Disclaimer: This article is provided for informational and educational purposes only and is not intended as investment advice. It does not constitute a recommendation to buy, sell, or hold any specific security. The views expressed are solely those of the author and are subject to change without notice.

Executive Summary

If perovskite solar cells become widespread, many people will assume one thing.

The companies that make them will win.
But the history of solar panels points to a different answer.

The real value did not go to those who made the panels.
It went to those who turned land into power plants.

And perovskite is fundamentally different from conventional flat panels.

It does not depend on a specific kind of place.

Not only rooftops, but walls, windows, stations, roads, and factories.

So the real question is not who makes them, or who owns the place.

It is who can turn all these different surfaces into power plants.

Chapter One: Where Value Was Really Created in the Solar Boom

First, why did solar panels become a boom in Japan?

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Disclaimer: This article is provided for informational and educational purposes only and is not intended as investment advice. It does not constitute a recommendation to buy, sell, or hold any specific security. The views expressed are solely those of the author and are subject to change without notice.

Executive Summary

In the previous article, I described perovskite solar cells as a technology that changes where solar power can be placed.

So why does that where matter so much in Japan?

Because the easy places are already taken.

Japan wants to add more solar power.
But it does not have the land.
It has many mountains, limited flat land, and its cities, farmland, factories, and roads are already filled with other uses.

Then comes another source of pressure.
AI, data centers, and semiconductor fabs.

A country that keeps buying fuel from abroad now wants more electricity, even though it has little land.

At the center of this contradiction sits the perovskite solar cell.

The reason the Japanese government is investing heavily in this technology is not simply because it is new.
It is because this technology fits Japan’s weaknesses almost unsettlingly well.

Limited land, energy insecurity, AI-era electricity demand, domestic resources, and industrial policy.

All of them are beginning to converge around one technology.

Reason 1: The Problem With Conventional Solar Panels

Conventional solar panels are running into three walls.

1. Heavy, rigid panels can only go in certain places

Silicon solar panels were the technology that brought solar power to the world.

But that technology assumes there is suitable space for it, such as large plots of land, strong rooftops, flat surfaces, and locations that are easy to maintain.

Conventional panels are heavy, rigid, and thick.
They are difficult to place on older buildings, roofs with limited load capacity, or the narrow gaps of dense cities.

And in Japan, flat land accounts for only 34% of the country.
Source: NEDO, Solar Power Development Strategy 2025

Still, within that limited land, Japan has already installed a significant amount of solar power.

Note: Comparison based on solar capacity density per land area
Source:
IRENA, Renewable Capacity Statistics 2026
World Bank, Land area (sq. km)

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Disclaimer: This article is provided for informational and educational purposes only and is not intended as investment advice. It does not constitute a recommendation to buy, sell, or hold any specific security. The views expressed are solely those of the author and are subject to change without notice.

Executive Summary

Solar power already looks like a mature industry.

Panels made in massive factories are installed across open land, rooftops, and utility-scale solar farms.
The image has become familiar around the world.

Yet Japan is now putting serious attention behind a new generation of solar technology.

That technology is called perovskite solar cells.

The promise is not simply a better solar panel. Perovskite could change solar power from something installed only in specific places into a material that can enter cities, buildings, and infrastructure itself.

That is why researchers, companies, and governments are paying attention.

And importantly, the opening chapter of this story begins in Japan.

This article explains what perovskite solar cells are, why they are being discussed as the next shape of the solar industry, and why Japan matters in this story.

The 3.8% Discovery Few People Noticed

Perovskite solar cells did not look like the obvious next winner from the beginning.

If one only looked at the first numbers, this did not seem like a technology that could reshape the global solar industry.

Note:
Conversion efficiency is the share of sunlight converted into electricity.
The chart shows approximate research-cell efficiency records.

Source:
NLR, Best Research-Cell Efficiency Chart
Solar Cell Efficiency Tables, Version 66

In 2009, a Japanese research team reported the use of perovskite as a material for solar cells.

At that time, crystalline silicon solar cells had already reached around 25% efficiency at the research-cell level.
Perovskite solar cells, by contrast, were only around 3.8%.

But what stands out is how quickly it improved after that.

Silicon solar cells were already a mature technology in 2009. Perovskite, however, climbed to the 27% range by 2025.

Researchers around the world improved the material structure, manufacturing methods, and technologies to reduce degradation. As a result, the gap with silicon has almost disappeared.

A technology that once looked weak is now moving closer to becoming one of the leading candidates for the future of solar power.

Perovskite can also be layered on top of a silicon solar cell in what is called a tandem structure.

In theory, this tandem structure could push conversion efficiency to around 43%.
Source: Fraunhofer ISE

The appeal of perovskite is not that it might edge past silicon.

