Japan Economy Watch

Takaichi’s False Solution To Real Problems

Richard Katz — Tue, 01 Sep 2026 22:07:15 GMT

Source: https://www.mof.go.jp/english/pri/reference/ssc/historical/all.xls

This is Part 3 of a report on Prime Minister Sanae Takaichi’s new ¥370 trillion 62 product/technology program. Part 1 and Part 2 were for paid subscribers. This part is for all subscribers.

Prime Minister Sanae Takaichi’s scheme for ¥370 trillion ($2.3 trillion) in investments in 17 sectors is a false solution to two real problems: low productivity that limits potential growth and anorexic consumption that compels chronic deficit spending. The one on today’s agenda is a chronic shortfall in private domestic demand due to stagnant real wages. Real consumption is no higher today than it was 13 years ago. That limits companies’ need to invest (see chart below).

Source: https://www.esri.cao.go.jp/jp/sna/data/data_list/sokuhou/files/2026/qe262/tables/gaku-jk2621.csv

That creates a negative dynamic. Primarily due to wage suppression, cash flow for Japan’s 900,000 corporations has risen to 17% of nominal GDP, while nominal business investment has remained flat at around 8-10% of GDP. Companies rake in more cash every year than they can profitably invest, a gap now amounting to 7% of GDP (see chart at the top). In essence, companies withdraw more purchasing power from the economy than they plow back in through wages, investment, and taxes. Excess corporate savings result in insufficient spending in the economy as a whole.

To avoid permanent recession, the government has to make up the demand shortfall via chronic budget deficits. No matter how hard the Ministry of Finance tries to push perpetual fiscal austerity, the Liberal Democratic Party (LDP) repeatedly resorts to fiscal stimulus. Government spending has accounted for 45% of all GDP growth since 2015. For details on how wage suppression makes Japan a deficit addict, see this post.

In addition, until recently, the government has tried to gin up foreign demand via a weak yen. Takaichi still favors a weak yen (just not one falling any further).

Raising Investment Or Lowering Excess Cash Flow?

Looking at the chart at the top, there are two ways to end the gap between corporate savings and investment. One is to lower the excess savings through higher wages, taxes, or dividends. The other is to increase business investment. The latter is Takaichi’s notion.

As I detailed in Part 1 of this series, Takaichi’s scheme is a chimera. Of the ¥370 trillion, Takaichi assumes 90% would come from Japanese business. But business investment is anemic because companies see little consumer demand for the additional products it would create. Moreover, if companies invested as much as Takaichi desires, the rate of return would plunge, as I detailed in Part 2. So, they won’t do it.

So, if we cannot raise business investment enough, we have to lower excess cash flow through measures that increase wages, corporate taxes, and middle-class stockholding.

Raising the Labor Share of GDP

The primary reason corporate cash flow is so high is that wage suppression has reduced labor’s share of nominal corporate value-added (business GDP) from 70% during 1995-2003 down to 59% at present (see chart below).

Source: https://www.mof.go.jp/english/pri/reference/ssc/historical/all.xls Note: The labor share rises in a recession because profits fall so sharply in a downturn, e.g., the banking crisis of 1999, the global Great Recession of 2008, and Covid in 2020.

From 1976 through 1992, nominal wages per worker more than doubled. By contrast, the next three decades saw no rise in either wages or sales per worker. Yet, profits per worker have more than doubled (see chart below). Profits are up not because of growth in productivity or sales, but because of wage suppression. These are nominal figures, but real wages are also no higher than they were in 1990.

Source: https://www.mof.go.jp/english/pri/reference/ssc/historical/all.xls

Hence, the main remedy for excess corporate savings is to reverse the decline in the labor share of corporate value-added through substantial wage hikes. Although nominal wages have risen in recent years, real wages kept on falling until the last few months.

Unfortunately, Takaichi’s plan includes nothing on the wage front besides saying that companies should pay more attention to wages than to shareholders. Actually, they’re neglecting both by hoarding cash. All she offers is the trickle-down theory that more investment will raise wages.

What could Takaichi do?

Over the last 15 years, the most effective measure has been steady increases of the minimum wage by around 3% per year. It has taken a couple of decades, but Tokyo has finally raised the minimum wage enough to lift almost 20 million workers above levels close to, or even below, the poverty level. The latter is a wage half that of the median wage. Moreover, Japan saw the share of full-time workers earning less than two-thirds of the median full-time wage reduced by half (see chart below). For more details on the minimum wage miracle, see this post.

Source: https://tinyurl.com/4bk72tv6

Worse yet, Takaichi wants to slow the annual rise in the minimum wage. The hourly minimum is expected to rise to ¥1,176 this fall (almost $12 in purchasing power parity dollars), and Prime Minister Shigeru Ishiba targeted ¥1,500 by 2030, which would require a nominal hike of 6% a year. Takaichi, by contrast, proposes to push that back to sometime before 2035. About 28 million Japanese employees—almost half the labor force—earn less than ¥1,500. With 2% inflation, a 3% nominal hike amounts to only 1% in real terms. It would take 30 years to reach ¥1,500 in 2025 yen.

A second measure to raise wages is to enforce Japan’s law mandating equal pay for equal work between men and women and between regular and non-regular workers. Non-regulars get an hourly wage 40% lower than regular workers. Meanwhile, women in the same occupation as men face wage discrimination. For more details, see this post.

The real irony, one lost on Takaichi, is that if companies raised real wages and thus consumer spending, they’d have to invest more.

Roll Back The Ineffective Corporate Tax Cuts

Over the past couple of decades, Tokyo has repeatedly shifted income from households to companies by raising the consumption tax while cutting corporate taxes. The government slashed the top corporate tax rate from a peak of 52% in 1994 to 30% at present. Keidanren (the big business federation) and the Ministry of Economy, Trade, and Industry (METI) claimed that everyone would benefit because companies would use the extra retained earnings to spend more on wages and investment. However, corporations never fulfilled their end of the bargain. Prime Minister Fumio Kishida raised the idea of rolling back some of the corporate tax cuts, but he quickly caved under pressure from Keidanren and METI.

From 1994 through 2024, the pretax income of nonfinancial corporations more than quadrupled as a share of GDP, from 4% of GDP to a shocking 18%. But, because of the tax cuts, corporate tax revenue stayed flat relative to GDP. In 2024, it amounted to just 3.3% of GDP instead of nearly 10% without the tax cuts (see chart below). That difference would have been enough to wipe out budget deficits. (Of course, if companies had raised wages, profits would not have reached 18% of GDP.) For more on this issue, see this post.

Source: https://www.esri.cao.go.jp/en/sna/data/kakuhou/files/2024/2024annual_report_e.html

Spread Corporate Profits to the Middle Class

A final measure is to increase middle-class shareholding so a larger share of corporate profits becomes income for consumers. As detailed below, this would also improve corporate governance and reallocation of capital to more efficient companies.

The new version of the tax-free NISA stock market accounts launched in January 2024 is an attempt to do so. But it seems as if people are buying NISA accounts by selling taxable stocks rather than putting in new money. The evidence is that the household share of all stocks has not yet increased. The share remains at 17% (see chart below). All of the increase in the value of household stockholdings in recent years is just a reflection of the hike in share prices. The goverment and stock market need to look at why NISA has not yet moves things toward the intended goal and what more needs to be done.

Source: https://www.jpx.co.jp/english/markets/statistics-equities/examination/vk0khi000001pt73-att/erenketsu_goukei2026_3.xlsx

In addition, corporate governance reform should be used to get companies to turn more money over to investors via dividends. Currently, the dividend yield on the Tokyo Stock Market (dividends as a percent of a share’s value) is just 2.25% for shares on the Prime Market and 2.56% on the Standard Market. By contrast, Real Estate Investment Trusts (REITs) currently pay 4.5% to 5.2%. Because of this and, before NISA, tax advantages for real estate investment, households historically invested much more in real estate (not counting their primary home) than in the stock market. For more details, see this post.

Two obstacles prevent households from earning more than a tiny amount from stock dividends. First, households hold such a small share of available shares. Secondly, despite talk of companies paying more dividends, the share of net income that corporations return to shareholders, i.e., the “dividend payout ratio,” has barely risen from its level of a decade ago, from 31% to 34% (see chart below).

Source: https://www.jpx.co.jp/english/markets/statistics-equities/examination/vk0khi000001sxp5-att/e-bunpu2025.pdf

Put these two factors together, and Japanese household dividend income is a tiny sliver of national income, i.e., less than 0.5% of GDP (see again the chart before the one just above).

NISA might lure a lot more investors if companies paid higher dividends and people could invest in more high-dividend funds. In recent years, activist investors have pushed hard for companies that cannot use their cash pile to return it to investors. Few focus on improving company operations. Most focus on extracting fallow wealth.

Takaichi has disparaged this as paying too much attention to shareholders rather than investing it in new plant and equipment. Really? Should steelmakers and auto companies be expanding capacity when steel sales at home and abroad are down by a third from 20 years ago and auto sales are down 20%. For the economy as a whole, it makes much more sense to reallocate capital to companies who can use it better rather than either hoard it or invest it in low-return projects. In fact, one of the major functions of the secondary market since stock markets began is such reallocation.

As I detailed in this post, one of the biggest reasons for Japan’s low growth is that it suffers from too little reallocation of capital and labor. Unfortunately, Takaichi is backpedaling on the reforms needed to improve reallocation. Nicholas Benes, head of the Board Director Training Institute of Japan (BDTI), points out that, “Clearly led by the LDP, the MOJ [Ministry of Justice] has floated a number of amendments to Japan’s Companies Act…which by open admission are intended to lessen the ‘pressure’ from activism that Japanese companies are now feeling.” Benes says these moves by themselves “might not make a big difference” but, when combined with proposals by the Ministry of Economy, Trade, and Industry (METI)’s “recent re-interpretation of its Takeover guidelines, they create the impression that Japan is backsliding on reform.” For details of Benes’ analysis, see his LinkedIn post.

This backpedaling is more likely to increase the Himalaya of retained earnings than spur new investment. By favoring old incumbent firms regarding wages and governance, she’s unwittingly strengthening the very flaw she wants to remedy.

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Response To Readers: Regarding “The Myth Of Yen Intervention And US Interest Rates”

Richard Katz — Fri, 14 Aug 2026 21:58:12 GMT

Source: Wall Street Journal Note: The percentages show the yield on the 10-year Treasury bond on the date(s) of Japan’s currency intervention The dotted lines are two “standard deviations” from the average over the past three years, which was 4.3%. Two standards deviations is the range within which 95% of the data points lie.

FLASH: Nikkei quotes me regarding Prime Minister Sanae Takaichi’s faulty ¥370 trillion plan to boost growth and national security: Richard Katz, author of “The Contest for Japan’s Economic Future,” calls the strategy a “throwback to the industrial policy of the 1950s and 1960s.” Japan’s more recent record, including Japan Display, Elpida Memory and the Cool Japan Fund, offers little encouragement. He says the deeper problem is not developing technologies but turning them into viable businesses: “The country suffers from the notorious ‘valley of death’ between the laboratory and commercialization.”

I wrote about this issue in two previous posts: this one and this one.

______________________________________________

One of the rewards of publishing a blog is the dialogue I enjoy with readers. I’m a firm believer that truth emerges from dialogue. A few readers pushed back on my last post, in which I claimed it was a myth that the US intervened to support the yen to stave off a spike in US interest rates. A further look at the data and Federal Reserve studies confirms that Japan’s holdings of US Treasury bonds are too small for its interventions to be impactful on US interest rates. If the Federal Reserve knows this, it’s hard to believe that veteran trader Scott Bessent does not.

Several readers contended that by selling US Treasury bonds to bolster the yen, Tokyo pushes US interest rates higher. The chart at the top of the blog refutes this. Tokyo has intervened six times since 2022 to try to arrest or reverse the yen’s depreciation. The only time that intervention was followed by a significant hike in the yield on ten-year Treasury bonds was the first time: on September 22, 2022. But, as the chart shows, this came at a time when US rates were already recovering from their Covid-era lows, and the rise simply continued the prior trend. In fact, that rise peaked a month later, when Tokyo intervened again. Following the next three interventions—October 21-24, 2022; April 29-May 1, 2024; and July 11-12, 2024—the T-Bond yield actually fell. And after the two interventions this year, the yield barely moved.

