Weekly: The Die is Cast!
January 13, 2026
I. Takaichi’s "Declaration of War" and the Sudden "Dissolution Wind": Where is Japanese Politics Headed?
Deciphering the Depths of the Political Situation from the Opening 45-Minute Discussion on Democracy Times
1. The "Dissolution Wind" that Began to Blow Without Warning
The atmosphere of Japanese politics shifted abruptly last weekend. In Nagatacho, observations that "the winds of dissolution have begun to blow" spread all at once, and the media is rapidly switching to political-contest mode. At this timing, the prospect of dissolution is extremely high-risk for an administration suffering from low approval ratings. Nevertheless, why "now"? The discussion on Democracy Times (featuring Isoko Mochizuki, Ikuo Gonoi, and Akira Eiito) pointed out that three elements—declining administrative leadership, pandering to the right wing, and internal conflict—are complexly intertwined. In particular, the recent hardline remarks by Sanae Takaichi—the so-called "Declaration of War" issue—are significantly destabilizing the internal dynamics of the administration.
2. What is Sanae Takaichi’s "Declaration of War" Issue?
The central theme of the program was indeed Ms. Takaichi’s remarks. Under the pretext of "strengthening deterrence," she continued to use expressions that incite military tension, leading to a flurry of criticism that there is a lack of cool-headed discussion based on international circumstances. Isoko Mochizuki emphasized "the danger of speaking about 'war' without understanding the reality of diplomacy and security." Ikuo Gonoi went further, stating, "When politicians speak of 'war' lightly, democracy falls into its deepest crisis." These remarks are being received not as mere "slips of the tongue," but as an expression of a political stance that prioritizes appealing to the right-wing base.
3. The "Vanity Dissolution" Theory—The Illusion of "Takaichi Popularity"
The program title also included the phrase "Takaichi Vanity Dissolution." This is a satirical expression for the illusion that "if Ms. Takaichi is put at the forefront, conservative votes will return, and the election can be won." The analysis by the participants was sober:
Backlash from urban and independent voters is instead intensifying.
While pandering to the right may win applause in the short term, it weakens the foundation of the administration in the long term.
The Kishida administration's judgment has become short-termist due to low approval ratings, and it has lost its strategic sense.
Akira Eiito warned, "If the administration misjudges its distance from right-wing groups, it will collapse all at once."
4. Unification Church and Political Funding Issues—The "Unresolved Triggers"
The program also touched upon the Yamagami trial and political funding issues. These remain "unresolved triggers" for the administration.
The Unification Church issue has not subsided.
The network between right-wing politicians, including Ms. Takaichi, and the religious right remains robust.
Dissolution also has the aspect of a "political operation" to divert the public's attention from these issues.
The view emerges that the structural problems facing the administration are being attempted to be temporarily covered up by the "strong medicine" of dissolution.
5. The Dangerous Intersection of International Affairs and Japanese Politics
From the perspective of international politics, Ikuo Gonoi emphasized, "Global tensions must not be used as tools for domestic politics." As the US-China confrontation deepens, Japan is becoming too "forward-leaning." Security policy has become linked to election strategy, while the lives of the citizens and economic policy are being sidelined. Isoko Mochizuki also noted, "While national wealth is being lost, politics is heading in a direction of flattering the right," highlighting the lack of economic policy. This overlaps with the themes I have pointed out: "the deterioration of institutions," "the short-termism of politics," and "civilizational regression."
6. Summary—The "Dissolution Wind" as a Terminal Symptom
Synthesizing the discussion from the first 45 minutes of the program, a common understanding emerges that this "dissolution wind" is a "vanity dissolution" motivated not by policy judgment but by the survival of the administration and pandering to the right.
Ms. Takaichi’s remarks are symbolic of the administration's rightward shift and internal chaos.
Dissolution is a decision that prioritizes the maintenance of the administration over the lives of the citizens.
Japanese politics is tilting in a dangerous direction in terms of diplomacy, security, and the economy.
This framework indicates not just a political situation, but a "deep crisis" for Japan's democracy and institutions.
7. Insights from a Civilizational Perspective
From the perspective of civilizational history and institutional theory, this political situation can be organized as follows:
When politics is ruled by "sentiment" (passion) rather than "ideals," institutions deteriorate.
When diplomacy and security become tools of domestic politics, the nation moves in the wrong direction.
When economic policy recedes into the background, national wealth is surely lost.
Pandering to the right may win cheers in the short term, but it deepens the division of society in the long term.
In other words, this dissolution wind should be understood as a "symptom" resulting from the institutional fatigue of Japanese politics reaching its limit.
8. In Closing
the discussion on Democracy Times was not merely an explanation of the political situation, but content that illuminated the structural crisis facing Japanese politics. Ms. Takaichi’s remarks, the sudden dissolution wind, pandering to the right, political funding issues, and the tension in international affairs—all of these are connected by a single line. At the end of that line lies the fundamental question: "Where is Japan's democracy headed?"
