even if the LDP wins a majority in the election and, technically, is no longer dependent on the Isshin Progressive Party to govern, I expect her commitment to regional government reform and a gradual re-design of central-to-local government to move into greater focus.

Specifically, here is what PM Takaichi’s fiscal policy changes are poised to focus on — greater autonomy of regional governments to pursue local industrial policy - its not about growing the budget, but about re-allocating it and, more importantly, changing the budget stewardship to empower the regions.

And yes, the national government will still get to direct the funds — regional gets to compete for projects deemed urgent and essential for national economic security reasons; they submit their plans, and the elite technocrats from METI and MoF decide the winners.

Importantly, a test-bed for this policy approach has already been launched in the field of education: the annual allocation of the Y10trillion new science promotion fund is decided in a nationwide competition (its a real competition — prestigious Tokyo University has failed twice to get the money because their proposal simply did not meet the KPIs stipulated by a government dead-set on not just building new science labs, but actually changing the rigid hierarchies and silos of established academia. Specifically, one requirement is that labs only get funds if the assistant professors get to do their own initiative research and experiments (rather than being beholden to whims of the tenured professor they report to).

On the industrial side, the built-in-record-time new semi-conductor industrial zones in Kyushu and Hokkaido lead are early tangible success stories that, in my expectation, Takaichi will promote more aggressively around the nation.

Takaichis has learned that Abe’s “special economic zones” never really took off to revitalize regions, because there was too much conflict between central government authority lost versus local authority gained. Under the mantle of national economic security, a win-win for both local and national technocrats is more likely.

Clear speak: Takaichi’s “Third Arrow” will be a hybrid of the Abenonics market deregulation legacy now feeding industrial consolidation and corporate revival followed with a new dynamics of state-mandated consolidation and innovation via “regional and national” champions.

Wanted: A Takaichi Vision for Japan

To be sure - PM Takaichi is the heir of Abe. We know she has a tough-as-nails Machiavellian drive to proof to the Japanese people that a woman from a normal not privileged background can indeed make her way to the top of Japan. To the world, she is the Made in Japan manifestation of the “nationalist leader” Zeitgeist, but more importantly, to the people of Japan she is the manifestation of a Made-in-Japan dream-come-true. The election will prove she does indeed capture the aspirations of her people.

But beyond that she has - so far - failed to define what she stands for in general, what vision she has for the Japanese economy in particular. I know it won’t be “Abenomics 2.0”, and I trust she will create her own narrative and present concrete policies - although realistically we may have to wait until next year’s budget cycle begins later this summer to see a more concrete push for the creation of “National Champions”.

Thank you reading — as always, comments welcome. From a light-snow & cold Tokyo with many cheers ;-j

The World’s Liquidity Trap

by Andrew Smithers

The World’s private sector is seeking to save more than it wishes to invest - the same problem caused the slump in the 1930s. Then the whole world suffered, though Japan less than most because Finance Minister Korekiyo Takahashi increased fiscal spending.^[1] He was right and, as Keynes showed, in times he called ‘liquidity traps’, large fiscal deficits are needed, despite ultra-low interest rates, to avoid large scale unemployment.^[2] The 1930s were one such period and the 21^st Century is another.

We now have a new problem. The national debts of several important countries, including France, Japan, the UK and the US, appear to be on track to grow faster than their economies’ ability to pay the interest on them. Conventional economic theory has no policy to answer this, so a new policy based on a different theory is needed.^[3] The Stock Market Model (SMM) recommends tax restructuring to prevent the current crisis being followed by a 1930s’ style disaster.

The SMM shows that corporation tax (CT) is not a tax on profits but on investment. Shifting government revenue from CT to income and value added taxes, boosts demand even when the fiscal deficit is unchanged, because the rise in investment that results is greater than the decline in consumption. This policy of tax restructuring solves the current problem in two ways. It lowers the interest governments must pay by reducing the deficit needs to prevent unemployment and accelerates countries’ ability to pay by speeding the growth rate of national income.

Japan is a bit different.

Japan is different from France, the UK and the US as it has a large current account surplus, which makes its problem less acute;, its interest rates are much lower, which makes it likely to get worse and to which its huge national debt makes it sensitive. So long as China runs a large current account surplus, the rest of the world must run a deficit, and this shows no sign of ending. President Trump is trying to end the US deficit, but the problem won’t go away even if he succeeds, it will simply shift to other countries. Countries borrow from foreigners when they run current account deficits. This boosts their economies’ growth if they spend the money on investment and ends in disaster, as the Greek euro crisis showed, when spent on consumption. The solution to the world’s problem is not to cut fiscal deficits, it is to spend the inflow of foreign savings on tangible investment rather than consumption.