I think the interventions were essentially irrelevant to US interest rates. Regardless of what has happened with the yen’s value, currency interventions, or the volume of Japanese holdings of federal debt, the T-bond yield has spent 95% of the time over the past three years fluctuating between 3.8% and 4.8% (see the dotted horizontal lines in the chart at the top). As I write this, it’s at 4.7%. Other factors far outweigh any impact the Japanese factors might have had, e.g., oil prices, the Iran war, inflation, unemployment, retail sales, etc. In fact, if I did not indicate the intervention dates in the chart at the top, it would be impossible to tell from the bond yield data points when the interventions occurred.

If we consider that the six interventions beginning in 2022, which added up to an staggering $300 billion, still amounted to only 0.75% of total federal debt today, we can see why they have had so little impact on US rates.

Federal Reserve Assessments

One reader said it was wrong to judge Japan’s impact by its small share (2.7%) of outstanding US Treasury bonds. Instead, we should judge it by the size of the currency intervention relative to the size of that day’s overall Treasury debt transactions. That may work for the immediate period of intervention, but it is not a good predictor of the impact over several months. It is not used in studies by the Federal Reserve and private firms, and my approach aligns with theirs.

A 2025 study by the Kansas City Federal Reserve suggested that a month-to-month sale of 1.9% of all (not just Japanese) foreign holdings of US Treasuries—which would amount to $173 billion these days—would initially raise US interest rates by 57 “basis points,” i.e., 0.57%. By that standard, Japan’s sole intervention in April of this year, a total of $72 billion, would initially raise US bond rates by just 0.24%, assuming no change in any other factor, e.g., oil prices, US inflation, or unemployment. The latter number—0.24%—matches typical daily fluctuations in US bond rates since the beginning of 2024.

Of course, the smaller the foreign share of outstanding federal debt, the bigger the foreign decline has to be to have the same impact on bond yields.

The reason that I emphasized “initially” is that a 2012 Federal Reserve study found that, when governments draw down their official reserves, e.g., via currency intervention, private holdings often rise to fill the gap albeit at a bit higher interest rate. The study estimated that, if foreign governments reduced their purchases of US debt by a huge 3.3% of total federal debt in that year, yields on five-year Treasury bonds would rise by 50 to 60 basis points (0.5% to 0.6%). It added, “But once we allow foreign private investors to react to the yield change induced by the shock to foreign official inflows, the long-run effect is about 20 basis points [0.2%].” The 3.3% estimate here is much larger than the 1.9% in the 2025 study, partly because results differ in such complex situations and because conditions in 2025 differ from those in 2012.

Intervention, Trade, and the $500 Billion Trump Package

In short, the size of Japanese interventions is simply too small to set off alarm bells in the US Treasury Department. I think the Trump administration is more concerned about the impact of weak yen on trade, and fears that currency weakness might spread to other countries in Asia, especially China.

I think it’s also worried about Japan’s ability to fund the $500 billion worth of investment in the US that Trump got Japan to agree to under the pressure of tariffs. The weaker the yen, the more expensive it is to finance that $500 billion. So far, the two governments have agreed on just $109 billion worth of projects, and the financing for them has been hard to come by. Less than $5 billion so far. It would not surprise me if Treasury Secretary Bessent told Tokyo: we helped you with the yen; now show us the money.

All Foreign Holdings and US Interest Rates

Another reader suggested that when Japan sells US Treasuries, it could signal to other countries that Tokyo knows something they don’t, and they might take that as a signal to sell. So, let’s check the data on this.

The chart below shows monthly changes since January 2022 in the total value of US government debt held by the Japanese government and foreign private investors. It then examines how these changes affect the ups and downs of US 10-year Treasury yields. The trendline shows that gyrations in Japanese holdings have virtually no impact on interest rates.

Source: https://fred.stlouisfed.org/series/FORLTTREASPOS42609 for Japanese holdings; Wall Street Journal for yield

If we look at all foreign holdings, which are nine times as large as Japanese holdings alone, the trendline suggests a bit more influence. However, that influence is so small—as shown by how widely the data points scatter from the trendline—that other factors can easily overwhelm it.

(One caveat about this data for those delving deeply into the weeds, as one reader did. I don’t have monthly figures on sales and purchases of US federal debt by all foreign public and private investors. What I do have is the change in the value. But that change comes only partly from new purchases and sales. It also includes changes in the value of the outstanding bonds they already own. If interest rates go up, for example, the value of a bond paying $50 per year in interest goes down.)

Foreign Investors Vs. America’s Private Sector

Those who raise alarm bells about Japanese and/or other foreigners buying a smaller share of US Treasuries forget that private American investors are making up much of the difference. Private US investors now own about 42% of all federal debt. That’s 75% more than foreign governments and foreign private investors combined. Traditionally, American individuals, banks, pensions, bond funds, and the like owned much more than foreign governments and investors. Only between 2004 and 2019 did foreigners own more federal debt than American investors (see chart below).

Source: https://fred.stlouisfed.org/

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Myth: US Intervened to Support Yen Out Of Fears About US Interest Rates

Richard Katz — Wed, 12 Aug 2026 23:51:51 GMT

Source: https://fred.stlouisfed.org/series/GFDEBTN, https://fred.stlouisfed.org/series/FDHBFIN# , https://fred.stlouisfed.org/series/FORLTTREASPOS42609

Somehow, it’s become the consensus view that the US intervened to support the yen in order to prevent a spike in American interest rates. To my mind, this view is so much at variance with both the evidence and economic logic that it’s hard for me to fathom how it became so widely adopted, even among people whose views I generally respect. It’s also become consensus that if the Bank of Japan (BOJ) raised the overnight rate, the yen would appreciate. That, too, is belied by the data. I discussed the second issue in yesterday’s memo for paid subscribers and will add some additional evidence here.

Yen Share of US Debt Too Small; Plus Yen Holdings Have Declined 20% Since 2020 With No Impact

All of the articles and investment newsletters arguing that US Treasury Secretary Scott Bessent acted due to fears about US interest rates cite the fact that Japan (both private investors and the government) is the biggest foreign holder of US Treasury debt. True enough. What they omit is that, even so, Japan’s holdings now amount to only 2.7% of all Treasury debt. Moreover, this is down from a peak of 7.7% two decades ago (see chart at the top).

These commentaries also note that Japanese investors hold more than $1 trillion in Treasury bonds, which may seem like an impressive figure. But total outstanding Treasury bonds now amount to almost $40 trillion (see chart below). With that knowledge, $1 trillion becomes a lot less impressive.

The bottom line is that Japan’s holdings are simply too small to have much impact even if Japanese investors drew down their holdings. We know this is true because Japanese investors have already drawn down their holdings by 16% since 2021, with no noticeable impact on US interest rates (see chart below).

If Bessent Is Worried, Why Is He Urging Japan to Hike Interest Rates?

A related myth was put forth earlier in the year: that rising interest rates in Japan were bound to trigger a spike in US interest rates. The logic was the following: because the gap in interest rates between the US and Japan was so high for so long, lots of investors spent years borrowing money at ultra-low rates in Japan in order to invest at higher rates in the US. This was called the “carry trade,” and, supposedly, it kept US rates from rising. Once the gap in interest rates narrowed, it was argued, then the money would stop flowing in from Japan, and US rates would spike. I refuted that contention back in a post in February on the same grounds as today: that Japan’s share of American public and private debt was too small to make a significant difference, and that the carry trade had already shrunk a great deal.

But that raises a curious conundrum about the commentators’ logic regarding Bessent’s motivations. The Trump administration is determined to keep US rates down. Trump is still trying to fire a member of the Federal Reserve Board based on false allegations, in order to create a majority in favor of low rates. If Bessent were worried that higher rates in Japan would lead to higher rates in the US, why, then, has he repeatedly urged the Takaichi administration and the BOJ to raise interest rates, a tack he began almost as soon as the Takaichi came into office on a program of keeping rates low? I wrote about this issue in a memo this May. Bessent raised the issue again just after the latest yen intervention, albeit obliquely: saying that the intervention won’t work unless followed by macroeconomic policy moves (read: higher interest rates).

Here’s my view of what’s driving Bessent. Trump wants a weak dollar and believes that other countries are cheating the US by keeping their currencies cheap. That, Trump argues, is why the US runs a trade deficit. Bessent believes—falsely in my view—that Tokyo could strengthen the yen by raising interest rates, including the overnight policy rate of the BOJ. But why would he push this so strongly if he believed that higher rates in Japan would raise rates in the US? On the contrary, I believe Bessent believes he can fulfill both of Trump’s priorities—making Asian currencies stronger and keeping US rates low—via the same instrument: raising Japanese overnight rates.

Higher Rates In Japan Don’t Raise Rates in the US

The fact of the matter is that, because Japanese holdings of US debt are so small, higher rates in Japan do not lead to higher rates in the US. On the contrary, despite a steady rise in Japanese 10-year government bonds (JGBs) since January 2024, the interest rate on ten-year T-bonds has traded within a very narrow range during that period: mostly between 4.0% and 4.5% (see the chart below).

Source: WSJ

For further details on why neither a hike in Japanese rates nor a decline in Japanese holdings of US debt will make a significant impact on US interest rates, see this past blog posting and this one.

Higher Interest Rates Have Not Boosted Yen in Last Couple Years

The consensus view is that if only the BOJ raised interest rates, the yen would strengthen. I disagree. First, let’s note that due to the rise in Japanese long-term rates, the gap between US and Japanese rates has more than halved (see chart below).

And yes, in the past, a narrower rate gap usually led to a stronger yen, but that has not been true ever since early 2025. On the contrary, even as the rate gap narrowed, the yen got weaker for reasons I discussed in yesterday’s post (see the chart below).

Instead of comparing the rate gap on ten-year government bonds, some commentators say we need to compare the real (i.e., after inflation) gap between the Japanese and American overnight central bank rates. I do that in the chart below. The result is similar to what we saw regarding the ten-year bonds. There was a correlation between a narrower rate gap and a stronger yen during 2021-2023. Beginning in 2024, the yen gyrated even as the rate gap barely moved. And, since late 2025, the yen has weakened even though the BOJ has raised the overnight rate. Whatever impact a narrower rate gap may have, it is being overwhelmed by other factors. So, why should anyone believe that another couple hikes by the BOJ would automatically boost the yen by a meaningful amount, if at all?

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Paid subscribers will be eligible for my new memos, an addition to these regular posts. Beyond that, if you feel you’ve gained insight from this blog, ever restacked it, if you ever subscribed to my previous publication, The Oriental Economist Report, and certainly, if you or your firm have gained insights that helped guide your investments, please support the blog with a subscription or by “buying me a cup of coffee.” You can buy a cup or two on a one-time basis, or once a year, or once a month.

Yen Has Already Given Up Half Of Its Gains From Joint US-Japan Intervention

Richard Katz — Wed, 12 Aug 2026 02:36:28 GMT

Source: Author calculation based on data from The Wall Street Journal

Key Points:

Yen has given up half the gain in value caused by the joint US-Japan currency intervention and is now around ¥159/$
If the pattern after past interventions continues, the market is likely to keep testing even weaker rates
Would a hike in interest rates by the Bank of Japan change the yen situation?
Many observers fear that Prime Minister Takaichi’s expansive fiscal policy is causing, or will cause, interest rates to shoot up
Are these observers right?

The memo below is available only to paid subscribers. If you only want this Memo, you can subscribe for a month for $5, get the Memo, and then cancel. You will also receive any other memos I issue over the next 30 days. Journalists desiring to cite this piece can write to me at rbkatz@rbkatz.com to obtain the full text. Free subscribers will continue to get the full text of my regular Posts.

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CNN Interviews Me On Joint US-Japan Intervention To Strengthen the Yen

Richard Katz — Tue, 04 Aug 2026 00:08:35 GMT

CNN interviewed me today about the joint US-Japan intervention to strengthen the yen. We discussed why Washington did this, whether it will work, and fears that financial turmoil in Tokyo could raise interest rates in the US.

To see the interview, when you get to the photo of the Japanese currency toward the bottom with the CNN crawl line on the bottom and the arrow in the middle, click on the arrow and that will call up the video.

Bank of Japan (BOJ) data indicated that Tokyo may have sold almost $59 billion of US dollars to buy yen when it intervened in New York markets on Thursday, before Friday’s confirmed joint intervention with Washington. The US has not confirmed the size of its intervention, but a Reuters photograph of a notepad in front of Bessent during a cabinet meeting on Friday read: “To Do: Buy Japanese Yen $5-10 bil.” (see below)

Most experts cited in the press doubted that this move will be effective for more than a short while. Its impact may last longer than Japan’s sole intervention because it will put some fear into the hearts of traders. But it does not address the fundamentals that have weakened the yen by a third since early 2021. These include rising import prices for food and energy and the diminished ability of Japan’s exports to sell their wares without a weak yen, which lowers their export prices.

