Weekly Report :
Japan’s Grand Design for National Reboot (March 22, 2026 Edition)
**The Hormuz Strait Crisis and the Approaching “Japan–U.S. Joint Volcker Moment”
— Abandoning the Remnants of Great-Power Illusions: Toward Monetary Normalization, Abolition of the Consumption Tax, and the End of Industrial Policy**
Introduction: A Civilizational Turning Point and the Collapse of Expectations
In March 2026, global financial markets moved beyond the unwinding of the “political optimism rally” and entered a far more serious second phase — the exposure of policy delays.
The risk of a blockade in the Strait of Hormuz is not merely an energy supply issue. It signals that the “high‑pressure economy” model — excessive fiscal stimulus combined with a persistent monetary‑easing bias — long relied upon by both Japan and the United States, is now breaking down under the weight of a cold, unforgiving supply shock.
Over the three weeks since early March, the U.S. “TACO trade” and Japan’s “Takaichi trade” have both reached “the beginning of the end.”
Markets are rejecting the comforting political narratives and confronting policymakers with the hard reality of interest rates.
I. The End of the TACO and Takaichi Trades — What the Three‑Week Turmoil Reveals
1. United States: The Unwinding of the TACO Trade and Erosion of Trust in the Fed
The Federal Reserve has continued to underestimate the neutral rate ( r^* ) at 3.1%, even as nominal growth exceeds 5%.
This gap has produced the unusual combination of falling equities and a stronger dollar — a clear expression of market distrust that “the Fed is structurally behind the curve.”
- Fed’s miscalculation: Ignoring the rise in the natural rate of interest
- Market reaction: Higher yields → equity correction → stronger dollar
- Background: Chronic fiscal deficits and political pressure for continued easing
To preserve the politically appealing narrative of a “soft landing,” the Fed postponed necessary tightening. The cost of that delay is now erupting in the bond market.
2. Japan: The Reversal of the Takaichi Trade and the BOJ’s Hesitation
The moment the Bank of Japan held its policy rate at 0.75%, Nikkei 225 futures plunged 13.3% in three weeks, the worst among major markets.
Investors delivered a clear rebuke to the BOJ’s “violation of the Taylor principle through persistent negative real rates.”
- Real interest rate: Still around –2%
- Inflation expectations: The anchor is beginning to loosen
- BOJ’s problem: Normalization delayed by political pressure
Under the banner of a “virtuous cycle,” Japan has maintained an abnormally accommodative stance with deeply negative real rates.
As a result, inflation expectations are creeping upward and confidence in monetary policy is eroding.
II. The “80 Trillion Yen Project” and the Trap of Great‑Power Illusions
The 80‑trillion‑yen investment package agreed upon at the recent Japan–U.S. summit is effectively a ransom payment for the reciprocal tariffs that the U.S. Supreme Court ruled illegal.
This is a classic case of “burden shifting” seen in the senescent phase of great‑power politics — and represents the very form of structural subordination Japan must avoid.
Where does the real problem lie?
- The root of the Japan–U.S. trade imbalance is not U.S. protectionism but Japan’s chronic lack of domestic demand
- Government‑engineered investment only further rigidifies both economies
- Japan’s fiscal capacity is already near its limit
The 80‑trillion‑yen project may serve short‑term diplomatic optics, but in the long run it undermines Japan’s autonomy and weakens national strength.
III. Special Column: Why Abolishing the Consumption Tax Is the Most Powerful Supply‑Side Reform
The core of my proposed “New Three Arrows” is the belief that abolishing the consumption tax is the only policy capable of dramatically restoring Japan’s supply capacity.
1. The consumption tax functions as a “production cost”
For small and medium‑sized firms that struggle to pass on prices, the consumption tax effectively acts as:
- Higher input costs
- A penalty on labor costs
- A brake on investment and risk‑taking
Abolition would mean a simultaneous reduction of intermediate costs across all industries.
2. The strongest defense against a Third Oil Shock
By reducing internal cost burdens in the face of an external supply shock (higher oil prices), Japan can avoid stagflation.
- Eases cost‑push pressure
- Supports real household income
- Restores corporate investment capacity
3. Firsthand experience as an author: A supply chain under strain
Across publishing, printing, logistics, and production, the consumption tax functions as a multi‑layered friction that suppresses creative destruction.
Subsidies and wage‑push campaigns act like doping on an economy with weakened supply capacity — accelerating inflation rather than solving the problem.
What Japan needs is structural reform to remove supply bottlenecks, not more fiscal injections.
IV. The Shared Fate of the U.S. and Japan: The Endgame of the High‑Pressure Economy
Japan and the United States are now committing parallel errors.
United States: The illusion of a soft landing
- Insufficient real tightening
- Deviation from the natural‑growth‑targeting rule
- Chronic fiscal deficits
Japan: The myth of a virtuous cycle
- Real interest rate at –2%
- Perpetual fiscal expansion
- Excessive industrial policy intervention
When this “high‑pressure economy” collides with the ultimate supply shock — a potential closure of the Strait of Hormuz — the outcome is clear:
A replay of the early‑1980s Volcker Shock.
With inflation expectations fully unanchored, central banks would be forced to raise rates toward double digits, even at the cost of recession.
V. The New Three Arrows — The Only Path to Prevent a Volcker‑Style Shock
Supply shocks cannot be overcome through monetary easing or fiscal expansion.
What is required is an integrated approach combining demand restraint and supply enhancement.
| Policy | Objective | Civilizational Significance |
|---|---|---|
| Arrow 1: Monetary Normalization | Gradually restore positive real rates; anchor inflation expectations; prevent violent rate hikes. | Restore central bank credibility; exit discretionary policy. |
| Arrow 2: Abolition of the Consumption Tax | Create a positive supply shock; revive domestic demand; reduce export dependence. | Establish a uniquely Japanese model for overcoming supply shocks. |
| Arrow 3: Abolition of Industrial Policy | Eliminate government‑engineered rents; promote market‑driven creative destruction. | Shift from great‑power illusions to an advanced small‑nation model. |
Conclusion: The Advancement of Small‑Nation Strategy Will Save the World
Monetary policy is not the “display of knowledge” but the management of ignorance.
As long as the Fed and BOJ rely on “invisible star variables,” the cycle of inflation and asset bubbles will not end.
Japan must now break free from great‑power subordination and rebuild its supply capacity.
Only then can it present to the world a new civilizational model:
“A nation capable of overcoming supply shocks.”
On that foundation, a truly reciprocal Japan–U.S. relationship can finally be built.
Table: Historical Comparison of Oil Shocks
| Year | Cause | Impact | Interest‑Rate Response |
|---|---|---|---|
| 1973 | First Oil Shock | Supply constraints | Sharp rate hikes |
| 1979 | Second Oil Shock | Stagflation | Volcker Shock |
| 2026 | Hormuz Crisis | Supply disruption risk | Delay in normalization poses greatest risk |
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