This Week's Weekly: The frenzy of "debasement" policies by Japanese and US authorities is the fuse to the simultaneous collapse of the Japanese and US bubbles.

 

This Week's Weekly: The frenzy of "debasement" policies by Japanese and US authorities is the fuse to the simultaneous collapse of the Japanese and US bubbles.

 

Monday, January 26, 2026

Tomo Nakamaru (Former World Bank Economist)

 

① What lies ahead as the Japanese and US authorities simultaneously pursue "debasement" policies?

 

Recently, exchange rates and stock prices have been unstable.

 

Behind this lies a little-discussed issue: Japan and the US are both continuing to pursue policies that weaken the value of their currencies.

 

This is not just a topic for experts. It is a very important issue that directly affects our lives, assets, and the future of the economy.

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■ America: The economy is booming, but interest rates are "too low."

 

The US economy is currently experiencing exceptional strength.

• Real GDP (growth excluding prices): +4.4% annualized in July-September

• Nominal GDP (growth including prices): +8.3%

• Growth is expected to accelerate further in October-December (nearly +9% nominal).

 

Normally, with an economy this strong, common sense would dictate raising interest rates further to curb overheating.

 

However, the Fed has instead cut interest rates three times in a row, leaving the policy rate at just 3.75%.

 

Nominal growth is 8-9%, but interest rates are in the 3% range, which is like stepping on the gas while easing off the brake.

 

If this situation continues, there's a risk that the bubble will overinflate and burst dramatically later.

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■ Japan: Expanded government spending and tax cuts are accelerating the economy, but interest rates remain at 0.75%.

Japan faces the same problem. Under Sanaenomics,

 

• This year's supplementary budget

• Next year's budget increase (totaling 11.5 trillion yen)

• A consumption tax cut on food products (approximately 5 trillion yen)

 

With these factors combined, it's only natural that the economy and prices will accelerate in fiscal 2026.

 

However, the Bank of Japan has left its policy interest rate unchanged at 0.75%.

 

With nominal growth likely heading toward 4-5%, interest rates below 1% are a dangerous setting that could further fuel inflation and asset bubbles.

 

 

■ "Debasement" Reveals the Market's True Feelings

 

As Robin Brooks (Brooks Institute, USA) recently pointed out, "debasement" is spreading in the market.

 

Simply put, this is a movement that believes "currencies of heavily indebted countries cannot be trusted"

and "buy currencies of less indebted countries."

 

The sudden recognition of the Swedish krona as a "safe haven" is a symbol of this.

In other words, the market is beginning to see the quality of the Japanese and US currencies as deteriorating.

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■ The "Sanae Shock" Reveals Weakness in the Japanese Government Bond Market

 

Last week, the stock market rally known as the "high market trade" in Japan suddenly began to collapse.

• Food tax cut pledge →

• JGBs plummet →

• Long-term interest rates soar →

• Stock prices plummet

This sequence of events demonstrates that Japan's government bond market has become so weak that it can be easily shaken by even the slightest policy change.

 

Another problem is that banks and insurance companies hold large amounts of government bonds, so a sudden rise in interest rates could quickly inflate their unrealized losses.

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■ The Japan-US Coordinated Intervention as the Exchange Rate Approached 160 Yen Was Only a "Life-Suspension Measure"

 

As the dollar-yen exchange rate approached 160 yen, Japan and the US engaged in coordinated intervention with a time lag.

 

However, this was merely a forced reversal of the side effects of policies that had been devaluing the currencies themselves.

 

The fundamental problem remains unresolved.

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■ Worst-case scenario: Simultaneous collapse of the Japanese and US bubbles → A repeat of the Great Depression

 

Japan and the US are currently in a dangerous situation:

• High debt

• Continuing policies that weaken the value of their currencies

• Central bank independence is shaky

• Interest rates are too low relative to the economic situation

• The government bond market is fragile

 

This situation is like the "bad conditions" of the 1929 Great Depression and the late 1980s Japan bubble collapse coming together.