Many of the experts cited in the press focused on only one fundamental: the gap between American and Japanese rates. They argue that if the Bank of Japan (BOJ) hikes rates, that will do a lot to boost the yen. Scott Bessent also buys this theory and has been vocal about his “expectation” that the BOJ will hike rates and his fear that it is falling behind the curve. It is notable that the intervention occurred hours after the BOJ decided on Friday not to lift overnight rates from 1% to 1.25%.

Contrary to these views, the data says that higher rates in Japan will not be enough to reverse the yen’s fall very much. While there was a strong correlation from 2021 to early 2024, that correlation ended in the spring of 2025. Even though the gap between American and Japanese 10-year government bonds has halved from 4% in October 2024 to less than 2% today, the yen has weakened further over the same period: from ¥150/$ to ¥164 just prior to the intervention (see below).

For previous posts and memos discussing the yen, interest rates in Japan, and Bessent’s desires on the yen and interest rates, and impact on the US, click on the following below the image. To see the interview, click the arrow in the image below:

Signal Vs. Noise On JGBs And Yen

Will BOJ Rate Hike to 1% Be Tipping Point, Or Just A Step In Gradual Normalization?

Bessent Hints BOJ Should Raise Rates to Boost Yen

Beijing Tells Private Banks to Trim Holdings Of US Government Debt

Decline of Yen “Carry Trade” Won’t Destabilize US Finances

Bessent Falsely Blames Japan For Stock Market Revolt Over Trump Threats Over Greenland

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¥370 Trillion Won’t Yield Miraculous GDP Boost If Companies Can't Compete

Richard Katz — Sat, 01 Aug 2026 21:36:15 GMT

Source: https://www.nomuraconnects.com/focused-thinking-posts/investing-for-a-strong-and-prosperous-japan/ Note: These eleven projects out of 56 account for two-thirds of the ¥370 trillion in investments and 80% of the ¥3,000 trillion projected economic benefits. The numbers in parentheses are the claims for how much GDP will grow for each yen of new investment over the latter’s lifetime.

Key Points:

Being the most efficient producer of a car, and packing it with futuristic technologies, won’t help if no one wants to buy your car
Takaichi’s ¥370 trillion growth plan promises miraculous economic paybacks, e.g., ¥8 trillion invested in autonomous driving will supposedly boost GDP 23 times the amount invested
Similar promises in AI, AI-related chips and AI-related healthcare
Given Japan’s poor track record in software and “big data,” is this realistic?
How come Japan’s performance in advanced fields doesn’t match the huge amounts invested in them?

The memo below is available only to paid subscribers. If you only want this one, you can subscribe for a month for $5, get the Memo, and then cancel. You will also receive any other memos I issue over the next 30 days. Journalists desiring to cite this piece can write to me at rbkatz@rbkatz.com to obtain the full text. Free subscribers will continue to get the full text of my regular Posts.

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Takaichi Claims Her Investment Plan Will Yield 1.4% GDP Growth, Part 1

Richard Katz — Thu, 30 Jul 2026 15:36:45 GMT

Source: https://asia.nikkei.com/politics/takaichi-s-new-economic-blueprint-for-japan-4-things-to-know and https://www.nomuraconnects.com/focused-thinking-posts/investing-for-a-strong-and-prosperous-japan/ Note: Figures for extra business investment and extra GDP during 2026-2040 are based on the favorable “Scenario 3” put out by the the Takaichi investment plan

Key Points:

Takaichi claims ¥370 trillion ($2.7 trillion) of government-directed investment will double real GDP growth from 0.7% per year in the last decade to 1.4% going through 2040
Claims “knock-on economic benefits” up to 20 times the amount of investment in sectors like AI, semiconductors, health, entertainment, wireless and food technology
Claims overall 8-fold expansion of GDP for every yen invested
Will companies kick in the money she proposes?
If they do, will that boost GDP as much as she says?
How realistic are her claims for the magnitude of knock-on benefits?
What Japan needs is not more company investment but smarter investment

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Japan’s “Make China Great Again” Energy Policy in Southeast Asia

Richard Katz — Thu, 23 Jul 2026 15:19:40 GMT

Source: https://ember-energy.org/data/electricity-data-explorer/?data=capacity&temporal_res=yearly

It is one of Japan’s most short-sighted policies: the attempt to keep Southeast Asian countries hooked on fossil fuels, especially natural gas. Unbelievably, it’s being done in the name of energy security at a time when events like the ongoing Hormuz blocking, not to mention plunging costs of solar and wind power, are luring countries into renewables.

In March, the first month of Trump’s war on Iran, China’s solar exports reached a record 68 gigawatts (GW), double the previous month. Fifty countries set records for Chinese solar imports, 60% of which were bought by Asian countries (see chart below).

Source: https://ember-energy.org/latest-updates/chinese-solar-exports-double-in-a-month-to-hit-record-high-amid-energy-crisis/

The reality is that, by trying to obstruct this shift and abstaining from exporting solar and wind technology, Japan has reduced security. It has created a vacuum that China has filled. Not even the ongoing Hormuz blockage has led policymakers to shed their blinders. Instead, Japan is only trying to diversify its sources of oil, coal, and LNG, and trying to increase the share of sources where it has direct control via its investment. In a long article criticizing the government’s stance, Nikkei quoted Japan’s ambassador for the promotion of the falsely named Asia Zero Emissions Community (AZEC) as saying, “AZEC’s fundamental aim is to break away from an exclusive focus on renewables.” By contrast, Korea has come up with a plan to triple renewable electricity.

I don’t have any problem with China helping emerging countries expand renewables. On the contrary, it’s the best option for both these countries’ prosperity and action on climate change. But I am opposed to countries being overly dependent on one source, especially one that has a history of using its dominance in certain products as a political cudgel, e.g., in the cases of Japan, Australia, and Lithuania.

Japan will have no more luck than King Canute in commanding the waves of renewables to stand still. Consider Vietnam, Thailand, and Indonesia, the recipients of 90% of Japan’s energy investments during 2000-2020, and members of the Japan-created AZEC. Vietnam raised the solar and wind share of electricity from virtually zero in 2018 to 28% last year while Thailand raised its share to 14% from less than 2% in 2012. Nine members of the Association of South East Asian Nations (ASEAN), except for Indonesia—the nine have a population of 400 million—have raised the solar and wind share to 18%. And Australia, another AZEC member, has raised it to half (see chart at the top).

While solar and wind supply just 1% of electricity at present, Indonesia has issued a plan to do so in the future. Huge price cuts in solar, wind, and batteries have now made renewable energy by far the least expensive electricity. In fact, recent national plans published by Indonesia, Malaysia, Singapore, Vietnam and Thailand would more than double ASEAN’s renewable capacity by 2030, according to the International Energy Agency. All renewables (including hydro, biofuels and geothermal) provided 32% of all electricity in ASEAN in 2025. In October 2025, ASEAN agreed to raise this to 45% by 2030.

In the absence of enough other players, these nations are turning to China, not only as a source of solar inputs but also for factories on their soil. China has invested heavily in Southeast Asian production hubs, often as a way of bypassing US tariffs (see chart below).

Source: https://rhg.com/research/solar-manufacturing-in-asia-at-a-crossroads/

EU, UK, and Pre-Trump USA Create Positive Alternative

In contrast to Japan, the US, UK, and EU established the Just Energy Transition Partnerships (JETP) in 2021 to help developing countries. Both decommissioning of coal plants and building of renewables are part of the package. Donald Trump pulled out soon after his return to power in 2025, and Japan was never a member.

So far, JETP has committed about $50 billion in public and private money, beginning with South Africa, Senegal, Indonesia and Vietnam. A 2022 commitment of $20 billion to Indonesia represents the largest JETP package to date. Last year, it announced a $15 billion pledge for Vietnam.

JETP is not without its problems, but its efforts can reduce over-reliance on China. Other countries, like India, are also making big efforts to become global solar suppliers, and those efforts should be helped.

A Game-Changing Economic Milestone Makes Japan’s Attempt Even More Futile

I’ll never forget it. Michael Caine was telling Johnny Carson that his father was so poor, he could never afford to buy a radio; instead, he rented one. And, over the years, he paid far more in rentals than it would have cost if only he’d been able to save that much. “Poor people cannot afford cheap goods,” Caine explained.

He could have been talking about solar energy. Until now. Over their lifetime, solar and wind are far cheaper than coal and oil. As early as 2021, in countries with half the world’s population, it was already cheaper to build and operate new solar and wind power plants than to operate existing coal and oil plants. But that’s over the lifetime of the plants. However, like Caine’s radio, the upfront cost of building solar and wind plants, and the accompanying battery storage, was prohibitive for poor countries. That’s no longer the case. It now costs less to build a new solar or wind plant than a new gas or coal plant. When one includes the necessary battery storage, that will be the case by 2030 (see chart below).

Source: https://ember-energy.org/app/uploads/2026/04/The-electric-fast-track-for-emerging-markets-PDF-1.pdf

Once the upfront costs are paid, no one must pay the sun to shine or the wind to blow. The only financial burden is marginal maintenance and repair costs. Nor can wars blockade the sun as they block oil and gas.

For countries that need to expand overall electric capacity, solar and wind are no-brainers. And ASEAN needs to expand its overall electricity capacity fivefold to equal the current per capita level in the OECD. No wonder that countries are increasingly turning to solar and wind for new capacity (see chart below).

Source: https://ember-energy.org/data/electricity-data-explorer/?data=capacity&temporal_res=yearly Note: The percentage label shows the portion of the total increase in per capita electricity that comes from solar and wind, e.g., 61% in Vietnam

So far, Indonesia has remained the exception. Not only is its per capita electric capacity very low and growing slowly, but the portion coming from solar and wind is just 1%. The plunge in upfront costs and the use of battery capacity changes all that. EMBER compares the situation to the difference between the cost of providing everyone with landlines vs. cell phones. There’s a huge cost to construct physical wires to everyone, especially those who live tens or hundreds of miles from a grid, or who live on one of Indonesia’s 17,000 islands. On the other hand, just as it is far less costly to put cell phone towers throughout the land, it costs so much less to build localized solar or wind facilities complete with battery storage in areas too far from the grid.

Fortunately, ASEAN is blessed with around 20 terawatts of solar and wind potential, 55 times its current total electric capacity.

Tokyo: “Natural Gas For Decades To Come”

Japan has exhibited an ideological adherence to fossil fuels, one impervious to any contrary evidence.

Until a few years ago, Japan was one of the biggest financiers and builders of coal-fired electric power plants in developing countries. When international and domestic opposition grew too hot, Japan switched to natural gas under the rubric of fighting carbon emissions by sponsoring a “coal to gas” transition.

In 2023, in a marvel of false advertising, Tokyo created the Asia Zero Emissions Community (AZEC). Of the 150 Memoranda of Understanding (MOUs) signed with ASEAN nations from AZEC’s inception until mid-2025, 35% supported fossil fuel technologies, while only 7% focused explicitly on wind and solar. Sending billions or tens of billions on a fossil fuel plant locks a country into that fuel for decades. More mentioned solar and wind in new MOUs signed in October 2025, but that doesn’t tell us how this translates into investment dollars, since only one MOU has actually been implemented so far.

What we do know is that, during 2000-2020, of Japan’s $67 billion investment in electricity projects in ASEAN—90% of that in Indonesia, Thailand, and Vietnam—only 4% was devoted to solar, wind, geothermal, and other renewables. Half consisted of fossil projects (see chart below).

Source: www.azectracker.org/#w-tabs-0-data-w-pane-0

At a 2025 conference of LNG producers and consumers from 30 countries, Minister of Economy, Trade and Industry (METI) Yoji Auto declared, “We believe that natural gas and LNG will continue to be an important energy source even after carbon neutrality. Japan’s natural gas emissions are low… and decarbonization is possible by utilizing CCS (carbon dioxide capture and storage) and hydrogen.” He referred to LNG as a “driver of clean economic growth” even though it’s a major source of carbon emissions.

Hence, a big part of the AZEC MOUs is investment in measures aimed at prolonging fossil use such as co-firing with ammonia and hydrogen as well as CCS. But “green hydrogen” takes two megawatts of electricity to produce for every megawatt it yields when used in co-firing. The situation is similar with ammonia. COS costs far more than renewables. This is what I mean by imperviousness to evidence.

