Yasuko Koido 
Prime Minister Sanae Takaichi’s administration will set economic and fiscal policy guidelines for 2026 in mid-July, targeting JPY370trn (US$2.3trn) in combined public and private investment by fiscal year 2040. We believe the guidelines heighten the risk of serious fiscal slippage in the coming years.
One of the central questions running through technology policy today is deceptively simple: what kind of policy environment allows technology to deliver its full economic potential?
One of the great privileges of working in economic consulting is the opportunity to see the same issue from many different perspectives.
Over the past year, I’ve had conversations with technology companies on topics ranging from AI governance and copyright to data regulation, digital competition, and semiconductor policy. They are very different debates, involving different technologies, different stakeholders, and different policy objectives. Yet they often arrive at remarkably similar economic questions.
The Bank of Japan (BoJ) raised its policy rate from 0.75% to 1% on June 16 despite the uncertainty around the Middle East conflict. The BoJ kept its forward guidance that it will continue interest rate normalization. However, the persistent perception in FX markets that the BoJ is behind the curve will likely continue to put pressure on the central bank to hike the policy rate faster and higher in the coming quarters.
We’ve raised our end-2026 10-year Japanese government bond (JGB) yield forecast to 2.8% from 2.5%. The prospect of higher inflation will keep yields elevated globally, and concerns about Japan’s fiscal expansion will also persist. We now see the risks to our JGB forecast as more balanced, although a further increase still isn’t out of the question.
Despite the continued uncertainty around the Middle East conflict, we now expect the Bank of Japan (BoJ) to raise its policy rate from 0.75% to 1% on June 16. No action from the bank would invite further yen depreciation, exacerbating the terms-of-trade shock. In our view, BoJ Governor Kazuo Ueda’s hawkish speech on June 3 is a precommitment to a hike.
We have raised our CPI forecast for Japan for this year and next, reflecting a revised profile for oil prices. We now expect core-core CPI (excluding fresh foods and energy) will stay elevated for an extended period, falling to 2% only in Q4 2027, instead of Q2 2026 as expected two months ago.
The Bank of Japan (BoJ) kept its policy rate at 0.75% at its March meeting. We now project the central bank will delay the next rate hike to July from June given the economy could fall into stagflation. Thereafter, the bank is projected to continue gradual rate hikes in Q1 and Q3 2027.
A sweeping reset of global trade policies under Trump 2.0 have triggered a sharp global pullback in foreign direct investments, yet Asia has shown notable resilience. In a study for the Hinrich Foundation, Oxford Economics examines how structural shifts in Factory Asia and China’s rise as a regional investor have been reshaping regional capital flows. The report explores what these changes mean for the trajectory of Asia’s FDI in a rapidly changing global environment.
The past year has seen a reshaping of long-run risks, with rising trade uncertainty, threats of US isolationism, and accelerating AI investment. This is highlighted by our Global Risk Survey, which captures what clients perceive as key risks and informs how we update our Megatrends Scenarios.
We’ve raised our terminal rate assumption for the Bank of Japan to 1.5% from 1% in February. This reflects changes in our estimate for Japan’s neutral interest rate, r* – the equilibrium level at which the policy rate should eventually settle – resulting from recent revisions to GDP, a new fiscal policy outlook, and rising inflation expectations.
The ruling Liberal Democratic Party’s (LDP) landslide election victory on Sunday doesn’t change our expectation of a primary fiscal deficit of 2%-3% of GDP in FY2026-FY2028 – we still see the deficit only starting to decline from FY2029. We also keep our view that the 10-year Japanese government bond (JGB) yield will be at 2.3% at end-2026 and 2.5% at end-2027 and beyond.
In our upcoming February forecast update, we’ll stick to our expectation of a primary fiscal deficit of 2%-3% of GDP in FY2026 and FY2027, but now think it will remain at that level in FY2028, only starting to gradually decline in FY2029 and beyond.
Today, Asia sits second in global data centre market share, behind North America, and the growth in capacity is set to expand by double digits over the next few years.
Japanese government bond yields have surged over the past few weeks. Here, we answer the most frequently asked questions about why this is happening and what it means for Japanese policy.
We expect the ongoing memory chip shortage to be particularly harmful for the purchasers of traditional memory chips such as electronics, electrical machinery, and automobile manufacturers. The IT services sector will also be hit, but strong demand for AI and higher profit margins will partly shield them.
We have upgraded our outlook for business investment and productivity in Japan following the December transition to 2020 as the base year used to estimate GDP. The new figures show that software investment by SMEs since the 2010s has been much stronger than previously thought.
The Bank of Japan raised its policy rate by 0.25ppts to 0.75% at its meeting on Friday, which the dovish government had to accept in face of yen weakening pressures. Although we still project another hike to a terminal rate of 1% in mid-2026, the BoJ could find it more difficult to justify this if inflation eases towards 2% in H1 2026 and pressure on the yen fades.
We’ve changed our fiscal outlook for Japan in our December forecast round. We now expect the new government to set a primary deficit close to that of 2024, at 2%-3% of GDP for 2025-2027, instead of restoring a balanced budget by taking advantage of strong tax revenue. We assume higher bond yields will force the government to take measures to reduce the deficit from 2028.
EMDEs are projected to account for 70% of global CO₂ emissions by 2050, making accelerated emissions reductions in these economies essential. Yet gaps in AE leadership—such as US policy rollbacks and insufficient climate finance—risk slowing the global transition.
