Japan Economist, Japan Macro Advisors

Takuji Okubo

Japan Economist

Concise and Insightful Analysis on Japan Economy

Japan Macro Advisors

Our mission is to provide a concise and timely analysis on the Japanese economy for the benefit of global audiences. Communication, especially in foreign languages, has always been a weakness for the Japanese, which was fine when Japan's economic might attracted foreign media and various other institutions to study and report on Japan - such days are long gone. In the last two decades, we saw foreign institutions reallocating their resources from Japan to other more exciting parts of the world. As a result, when we read reporting on Japan in foreign media, we sense a subtle but noticeable decline in the depth of understanding what is actually happening in Japan.

Macroeconomics

<ul>
<li>Most of the historic rise in JGB yields between 2022-26 came from long-run inflation expectation change and a normalization of term premia (TP) as BoJ lifted its unconventional easing.</li>
<li>TP across the yield curve has largely finished its normalization process, in particular at the longest end. TP at 10-year has a moderate room to expand further.</li>
<li>We think the hiking cycle in Japan is already in a late phase. Typically, the longer end of the yield curve starts to decline in a late cycle.</li>
</ul>


Most of the historic rise in JGB yields between 2022-26 came from long-run inflation expectation change and a normalization of term premia (TP) as BoJ lifted its unconventional easing.
TP across the yield curve has largely finished its normalization process, in particular at the longest end. TP at 10-year has a moderate room to expand further.
We think the hiking cycle in Japan is already in a late phase. Typically, the longer end of the yield curve starts to decline in a late cycle.


The Long Climb in JGB Yields Is Nearly Over

<ul>
<li>The super-long JGB curve inverts beyond 28 years — an odd behavior if fiscal fear is the primary driver.</li>
<li>The strange two-hump shape in the yield curve is a coupon effect: low-coupon bonds issued in the deflation era trade at a premium pulling down the curve.</li>
<li>Investors are not demanding extra yield to hold Japan's longest duration. On the contrary, they are paying a premium for high-duration bonds.</li>
</ul>


The super-long JGB curve inverts beyond 28 years — an odd behavior if fiscal fear is the primary driver.
The strange two-hump shape in the yield curve is a coupon effect: low-coupon bonds issued in the deflation era trade at a premium pulling down the curve.
Investors are not demanding extra yield to hold Japan's longest duration. On the contrary, they are paying a premium for high-duration bonds.


Japan's Fiscal Vigilantes Are Misreading the Curve

<ul>
<li>June Tankan beat expectations. AI-boom-led-demand is outweighing the negative shock from Middle East supply chain disruption. May industrial production, released this morning, showed Japanese manufacters benefiting from AI boom. </li>
<li>More consequentially, the Tankan survey delivered more evidence for the ongoing rise in inflation expectation. Large firms' five-year inflation expectations are now higher than the BoJ's 2% target </li>
<li>We expect faster rate hikes — 1.25% in October, 1.5% by March 2027. Stronger business conditions cut the downside risk; rising expectations affirm the upside inflation risk.</li>
</ul>


June Tankan beat expectations. AI-boom-led-demand is outweighing the negative shock from Middle East supply chain disruption. May industrial production, released this morning, showed Japanese manufacters benefiting from AI boom. 
More consequentially, the Tankan survey delivered more evidence for the ongoing rise in inflation expectation. Large firms' five-year inflation expectations are now higher than the BoJ's 2% target 
We expect faster rate hikes — 1.25% in October, 1.5% by March 2027. Stronger business conditions cut the downside risk; rising expectations affirm the upside inflation risk.


BoJ Tankan: Signs of Continued Reflation Open Doors to Additional BoJ Rate Hikes

<ul>
<li>Japanese industrial production eked out a second straight monthly gain in May (+0.5%), kept afloat by AI hardware — our AI Hardware index is up 14.5% over the past year.</li>
<li>That hardware basket is under 3% of the index yet added 0.7pp since December 2023; without it, production would be down 2.6% rather than 1.9%.</li>
<li>The resilience among Japanese manufacturers is a relief for BoJ officials who have been weighing the economic downside against inflation upside. We expect another rate hike in October to 1.25%.</li>
</ul>


Japanese industrial production eked out a second straight monthly gain in May (+0.5%), kept afloat by AI hardware — our AI Hardware index is up 14.5% over the past year.
That hardware basket is under 3% of the index yet added 0.7pp since December 2023; without it, production would be down 2.6% rather than 1.9%.
The resilience among Japanese manufacturers is a relief for BoJ officials who have been weighing the economic downside against inflation upside. We expect another rate hike in October to 1.25%.


<ul>
<li>The BoJ is turning hawkish to defend a weakening yen, breaking its usual silence by linking the policy rate to the exchange rate in June's Summary of Opinions.-</li>
<li>We bring our next-hike call forward to October 2026 (1.25%), then March 2027 (1.5%), with a hike as early as September if yen weakness persists.</li>
<li>We hold our terminal call at 1.5%, unchanged since September 2025. The June board remains dispersed, with only two clear hawks once Nakagawa departs.</li>
</ul>


The BoJ is turning hawkish to defend a weakening yen, breaking its usual silence by linking the policy rate to the exchange rate in June's Summary of Opinions.-
We bring our next-hike call forward to October 2026 (1.25%), then March 2027 (1.5%), with a hike as early as September if yen weakness persists.
We hold our terminal call at 1.5%, unchanged since September 2025. The June board remains dispersed, with only two clear hawks once Nakagawa departs.


BoJ Steps Up Its Verbal Yen-Intervention: Expect Faster Rate Hikes

Takuji Okubo is the Managing Director and Chief Economist of Japan Macro Advisors, an independent macro-research boutique he founded in 2012, specializing in the Japanese economy and its public policies. He has over two decades of experience covering Japan macro, beginning his career as an economist at Goldman Sachs Tokyo in 1997 before moving to Merrill Lynch and then Société Générale, where he served as Chief Economist Japan. He holds an MBA from INSEAD and an MSc in Economics from Universitat Pompeu Fabra (Barcelona). In 2022, he co-authored Japan Risk, in Search for a Strategy to Survive with former Bank of Japan Vice-Governor Hiroshi Nakaso.