Why?

Some people argue that Japan is pursuing this policy mainly because it boosts the exports and profits of its own heavy machinery and natural gas companies. But it’s not that simple. The state and fossil-allied companies form an ideological community. In stone-killing-two-birds fashion, the same policy can boost company sales and help the state pursue what METI sees as its interests.

For example, a recent report by IEEFA pointed out that Japan’s overseas fossil fuel investment strategy focuses on increasing its “fossil fuel self-development ratio”, i.e. the share of imported oil and gas from Japanese-owned upstream assets. Japan aims to raise this ratio from 37% in 2023 to over 50% by 2030 and 60% by 2040. Consequently, between 2013 and 2023, Japanese public financial institutions invested $93 billion in overseas oil and gas projects, despite having previously committed to end fossil-fuel financing by the end of 2022. At the 2023 Group of Seven meeting, Tokyo extracted permission to invest in new gas-burning power plants at home and abroad if they replace coal.

In addition, Japanese policymakers argue that promoting solar in other countries just strengthens China’s influence. Tatsuo Terazawa, a former Vice Minister of METI for International Affairs who now chairs the METI-affiliated Institute for Energy Economics Japan (IEEJ), wrote in 2023, “Decarbonization’s push for solar, wind power, batteries, and BEVs strengthens China’s dominance in the supply chain...It would take decades before we can stop using fossil fuels.”

In the face of that fear and China’s low prices for solar products, Japan’s market share in solar inputs fell from 25% or so in 2013 to less than 1% today. Its share in storage batteries fell from 27% to 5%.

I had hoped that the Hormuz crisis would provoke at least some significant change but talks with people in Tokyo have dashed that hope. Even companies that favor more renewables have kept a low profile so far. Hopefully, reality will eventually make an impact, but it could be quite a long time.

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Power Wars: Japan’s Fossil Empire Strikes Back

Richard Katz — Sun, 19 Jul 2026 16:08:38 GMT

Source: https://ember-energy.org/data/electricity-data-explorer/

A decade ago, Japan was a global leader in solar power. Solar accounted for a higher share of electricity in Japan than in the US, the EU, or China. Today, it is becoming a laggard as solar growth flattens in Japan (see chart above), even as solar and wind soar elsewhere. Wind never took off in Japan because its geography is less suitable for onshore wind, and offshore wined, while abundant is still too expensive.

The situation is going to get worse since Prime Minister Sanae Takaichi tipped the scales against solar and toward even more fossil fuels. She succeeded in getting the Diet to cut off all subsidies for all utility-scale solar and all ground-based solar over 10 Kilowatts (KW) as of next April. At the same time, the government not only continues to provide mass subsidies to fossil fuels, far more than ever went to renewables, but even adds more subsidies to measures aimed at prolonging the use of coal and LNG. These include ammonia and hydrogen co-firing and carbon capture technology, neither of which make any economic sense. If the government allowed a level playing field between renewables and fossils market forces would lead renewables to grow much faster. Instead, the state has intervened against the market to prevent that outcome. For more details on Takaichi’s war on utility-scale solar, see my post here.

The irony is that Japan was a pioneer in solar energy and electric cars back in the 1970s. When the 1973-74 oil shock made oil both too expensive and too subject to political crises, Japan’s Ministry of Economy, Trade and Industry (METI) launched the “Sunshine Project” to promote solar energy and electric vehicles to improve energy security by reducing dependence on oil. Only much later did concerns about climate change come on the scene. For more on this history, see my previous post here.

Before examining Japan’s situation, let’s first look at the global picture for context.

Solar And Wind Soar Worldwide; Fossil Share Falling

Around the globe, the share of electricity generation coming from solar and wind is soaring at an incredibly rapid rate. Twenty years ago, their combined share was less than 1% of all electricity generation. As of last year, their share had multiplied to more than 19% (see chart below). This occurred at a time when total global electricity generation had increased by almost 70%. So, in terawatt-hours (TWH), electricity generated by solar and wind in 2025 is 40 times the level back in 2006.

Source: https://files.ember-energy.org/public-downloads/generation/outputs/release_generation_yearly_global.csv

In the six years since 2019, solar power has increased by an average of 21% per year. If that rate continues, solar TWH will double every 3.5 years. Wind has increased by 11% a year since 2019. By contrast, total electricity increased by just 3% per year. That’s why the solar and wind share of electricity keeps increasing so rapidly.

Even better, the yearly percentage increase has been accelerating. 2017 was the first year the wind/solar share of total electricity increased by more than 1 percentage point. Last year, the share increased by more than 2 percentage points (see chart below).

Conversely, ever since 2012, the fossil fuel share of electricity has decreased every year except one and appears to be declining faster than before (see chart below).

In 2025, for the first time other than in a recession or pandemic, fossil-based electricity generation (TWH) actually fell on a global basis. The drop was just 0.3%, but it’s a start. Conversely, total renewables (including hydro) increased by 9% and contributed more than the total increase in electricity since they more than made up for the reduction in fossil-based power.

The nuclear share, by the way, has plunged from 15% in 2006 to 9% last year.

Rapid Cost Cuts Help Poor and Middle-Income Countries Leapfrog Over Fossil Phase

One of the big fears in the past was that, as poor countries electrified, it would add a huge amount to global carbon emissions. But the plunging cost of renewables has made them far more affordable than anyone foresaw. Since 2010, the cost of megasolar has fallen by 89%, onshore wind by 71%, offshore wind by 63%As a result, IRENA reports that renewables are now the cheapest source of new electricity in most markets. In 2025, more than 90% of newly commissioned, utility-scale capacity delivered power at a lower cost than the cheapest, newly installed fossil-fuel-based alternative.” Moreover, the cost of battery storage has plunged by 93%, making it possible for renewables to become a viable source of baseload power even when the sun isn’t shining and the wind isn’t blowing.

As a result, in the past half-dozen years or so, an increasing number of poor countries have rapidly expanded renewables to leapfrog over coal, oil, and gas as they build new electric capacity. In 2025, the solar share of electricity generation surpassed 5% in 51 countries, with 60% of the entire global population. And in 29 countries, home to 30% of the world’s population, the solar share has surpassed 10% (see chart below).

There are 52 countries where solar and wind combined supply more than 10% of electricity, and 32 countries where they supply more than 20%, which comprise 60% and 30% of the global population, respectively.

Consider India, a nation of 1.5 billion, comprising almost one in five people on the planet. From 2010 to 2025, its per capita GDP (in constant 2021 PPP dollars) doubled from $5,000 to $10,000. To accomplish this, India had to double its consumption of electricity. I remember taking a bus from New Delhi to the Taj Mahal a few decades ago. There was a lot of development, from farm irrigation to small manufacturing, where I could see the electric lines on the road. Where the electric lines ended, so did the modernization.

Had India not been able to use more renewables, the impact on emissions would have been horrendous. Fortunately, the Total Installed Cost of new Solar Photovoltaic Plants in India—with installation cost accounting for the vast majority of the lifetime cost—plunged by 92% from a prohibitive $6,100 per KW of capacity in 2010 to just $500 in 2025. The lifetime cost of onshore wind fell by half during the same period. As a result, India was able to increase its reliance on wind and solar from just 2% in 2010 to almost 15% last year. Add in other renewables, like hydroelectric, and the share grew from 15% to 24%. Conversely, coal’s share has dropped from a peak of 76% a decade ago to 70% in 2025 and, in 2025, declined slightly in absolute terms.

Then there’s the even poorer Pakistan, a nation of 260 million. Its real per capita GDP grew from $4,200 in 2010 to $5,600 by 2025. This growth was fueled by an 80% hike in electricity consumption. And to accomplish that, Pakistan increased the wind and solar share of electricity from 2% to 24%, a stunning achievement. Conversely, the power generated by fossil fuels tumbled 17% from 81 TWH a decade ago to 67 in 2025.

Other poor countries that have been able to dramatically increase their reliance on solar and wind due to plunging costs include Morocco, Moldova, Vietnam, Sri Lanka, Uzbekistan, Cambodia, Kenya, El Salvador, Armenia, and South Africa. Together with India and Pakistan, these countries constitute 25% of the world’s population.

By 2030, forecasts the International Energy Agency (IEA), solar and wind comprise 30% of all electricity generation globally. If we include hydro, renewables will reach 43%.

Japan Loses Its Lead: Illusions of Fossils and Nukes

Japan, unfortunately, is moving in the opposite direction. Growth in solar power has greatly slowed in the past few years, both in absolute terms (TWH) and as a share of electricity generation (see chart below).

In the first years after the 2011 nuclear disaster, the subsidies put in place by the Democratic Party of Japan government—and maintained for a while by Liberal Democratic Party Prime Minister Shinzo Abe—led to a rapid rise in solar power. But a few years after Abe’s return to power, he cut back on the subsidies. The government wanted more solar power, but not so much as to threaten fossil-fuel and nuclear interests. The go-slow policy caused a steady deceleration. In early 2016, Japan added 12 gigawatts (GW) to the total capacity, but by this year, the yearly increment fell by two-thirds to less than 4 GW. In early 2017, the percentage increase in capacity was more than 20%. By this year, it was less than 4% (see chart below). Takaichi’s war on megasolar will slow growth even more.

Not only has Japan’s 2030 goal for emissions reduction been thrown away, but Japan is abandoning low-cost electricity for higher cost power. This belies Takaichi’s claim to be a pro-growth Prime Minister.

Source: https://ember-energy.org/data/wind-and-solar-capacity-data-explorer/

Myths and Reality On How Japan Turned From Leader to Laggard

Japan’s fossil lobby—fuel companies, utilities, makers of heavy machinery and autos, and METI—insists that this lag is not under Japan’s control. It is imposed by the combination of geographic conditions and the security threat of relying on China in the same way Europe relied on Russian gas. Flat land, they claim, is scarce, so many solar farms must be built on mountainsides, which not only raises costs but also triggers landslides that provoke public resistance.

This is sophistry, as I detailed in this post. The biggest obstacle to more solar power is land use laws that prevent even abandoned farmland from being used for nonfarm purposes. As of 2020, there was already enough abandoned farmland to generate 112 GW of renewable capacity, a volume equal to a third of Japan’s total electric capacity in that year. By 2030, says the Agriculture Ministry, abandoned plots could triple to 30% of all farmland, as the number of farmers halves. Building solar farms on flat land rather than on mountainsides is both cheaper and safer. When I raised this issue with a government official, he replied that farmland cannot be used because Japan lacks food self-sufficiency. But I don’t believe abandoned land produces any food. Taro Kono, a former contender for Prime Minister, has repeatedly complained that land-use laws impede renewables.

Takaichi claims solar is unsafe because it makes Japan dependent on China. That’s like saying that Japan should shut down its auto industry rather than import rare earths from China. Instead, Japan helped develop other sources of rare earths. India has become the world’s third-largest generator of solar power and a major producer and exporter of solar modules, yet it still relies on China for upstream components. So, why not partner with other rich countries to help India develop further? Initially, these panels might cost more, but that is less costly than sticking to coal and gas. Finally, there’s a big difference between relying on Russia for oil continually and making a one-time purchase from China. Besides, if Japan wants rooftop solar, as Takaichi does, Japan must get affordable panels from somewhere.

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Signal Vs. Noise On JGBs And Yen

Richard Katz — Fri, 10 Jul 2026 01:41:18 GMT

Source: https://www.yahoo.com/entertainment/neil-degrasse-tyson-uses-dog-prove-climate-change-133600780.html Minute: 102-124

Key Points:

Signal vs. noise in JGB and yen markets
Some market players and policymakers see bond market revolting against Takaichi’s expansionary fiscal program via rate hikes
Is it true?
Varying explanations for JGBs moves
Market sees yen moving to ¥165 even if it’s undervalued
Contesting models to forecast the yen

The memo below is available only to paid subscribers. Free subscribers can get instant access to the full text of this and all future Memos by subscribing for $50 per year. If you only want this Memo, you can subscribe for a month for $5, get the Memo, and then cancel. You will also receive any other memos I put out over the coming 30 days. Journalists desiring to cite this piece can write to me at rbkatz@rbkatz.com to obtain the full text. Free subscribers will continue to get the full text of my regular Posts.

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Surprise CEO Switch At Toyota: How Will It Affect EV Strategy?