 

If we continue to neglect the value of our currencies, the worst-case scenario of the largest bubble in the postwar period, followed by a subsequent bubble burst and Great Depression, is not just a pipe dream.

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■ Conclusion: Trust in a currency is the lifeline of a nation

 

Protecting the value of a currency means protecting the assets and futures of its citizens. The direction Japan and the US are currently heading is a dangerous path that could damage that trust.

 

The market is already quietly sounding the alarm.

 

 

② The Essence of Foreign Exchange Intervention: Understanding Japan-US Cooperation from the Perspective of the Civilizational History of Interest Rates

After the Bank of Japan's policy meeting on Friday, January 23, the dollar-yen exchange rate surged to 160 yen, followed immediately by a sharp reversal in the yen's appreciation.

 

This movement was not simply a market volatility; it is highly likely a coordinated Japan-US exchange rate check (a precursor to currency intervention).

 

What does this mean from the perspective of the "civilizational history of interest rates"? We summarize it below.

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1. The recent sudden appreciation of the yen is almost certainly the result of a "coordinated Japan-US exchange rate check."

 

The following has been confirmed by multiple overseas reports and testimonies from market participants.

• The New York Fed conducted a dollar-yen exchange rate check.

• A London broker also testified that the Fed was conducting an exchange rate check.

• The yen surged from 159 to 157 yen within 10 minutes of the press conference.

• The yen strengthened to the 155 yen range even during New York time.

•

This can naturally be interpreted as Japanese and US authorities recognizing 160 yen as a danger zone and sending a coordinated signal to the market.

I view this as a "de facto liquidation foreign exchange intervention."

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2. Why did Japan and the US share common interests at this time?

(1) Japan: Election + Inflation + Institutional Fatigue

• The dissolution of the House of Representatives directly translates into political risk: "weak yen inflation"

• Many political parties advocate consumption tax cuts, and concerns about worsening fiscal conditions are pressuring the yen to weaken

• The Bank of Japan is delaying interest rate normalization

• A breakthrough above 160 yen could be fatal to the administration

 

(2) US: Political expediency in avoiding a strong dollar

• President Trump tends to dislike a strong dollar

• European tariff controversy creates market uncertainty

• FOMC rejects interest rate cuts → High US interest rates pressure the dollar

• Fears of infectious disease lead to rising long-term interest rates in Japan, which in turn leads to rising long-term interest rates in the US

• Japan's intervention signal is also convenient for the US

In other words, both Japan and the US share the short-term interest that "160 yen is inconvenient."

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3. However, the sustainability of a strong yen is extremely unlikely

Structural factors have not changed.

• The interest rate differential between Japan and the US is historically large.

• Expectations of a US interest rate cut are receding.

• The Bank of Japan's normalization is slow.

• Concerns about fiscal deterioration remain strong.

Therefore, the current yen appreciation is seen as merely a "temporary reaction to an intervention signal" and is not likely to have the power to change the trend.

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4. Here's the essential point: What is foreign exchange intervention from the perspective of the "civilized history of interest rates"?

 

From a civilized historical perspective, foreign exchange intervention is "an act by the state to repair distortions in the time system (interest rates)."

(1) Unilateral intervention: Expelling foreigners (resistance to external pressure)

• Unsustainable

• Depletes foreign exchange reserves

• Cannot overcome the civilized structure of interest rate differentials

• Similar to prolonging the life of a fatigued system.

• From a civilized historical perspective, this is the same structure as the expulsion of foreigners at the end of the Edo period.

(2) Concerted Intervention: Opening the Nation (Dialogue of Civilizations)

• Highly sustainable

• Large impact on market sentiment

• Possible trend reversal when combined with interest rate policy

• Similar to a "civilizational consensus" like the 19th century gold standard.

In other words, concerted intervention is a "readjustment of the time system" between civilizations.

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5. Is the current Japan-US cooperation a "dialogue of civilizations"?

Conclusion:

Half dialogue of civilizations, half political expediency.

●Civilizational Aspect

• An excessively strong dollar and weak yen create global imbalances

• Both Japan and the US agree that "rapid fluctuations are undesirable."

