Yasuko Koido 
Trade economists have long recognised that domestic regulations can affect international trade, even when restricting trade is not their purpose. As more economic activity becomes digital, some of the barriers to international commerce are turning up in less familiar places.
Japan’s Takaichi government approved a plan to cut the food consumption tax to 1% from 8% without resorting to debt finance in FY2027-2028 (Q2 2027-Q1 2029). However, we now assume that a primary balance will deteriorate to a 3% of GDP deficit and the 10-year Japanese government bond yield will rise to 3% by the end of 2026, as it will be challenging to fully make up for the lost tax revenue.
US-Japan coordinated FX intervention will likely have a longer lasting effect compared with past unilateral interventions but it still will not be enough to reverse the trend of yen weakness. We assume a slightly stronger path for the yen in the coming months but maintain our yen forecast for year-end and in 2027.
The Bank of Japan (BoJ) kept its policy rate at 1% at Friday’s meeting, as expected. We continue to project that the central bank will hike in December after assessing the impact of the June rate hike, as requested by the government. But a rate hike in October is possible, especially if the yen depreciates further.
There is a growing consensus that artificial intelligence (AI) has the potential to raise productivity, improve competitiveness, and underpin long-term economic growth. Yet at the same time, governments are placing more weight on AI sovereignty, seeking greater control and oversight over the data, compute infrastructure, AI models, tooling, and applications that increasingly underpin economic and public-sector activity.
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.