Richard Katz — Mon, 06 Jul 2026 21:29:27 GMT

Three years ago, Toyota CEO Akio Toyoda stepped down and was replaced by a dark-horse candidate, Koji Sato, who immediately called for a “BEV-first mindset.” If Sato really meant it, that would signal a stunning reversal of Toyoda’s tunnel-visioned focus on hybrids, his repeated denigration of EVs, and his joining with the Trump administration to end California’s right to impose restrictions on cars using gasoline.

It seems Sato did mean it. It was he who launched the upgrade of the BZ3X (for China) and BX4X (for the whole world) battery EVs (BEVs). It was this initiative that more than tripled EVs from 1.9% of all Toyota global sales in 2024 to more than 7.5% in May of this year, his course correction that lifted Toyota from limbo to the world’s 8th-largest manufacturer of EVs during January-May of this year. For the details of this remarkable change, see my last memo.

Sato could not accomplish all that he wanted. In 2023, he said he wanted ten new EV models and sales of 1.5 million BEVs by this year. There are just a few new models and BEV sales in May were at an annual rate of just 350,000. Still that’s 2.7 times the level of May 2025 (see chart).

Source: https://global.toyota/pages/global_toyota/company/profile/production-sales-figures/production_sales_figures_en_202604.xlsx

Now, however, after a reign of only three years, Sato was kicked upstairs in February, and replaced by Kenta Kon, an accounting expert who served for eight years as Toyoda’s personal secretary. Seiji Sugiura, a senior analyst at Tokai Tokyo Intelligence Laboratory, told Reuters. “Toyota keeps emphasizing, over and over, that Akio Toyoda wasn’t involved in the personnel decision…which means he probably was involved.”

On his way out, Sato warned against complacency. “Unless things change, we will not survive.” Automate.com commented, “Sato’s concerns stem largely from the speed at which Chinese automakers are advancing in electric vehicles, software integration, and cost-efficient manufacturing.”

Kon has been giving mixed messages. At his first press conference, not a word was heard about EVs. Instead, accounting-minded Kon stressed the need for production efficiencies to lower the breakeven level if sales of certain models decreased. He said nothing about a new product mix so that some models, like EVs, could grow as others shrank.

Moreover, Kon canceled the Lexus LF-ZC BEV, which was set to debut this year and showcase new battery and manufacturing technologies. On the other hand, Lexus said it would use the technologies planned for the LF-ZC in EV variants of some of its current hybrid models. It will take some time to see what Kon actually does.

Still, regardless of whatever Toyoda, and possibly Kon, may prefer, Toyota still faces the competitive pressures that helped trigger Sato’s EV-first posture. Let’s look at those pressures.

The Strategic Predicament: Customers Shift From ICE, To Hybrids, And Even More So To EVs

Global sales of conventional gasoline (internal combustion engine) autos peaked in 2017 at 80 million units (96% market share) and have since plunged to a mere 55 million (69%) in 2024).

Source: https://www.iea.org/data-and-statistics/charts/global-new-car-sales-by-powertrain-2000-2024

The only question was what would replace ICE cars. Toyota believed it would be hybrids and hydrogen fuel cell vehicles (FCEVs). Hybrids were a big winner while FCEVs were, and remain, money down the drain. Then, EVs came on the scene. While Nissan was first with its Leaf, it was Tesla and then China that turned EVs into a vehicle that legacy automakers felt compelled to adopt. By 2020, fully electric battery EVs (BEVs) surpassed hybrids (HEVs) and now outsell both HEVs and Plug-in hybrids (PHEVs) 2:1 (see chart below).

Source: https://www.iea.org/data-and-statistics/charts/global-new-car-sales-by-powertrain-2000-2024

While legacy companies like VW, Honda, GM, Ford, BMW, and Hyundai have tried to succeed in EVs, they’ve struggled, as legacy companies often do when a new technology comes on the scene (see this post and this one). Some legacy executives blamed consumers for allegedly slowing their adoption. Sure, BEVs did not live up to some early projections, but does the BEV line in the chart above look like a slump to you?

This year, overall EV sales will grow slowly, mostly due to Donald Trump’s war on EVs and China’s reduced incentives. But in the rest of the world, sales of BEVs in May were up 47%(!) from a year earlier.

Still, many at Toyota have latched onto the consumers-don’t-want-it mantra and self-assuredly claim this proves the prescience of laser focus on hybrids. Consequently, until Sato’s ascension, Toyota refused to try, although for a few years it paid lip service to the notion. Instead, hybrids rose from 26% of all Toyota sales in 2021 to 45% as of January-May this year (see chart below). Meanwhile, BEVs languished at a trivial 1.5% as late as 2024.

Source: https://global.toyota/en/company/profile/production-sales-figures/202605.html#

Two Problems With the Hybrid-Only Strategy

Stock market investors are regularly warned that today’s profits are no guarantee of future success. I’d argue that the posture bringing Toyota so much profit today undermines its ability to make profits tomorrow. It’s hardly the first successful corporate giant to suffer this problem. GM and IBM made record profits just a couple of years before their near-death experiences in the early 1990s. IBM recovered while GM continued to slide.

I see two problems with Toyota’s excessive dependence on HEVs. In 2025, one in every four cars sold in the world was an EV. By 2030, says Goldman Sachs, BEVs alone will capture 25% of the market compared to just 12% for HEVs. By 2040, it forecasts that half of all cars sold worldwide will be BEVs, while hybrids will sink to just 9% (see chart below). For Toyota to ignore 25% of the market to focus on just 8% makes no sense.

Source: https://www.goldmansachs.com/insights/articles/hybrid-adoption-to-rise-as-electric-vehicle-momentum-slows

Secondly, other companies are now encroaching on the hybrid turf that Toyota claimed as a virtual monopoly. In 2025. Toyota sold 4.4 million HEVs worldwide. By contrast, Honda sold just 400,000 hybrids and Ford just a quarter million. But these firms are just getting started, and Hyundai-Kia has now entered the fray. Kia alone is reportedly on track to sell 700,000 HEVs globally this year. In the first half of 2026, Hyundai sold 450,000 HEVs in the US alone, up 67% from 2025. So, as the years pass, Toyota is likely to have a smaller slice of a diminishing pie.

Stubbornness Loses Sales and Share

It’s easy to understand the numbers that rationalize smugness at Toyota. While other Japanese automakers are hurting badly because they produce neither EVs nor hybrids en masse, Toyota HEV dominance has so far enabled it to maintain its global market share at around 11-12% during 2021-25.

HEVs helped not just in the US, where Toyota gained from Trump’s war on EVs. Consider Europe, where BEVs alone now account for 23% of all auto sales and where that fact is one reason Chinese companies now outsell Japanese automakers. It is other Japanese companies that have borne the brunt of the damage. By contrast, hybrids have so far enabled Toyota to maintain its overall share, and they account for 80% of all Toyota sales in Europe. Of course, Toyota was also helped by raising the BEV share of its sales in Europe from 4% in 2025 to 12% in May 2026.

Still, there are danger signs that, unless Toyota steps up its EV game, it may no longer be the world’s top automaker in five or ten years. That is particularly true in parts of the world where overall auto sales are growing fastest. But many in Toyota’s leadership overlook this evidence due to “confirmation bias,” i.e., paying most attention to facts that confirm one’s preconceptions. It is the most successful companies that so often close their eyes to the need to change.

In China, Toyota’s sales have dropped from 1.9 million in 2021 to an annual rate of 1.6 million during Jan-May 2026. Its market share has fallen from 20% to just 16% (see chart below). In May, Toyota’s sales were down 31%(!) from the year before. One reason is that EVs hit a record 63% of all auto sales, and BEVs alone reached a record 42%. HEVs have a meager 4-5% share. Without a strong EV presence, Toyota will lose most of the market that, only a few years ago, accounted for one in five of the autos Toyota sold globally (see chart below).

Source: https://global.toyota/pages/global_toyota/company/profile/production-sales-figures/production_sales_figures_en_202604.xlsx

Then there is Southeast Asian Six (Thailand, Indonesia, Malaysia, Vietnam, Philippines, and Singapore). In 2023, they accounted for 10% of Toyota’s global sales. What makes the Six really pivotal is that sales are growing fast: 2025 sales were up 16% from 2021. And it’s a region Japanese companies once dominated. Not anymore. In 2019, the proportion of Japanese cars in Thailand was close to 90%, but now it’s only 68%. Conversely, since 2019, the Chinese share among the Six has increased from less than 1% to 12%. While other Japanese automakers have suffered more, the damage is beginning to hit Toyota as well. Its market share fell from 29.4% in 2023 to just 27.3% in January-May of this year.

EVs Now A Mass Market Item in Dozens Of Countries

With each passing year, the global share of BEVs alone continues to rise, belying claims of a slump. The chart below shows how many countries surpass each BEV market-share marker from 2020 to 2025. In 2020, only 15 countries had passed the 5% BEV share. By 2025, it was 50. A 5% share may sound small, but experts say that once it passes 5% or 10%, it usually keeps growing. Only three countries reached the 15% milestone in 2020; by 2025, it was 24.

Source: https://iea.blob.core.windows.net/assets/23cc1f1c-c869-4a39-ac51-457725c87103/EVDataExplorer2025.xlsx and (June forecast for 2026) https://assets.bbhub.io/professional/sites/44/EVO2026-Executive-Summary.pdf

If you think these are only small countries, look at the chart below. In 2025, EVs surpassed 5% in countries with 45% of the global population and 10% in countries with nearly 40% of the global population. This year, the share of the population passing the 5% mark will likely grow to around 65% as India, and perhaps Japan, join the 5% club. Meanwhile, the share of the population where BEVs alone account for more than 40% of auto sales will likely rise to 20% as China passes 40%.

In 2025, among 60 countries. Japan ranked third-to-last in the BEV domestic sales share. If the surge launched by Sato continues, Japan should rank much higher in 2026.

Source: https://www.iea.org/product/download/023453-000412-023061

Several major changes suggest that the global EV momentum, especially BEV momentum, will continue. One is cost. China is still the only large market where EVs are, on average, cheaper to buy than comparable ICE cars. But things are moving in the right direction. In major European markets, the BEV price dropped from 34% in 2024 to 17% in 2025. The American price gap dropped 12 percentage points from 2024 to 2025.

Bottom Line

Japan needs more BEV models to suit the wide variety of tastes and countries. It cannot rest on the laurels that Koji Sato achieved. From January through March, the upgraded BZ4X ranked in the top 20 EVs by global sales each month. But the model dropped out of the top 20 in April and May. So, initial enthusiasm is not sufficient to sustain the growth Toyota needs.

The handwriting is on the wall. Will Toyota’s leaders heed (or even read) the message?

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Former BOJ Board Member Shirai Says Yen Could Hit ¥165

Richard Katz — Wed, 01 Jul 2026 00:47:50 GMT

Source: https://fred.stlouisfed.org/series/DGS2 and http://www.mof.go.jp/english/jgbs/reference/interest_rate/index.htm

Key Points:

The yen could go to ¥165 says former BOJ Policy Board member Sayuri Shirai if the Fed raises US rates again, but it could go there even before such a hike
Yen reaches 162.6 as traders seem less fearful of intervention
Some say MOF recognizes that intervention won’t work and only the BOJ raising interest rates can work
But raising Japanese rates is no magic bullet to reverse yen weakness
Some analysts, including former BOJ Governor Kuroda, say the yen is bound to strengthen because it is woefully undervalued, but that’s not the case in my view

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Toyota Finally Moves On EVs—With Big Help From China, Part 1

Richard Katz — Mon, 29 Jun 2026 20:41:41 GMT

Source: https://global.toyota/en/company/profile/production-sales-figures/202605.html#

Key Points:

Toyota finally made its first serious move in Battery Electric Vehicles (BEVs)
Impelled by declining sales of gasoline and hybrid cars in key markets
Upgrades and price cuts bring BEVs to 4.5% of Toyota’s global sales in May, up from 1.9% in 2025
Including PHEVs brings the EV share to 7%
Increase in Japan from a negligible 280 BEVs in Jan-May last year to 11,000 this year, helped by subsidies of ¥1.3 trillion ($13,000 PPP)
China is half of Toyota’s global BEV sales, and its China-only model has 90% Chinese content and technology, making it more like a Chinese car with a Toyota name
Will progress continue or is this just a flash in the pan?

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Alan Greenspan: The Excellent, the Bad, and the Ugly

Richard Katz — Tue, 23 Jun 2026 22:21:58 GMT

A young Alan Greenspan with Ayn Rand

Alan Greenspan had an immense impact on the American and global economy. Some of that was excellent, and other parts were incredibly damaging.