●Political Aspect

• Japan: Election Strategy

• US: Preventing a "contagion" of rising US long-term interest rates from a sudden rise in Japanese long-term interest rates

• Bank of Japan: Desire to delay normalization

In other words, it is political cooperation "masquerading" as a dialogue of civilizations.

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6. Overall conclusion: This intervention is merely "prolonging the life of a fatigued system" and will not change the trend.

 

From the perspective of the civilizational history of interest rates:

As long as the time system (interest rates) remains distorted, foreign exchange intervention is merely a measure to prolong the life of civilization and has no power to change the trend.

 

The only way to truly change the trend is to normalize interest rates (restore the time system). This is the very first arrow of my "New Three Arrows for Creating the Future."

 

 

③ WSJ and FT Warn Against Takaichi's Dissolution and Sanaenomics: Outdated Inflation-Promoting Policies that Ignore Fiscal Discipline

 

Major international economic media outlets, including the Wall Street Journal (WSJ) and the Financial Times (FT), have taken a critical stance toward Prime Minister Sanae Takaichi's economic policy, "Sanaenomics."

 

The following summarizes the WSJ editorial (based on the edition around January 20, 2026) and the reactions of the FT and other publications.

 

1. Summary of the WSJ Editorial: Warn Against Takaichi's Dissolution and "Sanaenomics"

 

The WSJ views Takaichi's decision to dissolve the House of Representatives and call a general election as a "gamble to solidify her power base," while also pointing out the risk that her economic policies could undermine the stability of the Japanese economy.

• Concerns about fiscal discipline becoming a mere formality: The report criticizes Takaichi's proposals to shelve the goal of achieving a primary balance surplus and to shift to a flexible spending target that will be extended over several years as a de facto abandonment of fiscal discipline. They warn that continued expansionary fiscal spending, given that Japan's public debt currently exceeds twice its GDP, could undermine confidence in the government bond market.

• Intervention in monetary policy: Takaichi's public statement that "the government is responsible for monetary policy" and her apparent disregard for the Bank of Japan's independence are seen as political pressure to delay interest rate normalization to curb inflation.

• Risks of "Sanaenomics": The report argues that "Sanaenomics," an even more radical version of Abenomics, will likely worsen "cost-push inflation" without wage increases, further weaken the yen, and fail to lead to growth in the real economy.

 

2. FT (Financial Times) and International Reactions

The FT has also consistently criticized Takaichi's economic nationalism and expansionary policies (aggregate demand stimulation measures) since her victory.

• Comparison to Liz Truss: Columns in the FT and elsewhere have likened Takaichi to "Japan's Liz Truss (former British Prime Minister)." There are concerns that she could cause the same kind of chaos in Japan as Truss, who ignored market trust and pushed through massive tax cuts and fiscal stimulus, leading to market revolts (depreciating bonds and the currency).

• Central Bank Independence: The FT has harshly criticized Takaichi's repeated statements (later softened somewhat) that "interest rate hikes are foolish" as the Bank of Japan sought to raise interest rates, describing them as "an attempt to tie the Bank of Japan's hands."

• The Return of the "Bond Vigilantes": Market participants are wary of the return of "bond vigilantes," who are pushing long-term interest rates higher in anticipation of the Takaichi administration's fiscal expansion. This poses the risk of a sharp increase in the Japanese government's interest payment burden.

 

Summary

The editorial tone of major international newspapers tends to view Takaichi's policies as "outdated, inflation-promoting measures that ignore fiscal discipline" rather than "aggressive investment for growth." They are particularly wary of the erosion of the Bank of Japan's independence and the resulting weakening of the yen and accelerating inflation.

 

 

④ What is Japan's old media overlooking?

--A crucial difference in perspective from Western media, and the "three arrows" of creating the future.

 

Japan's major newspapers are writing almost daily about how "consumption tax cuts are irresponsible," "there are no financial resources," and "social security is at risk."

 

It's shocking to see how Asahi, Yomiuri, and Nikkei—three newspapers that are supposed to have different positions—strike out such a strikingly similar tone.

 

This domestic debate, dominated by the "funding debate," is far too narrow compared to the perspective of Western media.