II. Summarizing the AI Session at the American Economic Association (AEA) 2026 Annual Meeting
The AEA Annual Meeting was held in Philadelphia from January 4th to 6th, 2026. The summary of the notable AI session is as follows:
The theme was "How AI Affects Labor Productivity and Industrial Structure." MIT’s Erik Brynjolfsson served as the moderator, and researchers and corporate practitioners took the stage.
The key points are largely divided into five:
The "J-Curve Effect" in AI Adoption
Initially, productivity drops. However, it rises all at once as organizational reform and skill retraining progress. This is the same pattern as the IT revolution.
Productivity Gains in Knowledge Industries are Particularly Significant
In publishing, media, law, consulting, and programming, the speed of writing, research, summarization, and translation has increased, with efficiency gains of 30–50% observed in some cases.
AI Potential to Push Up US Total Factor Productivity (TFP) by 0.3–0.9%
This is equivalent to or greater than the IT revolution era. However, the effect depends on the "quality of complementary investment."
Supplementing Rather Than Replacing Workers
AI raises the baseline of average workers' abilities. High-skill groups grow even further. There is also the possibility that the skill gap will narrow.
Whether Institutional Design Can Keep Up is the Greatest Challenge
Misinformation, legal liability, governance, retraining, etc. If institutions do not keep pace with technical progress, social costs will increase.
Summary
AI is a "second IT revolution" and will dramatically push up the productivity of knowledge work. However, because it rises after passing through a J-curve, there will be short-term confusion. Whether institutional design can keep up seems to be the turning point for the future.
III. Must-See AEA Annual Meeting Session: "The Future of the FRB"
The presentation by Mr. Orphanides (former Governor of the Central Bank of Cyprus, MIT Professor) in the notable session titled "The Future of the FRB" at the AEA Annual Meeting overlapped surprisingly with the sense of unease I have long held toward the FRB.
He positioned post-COVID inflation as a "failure of discretionary monetary policy" and cited the "Pretence of Knowledge" and "Proclivity for Discretion" as chronic diseases of central banks.
What I have pointed out for many years are two major problems that could be called the Fed's Achilles' heel: the "too low neutral interest rate" and the "FOMC that cannot do addition in the SEP."
If discretionary policies continue based on an underestimation of the neutral rate and outlooks lacking macroeconomic consistency, it is only natural that inflation, bubbles, and financial imbalances will recur.
The "simple and transparent rules" and "accountability upon deviation" proposed by Mr. Orphanides are challenges posed not only to the Fed but to all central banks, including the Bank of Japan.
In the world of monetary policy, the question being asked now is not "who is the smartest," but "which institution is most resilient to errors." The following is a systematic reconstruction of his presentation at the AEA session.
1. Problem Statement: Post-Pandemic Inflation was a "Policy Failure"
Professor Orphanides clearly pointed out at the beginning:
The inflation surge in 2021–2022 was exacerbated by the Fed's discretionary judgment errors.
The Fed maintained zero interest rates for "too long."
Policy remained unchanged even though inflation expectations were rising.
This was a "discretionary runaway" and could have been avoided by following rules.
2. Two Structural Problems: Pretence of Knowledge and Discretion
Professor Orphanides cited the following two points as long-standing problems for central banks:
① Pretence of Knowledge: Central banks act as if they "know exactly" variables like the potential growth rate, the natural rate of interest, and NAIRU, when in fact the uncertainty is extremely high.
② Proclivity for Discretion: Discretionary policy is easily influenced by political pressure, excessive optimism, and past biases, resulting in policy delays.
3. Solution: Adoption of Simple Policy Rules
The core of his argument is here: "Simple and transparent rules, rather than discretion, enhance the resilience of the central bank."
Advantages of Simple Rules: They function robustly even under imperfect knowledge, suppress discretion, and make communication with the market clear.
Specific Example: Natural Growth Targeting Rule. This was presented in the Fed's internal Bluebook/Tealbook starting in 2004 but was not made public or adopted. If it had been adopted, it likely would have prevented excessive easing and the unanchoring of inflation expectations.
4. Strengthening Transparency: Deviations from Rules Must Entail Accountability
Orphanides emphasized that when deviating from the rule, the reasons must be disclosed to suppress the runaway of discretion and strengthen the central bank's credibility.
5. Conclusion: To Enhance the Resilience of Central Banks
"The greatest enemies of central banks are 'overconfidence' and 'discretion.' Rules and transparency are the only way to prepare for the next crisis." This is a universal point applicable to the ECB and the BoJ as well.
IV. Reconstruct Monetary Policy with the "Natural Growth Targeting Rule"!
1. Introduction: Why is a Policy Rule Needed Now?
In the 2020s, the world economy faced historical high inflation following the pandemic. The Fed introduced Flexible Average Inflation Targeting (FAIT), but as a result, rate hikes were delayed, and they are facing criticism for making a major policy mistake. Professor Orphanides presents a new prescription for "moving away from excessive reliance on unobservable variables (star variables)."
2. Core Concept: The Trap of "Star Variables"
The basis of Orphanides' argument is a strong wariness of unobservable variables ($r^*$, $u^*$, $y^*$). While theoretically important, their fatal flaw is that they "can never be measured accurately in real time." As Chair Powell compares it to "navigating by the stars under cloudy skies," relying on these leads directly to policy errors due to measurement errors.