On the positive side were his decisions on monetary policy, where he was not only guided by pragmatism, but where a supreme number-cruncher—one who even calculated the weight in tons of US GDP—sought truth from data. The result was faster US growth, the strength of the late 1990s productivity revolution, and a needed insurance policy against deflation.

In the latter, he was also guided by the Fed’s study of Japan’s deflation, which indicated that the Fed would have made the same mistakes given its view of Japan at the time.

On the negative side was his abdication of the Federal Reserve’s legal mandate to regulate the financial system, driven by his libertarian ideology. He had been an acolyte of Ayn Rand. At a lunch with regulator Brooksley Born, the head of the Commodity Futures Trading Commission, he said he opposed her efforts to impose strict regulations on derivatives, regulations which might have prevented, or at least attenuated, the 2008 financial meltdown. Born recalled this luncheon conversation.

Well, Brooksley, I guess you and I will never agree about fraud,” Born, in a recent interview, remembers Greenspan saying.

“What is there not to agree on?” Born says she replied.

“Well, you probably will always believe there should be laws against fraud, and I don’t think there is any need for a law against fraud,” she recalls. Greenspan, Born says, believed the market would take care of itself. Ayn Rand had taught that no corporation would commit fraud or produce bad products because that would harm its reputation. So no need for the Food and Drug Administration or the Securities Exchange Commission.

Greenspan was not as extreme as Rand. But he believed it was against Wall Street’s interest to commit fraud, since it would damage the big banks and their shareholders. But his ideology blinded him to a basic principle of economics: the Berle-Means thesis, published in 1932. Banks, indeed, all corporations, do not make decisions. Instead, the individuals running the banks make decisions, and they care more about their self-interest during their short reign than either the long-run interests of the companies they rule over or their shareholders.

The result of Greenspan’s ideology was untrammeled fraud in unhealthy types of derivatives and the worst financial cataclysm since the 1930s. Only swift action by his successor, Ben Bernanke, and the Bush and Obama administrations prevented another Depression. In testimony before Congress, after the 2008-09 disaster, he admitted that his ideology was at fault (see below).

The Maestro In Monetary Policy

In the 1990s, Greenspan, nicknamed The Maestro, said that there was no need to accept a priori the common presumption that the economy’s “speed limit” was 2.5% annual GDP growth and that its non-inflationary unemployment rate was around 6%. Instead, in the new environment produced by the Clinton administration’s deficit-cutting and new innovations in technology, he suggested removing the monetary tourniquets and testing how fast the economy could safely grow. He suggested relying on the results rather than preconceptions. The result was higher growth, a budget surplus, and millions more people with jobs. That created neither a rise in inflation nor a revolt by the “bond market vigilantes.”

The lower capital costs provided by the Clinton- Greenspan efforts were a vital ingredient in the famed productivity revolution. They enabled firms to buy machinery that incorporated the new technology. Business investment rose from an 8.6% share of real GDP in early 1995 to nearly 12% by the end of 2000.

In the early 2000s, he made another crucial decision that proved wise. Because of Japan’s experience, the markets feared deflation. Even though Greenspan thought deflation unlikely, he wanted an insurance policy. His concerns were based on a careful Fed study of Japan’s experience (Preventing Deflation: Lessons from Japan’s Experience in the 1990s). The study showed that, given the Fed’s own forecasts for Japan’s growth and inflation in the early 1990s, the Fed would have pursued an even tighter monetary policy than that of the Bank of Japan. But when it comes to deflation, an ounce of prevention is worth a ton of cure.

Hence, Greenspan chose to err on the side of caution and pursue a low-interest-rate monetary policy to prevent a recurrence of a similar miscalculation in the United States. Despite critics’ Jeremiads, no burst of inflation followed this choice.

A Culprit in the Worst Economic Disaster Since the Great Depression of the 1930s

By contrast, as the chief U.S. policymaker in charge of supervising banks, Chairman Greenspan seemed to operate within a more ideological framework, one that gave excess credence to the desire and ability of financial markets to self-correct. In 1994, for example, a bipartisan coalition in Congress passed the Home Ownership and Equity Protection Act (HOEPA). This act recognized a new financial world, one in which banks no longer kept mortgages on their books, thereby giving the banks a stake in the borrower’s ability to repay the loan.

In the new world, nonbanks generated mortgages that they then sold off to investment banks, which sliced and diced them into mortgage-backed securities. These securities were readily given an AAA rating by the credit rating agencies paid by the issuers. None of these players had any financial stake in ensuring borrowers could repay; they only had an interest in originating as many fee-generating mortgages and mortgage-backed derivatives as possible. Thus arose the no-documentation, no-down-payment loans later nicknamed “liar loans.”

HOEPA enabled, but did not compel, the Federal Reserve to force all mortgage generators and lenders to follow the traditional standards applied to banks: thou shalt not issue a mortgage unless the borrower makes a substantial downpayment, can prove he can repay, and can breathe (yes, in some locations, dead people received mortgages).

However, despite repeated pleading by various officials, including Edward Gramlich, a colleague on the Fed Board, Greenspan refused any significant enforcement of HOEPA. When questioned on this, Greenspan countered that the Fed issued some “guidances,” but these were not mandatory.

Without the unregulated shadow banking system, the bubble would never have become so extreme. Homes were built not for people to live in, but to provide an excuse to issue derivatives. Yet Greenspan, along with the Clinton and Bush administrations and much of the Congress, refused to regulate—or even count—the derivatives.

During Congressional testimony, when Rep. Henry Waxman (D-CA) pressed Chairman Greenspan on whether “your ideology” prevented him from heeding advice to restrain irresponsible lending practices, Greenspan acknowledged, “Yes, I’ve found a flaw [in my economic model]…Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.”

Only stubborn ideology can explain how Greenspan could say that with a straight face, given that decades of research have highlighted the divergence of interests between shareholders (principals) and managers (agents), and when we live in a world where CEO Stan O’Neal can bring Merrill Lynch to the brink of collapse and still walk away with a $161 million severance package.

Financial Crashes and The Rise of Right-Wing Populism

One final note: Historians have noted that huge financial crashes that destroy the savings of the middle class have often been followed in the US and Europe by a binge of right-wing populism, such as we are seeing today. In a 2018 Foreign Affairs piece commenting of the rise of Trump and other rulers of his ilk, scholars of this issue wrote: “In 2015, we published a study that compiled data on nearly 100 financial crises and more than 800 national elections in 20 democracies since 1870. We found that far-right parties are the biggest beneficiaries of financial crashes. After a crisis, the share of the vote going to right-wing parties increases by more than 30 percent. We also found that government majorities tend to shrink and governing becomes difficult as more parties and anti-establishment groups get into legislatures. These effects turn up in the wake of financial crises but, crucially, not in normal economic downturns.”

Had Greenspan made different decisions, perhaps we would not be living in the age of Trumpism.

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China Caught In “High-Technology/Low-Productivity Trap”

Richard Katz — Mon, 22 Jun 2026 00:06:38 GMT

Source: press reports Note: Personal services, wholesale/retail, and construction are estimates because they include workers in the informal sector. Personal services includes housekeepers, caregivers, nannies, ride-sharing, and food delivery services.

Sometimes it seems that not a month has gone by without some expert or institution putting out a report on how America’s great Asian rival has become the global leader in dozens of the technologies most vital for the future. Or how it is seizing dominant market share in this or that pivotal product. Or how America needs to change its ways before it gives away the commanding heights of the economy and suffers diminished global influence. And then there are the books talking about the possibilities of war.

Oh, did I forget to say I’m not talking about China today, but Japan a few decades ago? In 1989, Larry Summers, one of America’s foremost economists, wrote just a month before Japan entered the lost decades, “An Asian economic bloc with Japan at its apex ... is clearly in the making. This all raises the possibility that the majority of American people who now feel that Japan is a greater threat to the US than the Soviet Union are right.” And, yes, in 1991, The Coming War With Japan predicted the inevitability of war within two decades. I also recall a scientist specializing in superconductivity saying he’d get another $10,000 in grants for every mention of Japanese competition in his grant applications.

I’m not saying that China’s technological achievements are being hyped for ulterior motives. Nor am I predicting that China will suffer lost decades like Japan. But I am saying the economy has serious structural flaws. Moreover, as Japan’s history shows, dominance in important economic sectors does not ensure future growth, let alone global supremacy. China is caught in a “high-technology/low-productivity trap,” a term introduced in a 2020 report by two economists at the US International Trade Commission.

The ITC report explains the apparent paradox. On the one hand, China is indisputably gaining a leading role, sometimes even supremacy, in a variety of technologies and industrial sectors. There is no way to dismiss that. On the other hand, by all sorts of measures, its economy is a mess, something I’ve discussed here, here, here, and here. The ITC economists explained how both realities can co-exist.

This post is an overview. I will post future reports that go into more detail on each of the following issues.

Innovation Leadership Does Not Automatically Mean Economic Leadership

As I’ve argued before, technological innovation by itself does not create growth. What creates growth is companies transforming innovation into economic value.

The most-cited barometer of a country’s innovative capacity is the Global Innovation Index (GII). In 2013, China ranked 35th. By 2025, it had reached 10th, surpassing Germany, Japan, France, and Israel. Among other upper-middle-income countries, the next-highest was Malaysia, at 34^th. This is absolutely remarkable.

And yet, in a prescient 2020 comment, the ITC economists wrote, “Whether such innovation capacity will result in improved GDP growth performance…is uncertain as countries with higher ratings have not clearly demonstrated such improvements in performance. In fact, China’s own growth rate and productivity gains have been declining even as its GII rankings have risen.”

As poor countries become richer, improvement in GII scores is part of the recipe. However, once countries become rich, it’s not so simple. On the contrary, among the top twenty countries in 2025, there was no correlation between its GII ranking and its growth rate. It depends on how effectively its companies can exploit that innovation (see chart below).

Source: https://www.wipo.int/web-publications/global-innovation-index-2025/en/gii-2025-results.html

Superstar Sectors Are Tiny Share of China’s “Dual Economy”

Like Japan at its peak, China suffers from a “dual economy,” a hybrid of super-productive, export-oriented sectors that dazzle the world and an even larger mass of domestically oriented, low-productivity sectors that hamstring overall growth.

As with Japan, Western analysts focus mostly on the impressive parts of the economy because those are the ones impacting them. Among the big superstars are electric vehicles, solar energy, and batteries. Global demand for these products is growing exponentially, and China is beating everyone else in filling that demand. Yet only 1.5% of Chinese workers produce solar energy products and components. Only 0.7% work in making all autos and auto parts, not just EVs. And only 0.2% make batteries (see chart at the top).

Moreover, there’s a huge divide in the productivity (GDP per worker) among different sectors of the economy. Manufacturing has the highest efficiency, although there are big differences among subsectors. In 2024, factories employed 18% of all Chinese workers but produced 25% of GDP. By contrast, 22% of Chinese labored in farming, but they produced only 7% of GDP.

If we make an index of productivity with manufacturing as 100, we can see that farming, wholesale/retail trade, and construction are huge laggards. Yet, these sectors add up to almost half (45%) of all jobs (see chart below).

Source: Press reports Note: The numbers in parentheses show the share of the labor force working in each sector

Keep in mind that, as in other maturing economies, manufacturing’s share of the economy is falling. In China, it fell from 29% of nominal GDP in 2017 to 25% in 2024.

The Best And The Rest

While some Chinese companies in certain sectors have made remarkable technological achievements—e.g., solid-state batteries—these advances are not being diffused to typical companies in the same sector. In a previous post, I pointed out the same syndrome in Japan. Countries grow best when this diffusion takes place.

The top 10% of Chinese firms in 31 manufacturing sub-sectors more than doubled their Total Factor Productivity (TFP) between 1998 and 2007, an increase of about 115%. By contrast, the median firm increased TFP by about 85%, and the bottom 10% by about 75%. I suspect the gap between the best and the rest is much bigger in sectors outside of manufacturing. (TFP is the combined productivity of labor plus capital; I’ll discuss below why TFP is a better predictor of long-term growth than just labor productivity.)

Refusal To Cull the Zombies

Worse yet, as in Japan, huge numbers of zombie companies are being sustained on artificial life support. That denies resources of labor, capital, finance, and real estate from those who could use those resources better. That hurts growth.

Consider China’s auto sector. As I detailed in this post, alongside China’s world-beating companies like BYD or Geely and a dozen others, there are about 230 more. Almost 100 of them sell less than 10,000 units per year. As a result, China has the capacity to produce twice as many autos as it can sell at home or abroad. This has resulted in a price war that hurts the best companies. China has wasted a lot of investment on factories that create virtually no GDP. Such overcapacity is seen in many industries.