 

Furthermore, the arguments of Japan's old media are at odds with the sensibilities of the average Japanese citizen.

 

Why? The reason is simple.

 

Japan's old media doesn't discuss the interconnectedness of the macroeconomy, instead confining the public to a household accounting-like framework of "financial resources."

 

On the other hand, Western media base their discussions on macroeconomic dynamics such as interest rates, foreign exchange rates, inflation, government bond markets, and central bank independence. Surprisingly, the reality of everyday life for ordinary Japanese citizens is actually closer to the Western media's analysis.

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1. Ordinary Japanese People Are Most Sensitive to "Inflation and a Weak Yen."

Ordinary Japanese citizens face the following issues on a daily basis:

• Rising food prices

• Rising utility bills

• Soaring import prices due to a weak yen.

 

This is in perfect agreement with the "cost of living issues" pointed out by Western media: a weak yen and inflation.

In other words, ordinary Japanese people are "experiencing" the Western media's macroeconomic analysis in their daily lives.

The problem is that domestic media does not provide this perspective.

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2. Japan's old media exploits the language barrier to trap the public in a "funding debate."

 

The tone of Western media is based on internationally standard macroeconomic discussions, such as:

• the need for interest rate normalization

• the side effects of fiscal expansion

• the structural risks of a weak yen

• the importance of central bank independence.

 

However, Japan's old media rarely introduces these topics. Even when they do, they strip them of their context and revert them to a domestic "funding debate."

 

As a result, the Japanese public is isolated from globally standard discussions.

 

This is exactly like the "open the country or expel the barbarians" debate at the end of the Edo period.

• Western media = "global-standard knowledge" brought by the Black Ships

• Japanese old media = information control that clings to the expulsion of foreigners ideology

• Japanese citizens = ordinary people who would choose to open the country if they were aware of global trends.

 

This analogy is by no means an exaggeration.

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3. The "Three Arrows" for Creating Japan's Future

--A Policy Axis Integrating Western Media Perspectives with the Realities of Japanese Life

 

The "Three Arrows" for Creating Japan's Future, proposed in my 12-part series (January 13-24), "Market Rebels and Japan's Future," are a set of policies with minimal yet maximum impact to rebuild Japan's macroeconomic structure.

1. Interest Rate Normalization

--Eliminating the Root Causes of the Weak Yen and Inflation

This is what Western media emphasizes most.

• Prolonged Unprecedented Monetary Easing

• Yen Carry Trade Due to Zero Interest Rates

• Persistent Yen Weakness

• Stagnant Real Wages

All of these are due to the failure of interest rates to normalize.

Interest rate normalization will simultaneously achieve three goals: correcting the weak yen, curbing inflation, and stabilizing the government bond market.

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② Abolish the Consumption Tax

--Abolish the Most Regressive Tax and Restore Domestic Demand

Japan's consumption tax:

• Places a heavier burden on low-income earners

• Permanently suppresses domestic demand

• Is a rare tax system in the world, introduced and increased during a period of deflation.

 

Western media are not downplaying the importance of a "consumption tax cut." Rather, the problem lies with the domestic media, which do not fully understand that Japan's consumption tax is a highly regressive, evil tax.

 

Abolishing the consumption tax would:

• Immediately improve real wages

• Restore domestic demand

• Lower the cost of living

 

 

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③ Abolish Industrial Policy

-- End political allocation and unleash the creativity of the private sector and the market

 

Western media most criticize the inefficiency of state-led industrial support.

• Semiconductors

• Quantum

• Green

• Regional revitalization

• Tourism-based nation

These are prone to political allocation and could lead to the crowding out of private investment.

Eliminating industrial policy will lead to:

• eliminating political arbitrariness

• restoring private capital allocation

• restoring the original source of productivity growth

 

 

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4. Conclusion: Japan Should "Open Up"

--Western Media Perspectives Are the Compass for the Future

The average Japanese citizen is already experiencing "global-standard macroeconomic pain" through:

• a weak yen

• inflation

• stagnant real wages

• rising cost of living.