3. Proposal of the "Natural Growth Targeting Rule"
Orphanides proposes a rule focused on the growth rate rather than the level.
Mechanism: $i_t = f(E_t[ngdp_{t+3}] - (y^*_t + \pi^*))$
Target: Forecasted growth rate of nominal GDP 3 quarters ahead.
Benchmark: Potential growth rate (approx. 2%) + Inflation target (2%) = 4% Nominal Growth.
Operation: If forecasted nominal growth exceeds 4%, raise rates; if below, lower them.
Why is this rule superior?
Robust to measurement error: Estimating "growth rates" is much more accurate than measuring "levels."
Can ignore $r^*$ (Natural Rate of Interest): Since it shows the "direction to move" rates rather than the "level," you don't need to know where $r^*$ is.
V. The Paradigm Shift in Monetary Policy is a Major Trial for the BoJ
1. Visualizing the Structure of Policy Errors
A. Fighting the "Ghost" of the 1970s: The failure was pursuing "economic slack" that did not exist.
B. Anatomizing the Natural Growth Targeting Rule: A simple combination of 3-quarter ahead nominal growth forecasts, the trend potential growth rate (approx. 1–2%), and the inflation target (2%).
2. Comparison: Level Targeting (Beckworth) vs. Growth Targeting (Orphanides)
| Item | Nominal Income Level Targeting | Nominal Income Growth Targeting |
| :--- | :--- | :--- |
| Proponent | David Beckworth, Scott Sumner | Athanasios Orphanides |
| Response to Past Misses | "Make-up." Continue easing until past shortfalls are recovered. | "Bygones be bygones." Focus on the present growth matching the target. |
| Function in History | Effective after the Lehman Shock (solving demand shortage). | Effective in the post-COVID inflation phase (responding to abnormal growth). |
3. Detailed Comparison of 3 Major Rules
| Feature | Taylor Rule | Level Targeting (LT) | Natural Growth Targeting (Orphanides) |
| :--- | :--- | :--- | :--- |
| Dependent Variable | Inflation + Output Gap | Deviation from Nominal Income Trend | Nominal Income Growth Forecast |
| Benefit | Established standard guide | Strong influence on expectations | Most robust to measurement errors |
| Drawback | Weak against mismeasurement of $r^*$ | Risk of "overshooting" | Temporarily allows inflation during supply shocks |
| Suitability | Low (frequent revisions) | Medium (hard to explain) | High (operable with forecast data) |
4. Simulation: If this rule existed in 2021
In 2021, US nominal GDP growth was over 10%. With a target of 4%, the gap was 6%. Even with a conservative coefficient, this signaled the need to raise rates by 3% by the end of 2021. The Fed waited until March 2022. The Orphanides Rule would have allowed preemptive hikes.
VI. The BoJ Cannot Avoid Large, Continuous Rate Hikes!
1. Application to Japan: A "New Compass" for the BoJ
If Governor Ueda adopts this compass:
Liberation from the "Invisible $r^*$": No need to worry if Japan's $r^*$ is negative. Only judge if nominal growth (wages + prices) exceeds the target.
Trial Calculation: Potential growth (0.5%) + Inflation target (2.0%) = Target Nominal Growth of 2.5%. If forecasts exceed 2.5%, rates can be raised mechanically.
2. Historical Verification: Applying to the 1990s–2010s
Late 1990s: Nominal growth was 0% while the target was 3%. The rule would have urged immediate negative interest rates.
Abenomics Era: The rule would have supported continued easing, but without the "make-up" requirement of level targeting, allowing for an earlier "exit" once 3% growth was reached.
3. Current Analysis: Risks Under 2026 "Sanaenomics"
A. Impact of Over 5% Nominal Growth: 2026 spring wage negotiations are at 5%, and nominal GDP growth is also hitting 5%. The gap is +2.5%. This is "emergency-level overheating," requiring rates to rise from 0.75% to the 2.0–3.0% range.
B. Impact of Fiscal Expansion (3% of GDP): With Takaichi's massive 21.3 trillion yen budget, fiscal policy is at "full throttle." The central bank must step harder on the brakes (rate hikes) to offset this.
4. Verifying the Fear: Large Continuous Hikes are Unavoidable!
Why is this necessary?
Real interest rates are still significantly negative: With 3% inflation and a 0.75% policy rate, real rates are below -2%, which is extremely stimulative for an economy growing at 5%.
Uncertainty of $r^*$: While the BoJ assumes $r^*$ is near 0%, the nominal growth of 5% indicates the economy can already withstand rates of 2% or more.
5. Conclusion: The BoJ faces "Orphanides' Dilemma"
If Takaichi's fiscal expansion fails to improve supply capacity (potential growth) quickly, the BoJ will be under intense pressure to hike rates to counter the demand explosion. If Governor Ueda adopts the "transparent rule," market consensus for 3% rates will emerge, potentially causing a shock to mortgages and corporate loans. Avoiding this through "discretionary delay" would be a revival of the "1970s error" Orphanides warned about.
Tomo Nakamaru
Former World Bank Economist
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