With every passing year, we see a rise in the share of firms in China that do not earn enough to pay their interest bill (see chart below). Economists at the Dallas Fed reported: “The zombie share in manufacturing has risen fairly rapidly from a low of 4 percent in 2020 to 11 percent in 2024. With a sustained decline in industrial profits, this share looks likely to continue growing. Yet, China’s services sector has a higher proportion of zombie firms, increasing over the past several years to 17 percent in 2024.” Services now comprise half of GDP.

Source: https://www.dallasfed.org/research/economics/2025/1223

Without the “destruction” side of creative destruction, you get less creation. But, of course, you need a social safety net to help workers in zombie firms transition to better companies. China is deficient here, one of the reasons it sustains zombies.

Stalled Entry Of New Firms

All economies benefit from the entry of new, more productive firms. This mainstream view is the basis of my book, The Contest for Japan’s Economic Future, which demonstrated that Japan was highly entrepreneurial during the high-growth era (1953-1973) and became less entrepreneurial from the mid-1970s onward.

China suffers from a similar syndrome. In the period up to 2007-2008, two-thirds of China’s remarkable growth of manufacturing TFP came from the entry of new companies. By contrast, the exit of inferior firms made a limited contribution to productivity.

Unfortunately, the entry of new firms and their share of factory jobs peaked around 2007 and then declined sharply through 2013. The job share fell from 25% in 2007 to 15% in 2013 in the digitally intensive sectors, and from 20% to 10% in the rest of manufacturing. The share has undoubtedly declined even further since then (see chart below). It’s no coincidence that, as the entry of new firms slowed, so did TFP growth, as I detail below.

Source: World Bank at https://bit.ly/EAP2024_FullReport Note: Top line is digitally-intensive sectors, and the bottom line is the rest of manufacturing

China Investing More Instead of Investing Better

Like Japan, China is trying to boost labor productivity by piling on more and more investment. But as economies mature, investment faces diminishing returns. I’ve seen with my own eyes how building modern roads replaces subsistence farming with farming for the market, thereby greatly improving farm productivity and farmer income. But, at some point, it takes far more dollars of road-building to gain each dollar of GDP growth. While giving workers more computers boosts their productivity, at some point, it helps even more to replace a 2010 computer with one made in 2026. China’s obsession with excessive levels of investment instead of diffusing this kind of technological upgrade is a main reason why its growth is decelerating so rapidly. Japan makes the same mistake.

TFP is the measurement that captures the benefits of such upgrades. It involves not just technology in the narrow sense, but how well firms use that innovation. Historically, China has typically had a lower level of TFP than other countries at the same level of per capita GDP. The light dots in the chart below show various countries’ levels of TFP relative to the US (indexed at 1.0). The red line shows China’s TFP relative to the US over the years as China’s grew. The rise in the ratio is the classic “catch-up” phenomenon. What’s troubling is that catch-up started to decline a decade or so ago.

Source: https://documents1.worldbank.org/curated/en/833871568732137448/pdf/Innovative-China-New-Drivers-of-Growth.pdf

From 1980—the beginning of Deng Xiaoping’s reform—through 2009, growth in GDP per worker accelerated to a stunning 9.3% per year, and a third of this leap came from growth in TFP. By contrast, in 2010-2019, labor productivity slowed to a still-stunning 7.2% even as China poured on even more investment. That’s because TFP contributed just 1.1 percentage points to growth instead of 3.1 points (see chart below).

Source: https://share.google/ail8eN9R2w6GeCvTY

TFP growth has gotten even worse, almost negligible, in 2023-24.

None So Blind As Those Who Will Not See

If China is in trouble, it is not because of a mythical “middle-income trap,” discussed in this post, but the result of decisions by Xi Jinping to reverse many of the policies that had created the Chinese miracle. Rather than face up to these flaws, Beijing has made it a violation of national security law to “defame” the economy.

One final note: even with these drawbacks, China’s economy is sufficient to support the country’s geopolitical challenges to the West unless it results in social dislocation.

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Assessing BOJ’s Claim That Companies Are Now Competing For Workers

Richard Katz — Wed, 17 Jun 2026 19:54:30 GMT

Source: https://www.boj.or.jp/en/about/press/koen_2025/data/ko250824a1.pdf Note: High/low productivity firms are defined as those in the top/bottom tercile within each period and each industry who responded to a survey. The bands indicate 95% confidence intervals.

FLASH: Financial Times cites me on the reason for Japan’s low productivity. “Japan’s economic output per hour worked is only worth $53 adjusted for purchasing power, compared with a G7 average of $75, according to the International Labour Organization. Richard Katz, an economist and longtime Japan-watcher, said the country’s low productivity was a feature of an “extremely severe dual economy” in which many sectors had consistently performed poorly over decades. “Japan’s productivity problem is one of capital allocation. Normally labour and capital should move over time from the sectors that are failing to the ones that are rising, but that has not happened in Japan,” Katz said. There is more on this topic in today’s blog.

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In Part 1 of this series, I argued that the main reason the labor shortage has not pushed up wages is that, aside from especially skilled people and new recruits, companies do not have to compete all that much for workers. This is due to the combination of lifetime employment and the rise of non-regular workers.

In a recent speech, Bank of Japan (BOJ) Governor Kazuo Ueda claimed that this situation is rapidly changing. “In the past, regular full-time employees rarely changed jobs, and firms faced little pressure to raise base wages to retain staff. Recently, competition for workers has intensified [emphasis added—rk].” He then pointed to the chart I have reprinted above, which shows a decrease in the number of workers employed at lower-productivity companies and an increase at higher-productivity ones. He concluded, “This may be one instance where moderate wage increases under labor shortages lead to efficiency-improving reallocation.”

If the numbers in the chart really meant what Ueda said they do, that would be good news indeed. The magnitude of the shift is not huge, a total decrease of 12% in the number of those in low-productivity companies and an 8% gain of those in higher-productivity firms. But it is still significant. If more of Japan’s labor force works at higher-productivity companies, that helps Japan grow better. Secondly, higher-productivity companies pay higher wages. On average, among companies with at least 50 employees, for every 1 percentage point that a company’s productivity level exceeds that of others, wages are 0.6% higher.

Unfortunately, Ueda misreads the numbers. First of all, his numbers refer to only half of the labor force, those working for Japan’s 900,000 incorporated companies. For the labor force as a whole, a larger portion than in the past now works in low-productivity, low-wage unincorporated companies. Secondly, while a larger share of corporate employees work in more productive companies, this is not evidence of firms competing for workers but of something else, which I’ll detail below.

Ueda’s speech reflects the tendency of BOJ leaders to see the data through rose-tinted glasses to justify their claim that wages are moving toward 3% nominal growth and 1% inflation-adjusted growth. Unless wages do that, the BOJ’s strategy for reaching healthy demand-led 2% inflation falls apart. I believe the BOJ suffers from “confirmation bias,” i.e., focusing on evidence that confirms its preconceptions.

To be sure, there are certainly encouraging signs of progress, but they’re not yet large enough to change the big picture. One-third of Japan’s GDP is produced in sectors where labor productivity declined by 1% per year over the quarter-century from 1995 to 2019. And yet, instead of labor shifting to the more dynamic sectors, the dark-side sectors now employ a larger share of aggregate hours of work in the economy than in 1995: 34% today vs. 29% in 1995. Conversely, the sectors with rising productivity suffered a decline in the share of all work-hours from 71% to 65%. I have used hours instead of workers because so many workers work part-time. (See chart below; this is similar to the situation for Total Factor Productivity discussed in this post.)

Source: https://www.rieti.go.jp/en/database/JIP2023/data/jip2023_4.xlsx

Bifurcation of the Labor Force

Japan’s workforce is becoming increasingly bifurcated. While a vital minority of the best and brightest among workers in their 20s and 30s are enjoying upward mobility, a large share of average workers, particularly among the middle-aged, are suffering downward mobility. As we’ve seen in other countries, increased downward mobility feeds right-wing populism.

The good news is that an increase in labor mobility (see this post) is creating opportunities for the best and brightest to change jobs and gain higher wages. In fact, among those who changed jobs in 2023, 35% enjoyed a pay hike of more than 10%, whether they moved to a large company or to a small or medium-sized enterprise (SME), as about half of them did. Back in 2009, only 15% of male job switchers received a pay hike of more than 10%.

On the other hand, a large proportion of job-switchers suffer a cut in pay. In 2017, the latest numbers I currently have on this issue, the same proportion enjoyed pay hikes and pay cuts of more than 10%: 26%. Age is a big dividing line. Job switchers among workers under 40 received larger pay hikes, while those over 50 suffered larger pay cuts (see table below).

Source: https://www.mhlw.go.jp/english/database/db-yl/2017/02.html

Under the seniority system, middle-aged workers earn much higher salaries than younger workers. So, replacing a middle-aged worker with a younger one may reduce a company’s labor bill, even if it gives younger workers a pay boost compared to their previous employer. In short, an increase in labor mobility does not automatically yield wage hikes for the overall labor force.

Corporate Employees Decline As Share of Total Employees and Employed

Ueda’s numbers, while accurate, do not mean what Ueda claims they mean.

As noted above, Ueda’s numbers refer only to changes in employment shares within half of the labor force: those employed by the 900,000 incorporated firms analyzed in the Ministry of Finance’s corporate statistics. This is the segment of the labor force with the highest wages and productivity (output per hour). But the corporate share of the labor force has been shrinking since the peak year of 2008. Since then, corporate employees have dropped from 70% of all employees to just 58%. They dropped from 61% of all employed people—including the self-employed and company staffers without employee status—to 53% (see chart below).

Source: https://www.mof.go.jp/english/pri/reference/ssc/historical/all.xls

As a result—considering the nearly 4 million working for all levels of government and nonprofits—the share of employees in very small unincorporated companies has risen from about 25% to 43%. So, when we look at all employees, not just corporate employees, we see a shift in the share in the direction of companies with the lowest productivity and lowest wages: the opposite of Ueda’s conclusion.

24% of all employees work in unincorporated micro enterprises with just 1-9 employees. But their productivity—value added per worker—is only 35% of that of those working at firms with 100 employees in manufacturing and 50% in services (see chart). And their wages are much lower, too. Many others work in SMEs with just 10-49 employees.

Source: Figure 2.6 at https://www.oecd.org/content/dam/oecd/en/publications/reports/2026/05/oecd-economic-surveys-japan-2026_9457bba4/54cc833d-en.pdf

There’s a second problem. Ueda asserts that the shift in employment shares is a case of firms competing for workers by bidding up wages. This is simply not the case. The reason for the shift is that, since 2008, among incorporated enterprises, the number of small firms has fallen by 25%, and the number of workers they employ has fallen by 20%. By contrast, the number of medium-sized firms has fallen less, and the number of people working at them has risen steadily and is now 60% higher than in 1996. There were fewer medium-sized companies, but they were larger (see chart below).

As a result, among all corporate employees, the share working at medium firms has grown from 14% to 20% over the last two decades, while the share at small firms has fallen from 66% to 60%. The share at big companies has stayed the same.

Workers at medium enterprises have higher productivity (value added per worker) and higher wages than those at small firms. Value added means the value contributed by the firm after deducting from sales figures the cost of inputs. It is the sum of wages, operating profits (before interest), and depreciation of capital stock (see the two charts below).

The data does not show evidence of firms competing for workers by bidding up wages on a large scale. If companies were competing, the wage share of value added would have increased. Instead, across all companies, the labor share continued to go down. The biggest decline, 7 percentage points, was in the medium-sized corporations, the segment that gained employees. Big companies showed a 6-point drop in the labor share, including a steep drop during recent years when Japan’s leaders crowed about the big nominal hikes resulting from the shunto wage negotiations (see chart below).

Meanwhile, the only segment of corporate employees to gain real wage hikes during 2022-26 were the seven million working for the 4,500 largest and most profitable companies. They saw a 2.5% total real wage hike during that period. The 7.2 million working in 26,000 medium-sized firms saw a sizeable nominal wage hike but an 0.8% drop in real wages. The 21 million working for 860,000 small firms suffered a 2.2% real wage cut. And the 26 million working for micro and small unincorporated firms likely suffered an even bigger real wage cut (though I don’t have figures on the exact amount).