 

However, domestic media trivializes this pain with "funding arguments" and isolates the Japanese public from global debate.

 

That is why Japan should "open up" in the information sense.

 

The three arrows of creating the future—(1) interest rate normalization, (2) consumption tax abolition, and (3) industrial policy abolition—are a "policy package of opening up" that connects Western media analysis with the realities of the Japanese people's lives.

 

Japan's path to reconnecting with the world and reclaiming its future begins here.

 

 

 

⑤ Reading the Nikkei editorial "We Can't Trust Our Future to Consumption Tax Cut Populism" - Don't Miss the Three Arrows of Future Creation

 

The January 21 (Wednesday) Nikkei editorial, "We Can't Trust Our Future to Consumption Tax Cut Populism," raises some understandable issues, but I must criticize its conclusion for being seriously flawed.

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■1. The Japanese Economy is Facing a "Quadruple Whammy"

The Japanese economy is currently facing an unprecedented quadruple whammy:

• A declining birthrate

• Long-term stagnation in consumption

• A depreciating currency

• Inflation

 

To address this crisis, interest rates must first be normalized.

 

Gradually raising policy interest rates into positive real territory is an unavoidable prerequisite, in light of the "Taylor Principle" proposed by Harvard University macroeconomist Professor Mankiw.

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■2. Interest Rate Normalization Has "Side Effects"

However, as interest rates approach positive real territory, the following side effects are inevitable:

• Concerns about a recession

• Pressure for the yen to appreciate

• Tension in the bond market due to rising interest rates

 

Therefore, interest rate normalization alone is insufficient; both economic support and price stability are required.

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■3. A permanent consumption tax cut to 5% is a "sufficient condition"

 

A sufficient condition for counteracting these side effects and moving toward sustainable growth is to permanently reduce the consumption tax rate to 5% and chart a path toward its eventual elimination.

 

A consumption tax cut is by no means populist.

 

Rather, it is a "second arrow" that permanently increases future disposable income and lays the foundation for creating the future.

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■4. Problems with Sanaenomics: The danger of trying to catch two rabbits at once

In response, we must say that there are serious concerns about the current policy management.

Simultaneously pursuing increased government spending (military expansion) and tax cuts increases the risk of fiscal collapse and undermines confidence in the bond market.

 

The sudden rise in interest rates last week is nothing less than a warning from the bond vigilantes.

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■5. Arbitrary industrial policies are a breeding ground for vested interests.

Furthermore, arbitrary industrial policies that funnel funds to specific industries in exchange for party tickets foster:

• hereditary control

• privilege

• vested interests

and hinder productivity growth.

 

What the Japanese economy needs is free competition that encourages creative destruction, not industrial policies that preserve vested interests.

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■6. These are the three arrows of creating the future.

The three arrows essential for creating the future are clear.

1. Normalizing interest rates (restoring civilization's time system)

2. Permanent tax cuts toward the abolition of the consumption tax (resource allocation for the future)

3. Eliminating industrial policy and creative destruction (free market competition)

These are mutually complementary, and without either one, the future will not be opened up.

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■7. Problems with the Nikkei Editorial: The Misconception that Consumption Tax Cuts Equal Populism

The Nikkei editorial dismisses consumption tax cuts as "populism that destroys the future."

 

However, this is a red herring. While the consumption tax is certainly a stable source of revenue, being a stable source of revenue and contributing to the creation of the future are two different issues.

 

In fact, it is our reliance on the consumption tax that has led to:

• stagnation in consumption

• deflationary pressure

• hindrance to productivity growth

 

It is a permanent increase in disposable income that will open up the future, and it is far too simplistic to dismiss tax cuts aimed at achieving this as populism.

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■8. Conclusion: Japan cannot be saved by discussions that lack a perspective on creating the future.

Japan is currently on the brink of institutional fatigue and a currency crisis. What is needed are the "three arrows of future creation":

• interest rate normalization

• a path toward abolishing the consumption tax

• a productivity revolution through creative destruction.

 

Discussions that dismiss consumption tax cuts as mere populism will not open up the country's future.