Some years ago, I received an unofficial question from friends in the Bank of Japan. “Why” they asked, “had Japan’s growth slowed so much when investment had remained so strong?” My answer was simple. “Real investment has fallen sharply, but the data don’t show this because the way national accounts, including GDP, is calculated has been changed.”^[4] The result is dramatic, as shown in Figure 1.

What Went Wrong.

The alteration in data involved a new definition and a new way of measuring investment. Those who supported the change claimed that the value of intangible investment could be measured and had not previously been included in the national accounts data. Both assumptions were, I think, wrong.^[5] The value of capital equipment depends on the technology which it uses; even if this requires no new physical investment – the type termed “putty-putty” - and we cannot tell how much of the value of capital stock depends on its intangible (IP) element and how much on its tangible one. It’s not a matter of cost, as equipment which has not benefitted from a putty-putty advance in technology does not cost less than stuff that does, it’s just worth more.

In all countries included in the G5 group (France, Germany, Japan, the UK and the US) living standards have slowed sharply this century, in line with a marked deceleration in the growth rate of the value of capital stock. As Figure 2 illustrates, had the trend rates of growth continued this century, G5 countries would have been between 25% and 50% better off by 2022. This slowdown could be due to less money being invested or to the technology used advancing less rapidly than before. It would be helpful to know, but we can’t tell and, as others have also remarked, it is dangerous to pretend to know things we don’t.^[6]

The Technology Bias.

Confused by bad data, the consensus view is that growth depends on the rate at which technology advances. In fact, it depends much more on how much we invest. There have been huge advances in technology not yet exploited because they need new tangible investment. The big stock market successes this century have been the companies with new technology, and this has misled public opinions and policymakers into thinking that technology is the sole key to growth.

Spending on research (R&D) is subsidised heavily in both the UK and the US, and investment on it has risen as it has fallen on equipment. We can’t tell whether tangible investment would have been even lower if less had been spent on R&D, but we do know that the policy of subsidising it has not produced growth.

Persevering with a policy that has failed and expecting the results to differ in the future is a form of insanity.

If Japan’s current account surplus falls as the US becomes protectionist, it will need to boost domestic demand to avoid unemployment. Tax cuts will make its debt problem worse, so Japan should, as it wisely did in the 1930s, ignore consensus theory, which today means subsidising tangible investment. I hope that this will be followed by other countries, preferably before the next financial crisis.

Andrew Smithers, London January 2026.

Andrew Smithers :

Andrew received an MA in Economics from Cambridge University, having been at Clare College 1956-1959., where his supervisor and director of studies was Professor Brian Reddaway. Andrew was born in 1937 and attended Winchester College 1951-1955.

Andrew founded Smithers & Co in 1989. Before that he ran SG Warburg’s asset management business for many years (now part of Blackrock). A regular financial commentator and columnist, and author of many academic publications, he co-authored “Valuing Wall Street” with Stephen Wright (March 2000). He wrote “Wall Street Revalued: Imperfect Markets and Inept Central Bankers” (July 2009), and “Can we identify Bubbles and Stabilize the System?” in The Future of Finance (LSE September 2010), “The Road to Recovery: How and Why Economic Policy must Change” (September 2013), “Productivity and the Bonus Culture” (July 2019) and “The Economics of the Stock Market” (Oxford University Press 2022).

Andrew seeks urgent change to accepted economic theory as the policy on which it is based is the cause of regular financial crisis and bouts of rapid inflation. He is currently working on a book with the working title “Managing an Economy with Multiple Sources of Disequilibria” which he hopes will be published soon.

^[1] Cambridge History of Japan Vol 6 p468 quoting Kinshuku seisaku.

^[2] The General Theory of Employment Interest and Money by John Maynard Keynes (1964) Macmillan

^[3] Coming to Terms with Fiscal and Trade Deficits by Andrew Smithers (2025) American Affairs (Vol. 9 No.3).

^[4] The change was internationally agreed under the United Nations’ System of National Accounts (SNA) and implemented in most countries e.g. in 2012 by the US Bureau of Economic Analysis (BEA) in its 14^th amendment.

^[5] As I explain in Tangible and Intangible Capital by Andrew Smithers (2025) World Economics (Vol. 26 No.2).

^[6] Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome by Ricardo Caballero (2010) Journal of Economic Perspectives Vol. 24 No. 4.