Conclusion

Confirmation bias rarely yields effective policy. That’s one reason there has been such a gap between the BOJ’s inflation forecasts and the actual results (see this post). This has been going on since 2013, when Shinzo Abe’s handpicked Governor Haruhiko Kuroda confidently predicted he’d hit 2% inflation in just two years.

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Thanks For Making Me 12th Highest on Substack’s List Of “Rising” Business- and Economics-Related Newsletters

Richard Katz — Mon, 15 Jun 2026 20:16:27 GMT

A big thank you to those of you who upgraded to paid subscriptions to read my two most recent paid memos: https://richardkatz.substack.com/publish/posts/detail/201675746?referrer=%2Fpublish%2Fposts%2Fpublished and https://richardkatz.substack.com/publish/posts/detail/201774434?referrer=%2Fpublish%2Fposts%2Fpublished

As a result, total paid subs rose by 5.6% over the past seven days. And that put me at 12th on Substack’s list of “rising” newsletters in business and economics. “Rising” means those with the biggest percentage increase in revenue from subs over a short period of time.

Of course, as is often the case with the issues I discuss, this is a good-news/not-so-good-news story. The good news is a rush of new subs. The caveat is that it’s easier to get a big percentage increase when the base is relatively small.

I have enough paid subs to be in the initial rank of Substack’s “best seller list,” but a way to go before enough of the 12,000 subs to Japan Economy Watch are paid subs. For most hybrid newsletters—a combination of free and paid posts—2-7% of the total subs are paid. 5% is my initial goal. If you gain insight from reading this blog, please join those who’ve already upgraded; help me reach 5%—and beyond.

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The Real Rate of Inflation In Japan: Official Numbers vs. BOJ Correction For Subsidies

Richard Katz — Fri, 12 Jun 2026 17:22:51 GMT

As I detailed in this post, the Bank of Japan (BOJ) is now regularly releasing figures that correct the official consumer inflation numbers to account for subsidies. For example, when the government subsidizes gasoline prices, inflation goes down. But that just changes who pays the cost. So, the BOJ publishes numbers showing what inflation would be without the additional subsidies. The latter is the number that helps guide interest rate decisions, such as the one to be made next Tuesday. There are a few different measures: all prices, prices ex-fresh food, prices ex fresh food and energy, and prices ex all food and energy. They’re giving mixed messages.Here’s what it looks like so far this year

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Will BOJ Rate Hike to 1% Be Tipping Point, Or Just A Step In Gradual Normalization?

Richard Katz — Fri, 12 Jun 2026 00:29:59 GMT

Source: Bank of Japan

Key Points:

Some observers see a hike in the BOJ policy rate to 1% as a tipping point in financial markets
Others see it as another step in Japan’s gradual normalization of rates
I’m in the latter camp
I’ll examine the impact of bank lending rates, Japan Government Bonds, and the Currency Markets
Also, a look at the potential impact on the dollar and US interest rates

Why Hasn’t the Labor Shortage Pushed Up Real Wages?

Richard Katz — Mon, 08 Jun 2026 02:21:40 GMT

Source: https://www.jcer.or.jp/english/is-japan-really-short-of-labour

For a dozen years, the Bank of Japan, the government, and stockbrokers have all been promising that a labor shortage in Japan will soon push up wages. And that faith is behind the BOJ’s decision that it’s time to normalize interest rates. Here’s the argument. Due to the declining working-age population, companies in 2014 offered 1.2 jobs for every job seeker. By 2019, the ratio had climbed to 1.6 and is now 1.2. So, it is argued: when demand exceeds supply, wages must inevitably rise.

And yet, for the same dozen years, these forecasts have proved false. On the contrary, real annual earnings for a full-time worker were no higher in 2024 than they were in 2014: just $46,500 in real purchasing power parity dollars. In fact, these earnings are barely higher than 36 years ago when the lost decades began.

This apparent paradox leaves only two possibilities. Perhaps the labor shortage is not as severe as some statistics make it look. The alternative is that labor market rigidity prevents the forces of supply and demand from working as expected.

Japan’s leaders and stockbrokers point to the first explanation. BOJ Governor Kazuo Ueda contended that so many women and the elderly entered the workforce during 2012-24 that this offset the decline in the working-age population. The reason for the influx, in my view, is that wages and pensions were so stagnant that more people needed to work just to keep household living standards from falling. Now, argues Ueda, the reserve supply has been exhausted, and from now on the number of employed people will decline (see chart below). Consequently, the BOJ promises that this time the forecast will come true: Japan is headed toward an era of 3% nominal wage hikes minus 2% inflation, leaving 1% real wage growth.

Source: https://www.boj.or.jp/en/about/press/koen_2025/data/ko250824a1.pdf Note: Red circle is the Abenomics era

While this explanation may be part of the story, I believe a bigger part is a case of “market failure,” and that this obstacle remains. It’s a staple of orthodox economics that excess demand for workers can only raise wages when workers are free to move to another company paying more. That forces companies into a bidding war. Without such competition, a labor shortage and flat wages can co-exist. I’ll explain the economic theory on this at the end.

In fact, the reason that Japanese employers began creating “lifetime employment” in the late Meiji Era was precisely to end a bidding war. In the 1910s, 80% of blue-collar workers switched jobs every year in search of higher wages. In response, employers created a no-poaching pact: they’d stop luring workers away via a higher wage, or refuse to hire those who left for any reason. To bolster this ploy with propaganda, employers fabricated the story that loyalty stemming from a “feeling of company as family” was an age-old facet of Japanese culture. There were certainly times, e.g., the high-growth era, when the benefits of lifetime employment outweighed its harms, e.g., worker acceptance of labor-saving technology. Today, however, the costs outweigh the benefits. For details, see Chapter 11 of The Contest for Japan’s Economic Future.

Competition For Workers And Wage Hikes

For markets to work, they must be embedded in market institutions, and robust competition is one of the most fundamental of them. Insufficient competition in the labor market explains why Japanese wages remain below free-market levels. Compare the wage hikes between younger workers just starting and regular workers trapped in lifetime employment. As we can see in the chart at the top of this blog, workers in their 20s got nominal wage hikes of 6-7% per year during 2018-23, whereas those in their 30s and early 40s received wages of just 1-3%, and most workers over age 45 suffered wage cuts. The reason is that job changes are far more prominent among younger workers than veterans (see chart below).

Source: https://www.boj.or.jp/en/about/press/koen_2025/data/ko250824a1.pdf

New workers hired out of high school or college have a choice of where to work. Moreover, the first few years are a probation period for both sides. So, companies must compete not just to hire them, but to retain the ones they like. Low wages are a big issue for these younger workers.

By contrast, older workers with a regular job find it much harder to find another regular job in the same industry. Switching to a different industry is even harder and rarer because their skills have been developed to fit their current employer, rather than providing marketable skills in an occupation that suits a wide range of companies.

Moreover, workers have been given an incentive to prioritize job security over wages because a job loss could mean being relegated to a non-regular job. That means a monthly pay cut of at least 25% at small companies, 30% at medium-sized ones, and 40% at big ones (even more when bonuses, retirement packages, and other benefits are considered). Worse yet, once one falls out of regular status, it’s very hard to return. The bottom line is that employers have less need to hike wages to retain veteran employees unless those individuals have a very valuable and rare skill, e.g., a software engineer.

Not surprisingly, highly skilled younger workers are much more willing to switch jobs and much more willing and able than they were 10 or 20 years ago. Women are far less willing to leave a regular job than men because they face a greater risk of losing promotion opportunities or ending up in a non-regular job.

The good news is that, across all ages and both genders, workers are more willing and able to switch jobs than they were ten years ago (see the chart above again).

Firms Want Cheap Labor

Firms complain that they cannot find the workers they need. In reality, they cannot find enough workers at the wages they are willing or able to pay. They’d rather hire non-regular workers who are less skilled than regulars but cost less. The ratio of job offers to applicants is 2.0 for non-regular workers, but just 0.99 for regulars. These firms also invest less in training non-regulars. Hence, this practice not only suppresses wages but also hurts productivity.

Companies That Cannot Pass Wage Hike Costs Onto Customers

Lots of companies, especially the small and medium enterprises (SMEs) that employ 70% of all employees, insist they cannot afford to hike wages. For many, this is true. According to a 2024 survey by Teikoku Databank, Japanese companies were able to pass on to customers just 32% of their wage hikes. Including hikes in other costs and the overall pass-through rate tumbled to 39% in 2024, the lowest since the survey began.

Moreover, the average firm does not even raise wages in response to hikes in labor productivity. Suppose a company can produce 101 units with the same amount of labor as it employed when it produced just 100 units the previous year. It can raise wages 1% with no loss of profits. That used to happen in Japan during 1970-94. But during 1995-2021, they increased wages by just 0.36% for every 1% hike in productivity. That’s because they have the market power to suppress wages. During 1995-2017, real GDP per hour rose 30%, but real wages per hour did not rise at all, the worst record in the OECD (see chart below). Instead of raising wages, they are enjoying soaring profits that they don’t even deploy in new investments.

Source: http://dx.doi.org/10.1787/888933969219

To make matters worse, 29 business sectors, comprising a third of Japan’s GDP, experienced absolute declines in labor productivity during 1995-2019.

If workers were free to leave such SMEs and move to other companies able to pay better wages, then these low-productivity firms would gradually exit the market. As a result, the whole economy would enjoy both better wages and better productivity. Like the Scandinavian countries, Japan should invest in “active labor measures” to support such transitions. Instead, all sorts of measures, from credit guarantees to subsidies, are used to prop up such firms as a kind of disguised unemployment.

Some people claim Japanese wages are low because labor productivity is low. But the converse is at least equally true: productivity is low because wages are kept low enough to sustain low-productivity SMEs.

Skills Mismatch vs. A Broad Macroeconomic Imbalance

In a few sectors, like Information and Communications Technology (ICT), there is a genuine physical shortage because of a “skills mismatch.” Japan produces at least half a million fewer ICT professionals than companies need. IT companies are offering four times as many new jobs as there are applicants to fill them. In response, companies are bidding against each other for the talent. Consequently, ICT is one of the few sectors where wages have risen. Nominal wages are up 40% since 1997.

Source: https://isvd.or.jp/columns/real-wage-industry-30year-comparison

By contrast, the economy-wide labor shortage is a completely different phenomenon. Companies in all sorts of sectors that are willing to pay the prevailing wage, or even more, are unable to secure workers. The BOJ insists this is just the vestige of a deflationary mindset that is gradually disappearing. I believe it’s not a psychological issue, but the consequence of barriers to labor market competition. I’ll turn to that next.

A Bit Wonkish: How Weak Competition Can Combine a Labor Shortage With Flat (Or Falling) Real Wages

Many readers will still find it counterintuitive that a labor shortage would fail to raise wages eventually. Bear with me as I do something for the first time: use supply-and-demand diagrams. My explanation is part of orthodox economics taught in every mainstream textbook. Just as monopolists can charge above-market prices for what they sell, monopsonists, including employers, can pay below-market prices for things they buy.

The first figure below shows a labor market with free competition. The demand curve (D) means that, when wages are lower, companies will want to hire more workers. The supply curve (S) means that, if wages are higher, more people will seek work. At the initial supply curve, S1, demand and supply equalize at Point A. Now, suppose the supply curve shifts to S2 because, as in Japan, the working-age population shrinks. There are fewer people available to work at a given wage. In that case, supply and demand will equalize at Point B: fewer total jobs but at higher wages. At Point B, every company willing and able to pay the prevailing wage can hire as many workers as it wants. Companies that cannot pay will go out of business, freeing up workers to be employed at higher wages elsewhere. The BOJ’s entire strategy depends on its faith that Japan is moving toward this situation.

The next figure shows what happens when a rigid labor market keeps wages below the free market level. We have the same leftward shift in supply as in the figure above. However, barriers to competition keep wages at the same level as at Point A. This is what happened in Japan from 1990 to 2024, as shown in an earlier chart. But the number of people able and willing to work at the 1990 wage has decreased: it has moved from Point A to Point C. As a result, companies suffer a “labor shortage” equal to the distance seen in the dotted line between A and C. The problem is not an absolute shortage of labor, but a shortage of cheap labor, the failure of wages to rise to Point B.

Unless Japan promotes reforms that make companies compete for labor—such as enforcing its laws on equal pay for equal work between regulars and non-regulars, and between men and women—the coexistence of a labor shortage and wage stagnation is likely to continue.

Next: The BOJ claims workers are leaving low-wage jobs and moving to higher-wage jobs. I’ll look at that claim.

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