It is that, in a tandem structure, it could lift the ceiling of mature silicon technology.

And Japan was there at the beginning of that story.

How Perovskite Differs from Conventional Solar Panels

The meaning of perovskite is not only about efficiency.

The deeper question is this:

Where can solar power be installed?

Conventional solar panels have mainly relied on silicon.

Silicon-based solar panels became widely adopted around the world because they are efficient, proven, and supported by decades of manufacturing experience.

The constraint is physical.

Conventional panels are heavy and rigid, so solar power usually needs open land, strong rooftops, or enough room for installation.

Perovskite solar cells could change that assumption.

Because perovskite cells can potentially be made thin, lightweight, and flexible, building walls, older rooftops, windows, public facilities, and urban infrastructure could turn into power-generating surfaces — places that were once hard to imagine as solar sites.

This is the real difference from conventional panels.

Perovskite is a technology that could shift solar power from panels placed on land and rooftops to power built into buildings themselves.

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Disclaimer: This article is provided for informational and educational purposes only and is not intended as investment advice. It does not constitute a recommendation to buy, sell, or hold any specific security. The views expressed are solely those of the author and are subject to change without notice.

Executive Summary

Japan’s regional areas are shrinking as the population declines.

That is an unavoidable reality.

In the next phase, it will no longer be enough to say that regional Japan is shrinking as one single category.

Semiconductors, tourism, AI, defense, logistics, renewable energy, and wealthy migration are beginning to pull people, capital, and industries into places with clear themes.

This is different from the old model of regional development, which relied heavily on attracting factories.

In the coming years,
AI infrastructure, tourism, wealthy migration, and national strategy will widen the gap between places that grow and places that decline.

In other words, even in an age of population decline, regions with clear themes can still create new demand.

This article looks at the regional areas in Japan that may continue to develop in the population-decline era, and the forces behind that change.

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The Essence Is Not in the Numbers

For a long time, Japan’s regional development story was built around population growth, factory attraction, large commercial facilities, and public works.
Source:Regional Economies in Postwar Japan

But in an era when the population is no longer growing, not every region can grow in the same way.

The real issue is not how many people live there, but what exists there.

Four Themes Accelerated by Population Decline

Because Japan’s social structure is under pressure, new forms of demand are emerging.

The regions where that demand remains tend to have four themes.

1. Semiconductors and AI Infrastructure

In Kumamoto and Hokkaido, semiconductor-related investment is already beginning to move local economies.

What the AI era needs is not only factories, but also the massive infrastructure that supports computing power.

That requires regions with stable electricity supply, water resources for cooling, large amounts of land, and high-speed communications networks.

Kumamoto has a concentration of semiconductor-related industries and abundant groundwater, while Hokkaido is also expected to benefit from its cool climate and large land area.
Source:
METI, Japan’s Semiconductor Strategy
JETRO, Hokkaido Semiconductor Investment

Furthermore, demand for data centers, electricity, water resources, and communications infrastructure will spread into construction, logistics, food services, housing, and other areas.

Even in an age of population decline, regions where national-strategy-level infrastructure investment concentrates can create new jobs and demand.

2. Tourism and Foreign Capital

In the past, many tourist areas were built mainly around Japanese travelers.

But in a society with a shrinking population, a model that depends on domestic travelers becomes harder to sustain.

When we look at the world, however, the situation changes completely.

The global population continues to grow, and the middle class and wealthy class are expanding, especially in Asia.

The customer base for regional tourism is expanding beyond Japan and into the world.

Recent inbound demand is shifting from “cheap Japan travel” toward experience-based travel.

The value is shifting from famous tourist spots to local experiences such as skiing, hot springs, nature, food culture, and history.

As a result, housing prices and accommodation costs are beginning to be shaped not by Japanese income levels, but by the spending power of wealthy overseas visitors.

Some parts of regional Japan are now moving not by domestic prices, but by global prices.
Source:Tourism and Land Prices in Japan

Even if the local population is not growing, the regional economy can still change.

3. Wealthy Migration and Older Assets

Even as the population declines, regional Japan still holds deposits, land, real estate, businesses, and other assets.
And in recent years, the movement of people who hold those assets has slowly begun.

In the past, it was rational in Japan to gather in cities for work.

But with the development of communications technology and changes in work styles, the place where people work and the place where they live no longer have to be the same.

In particular, wealthy people and older people are beginning to value not only convenience, but also the living environment itself.

Areas such as Karuizawa and Yatsugatake in Nagano, Hayama in Kanagawa, and Okinawa are not only places for permanent relocation, but regions accessible from the Tokyo area that are beginning to be chosen for comfort and natural surroundings.

As a result, they have become more able to capture demand not only for permanent residence, but also for dual-location living and long-term stays.
Source:Dual-Habitation in Japan

In such regions, what people look for is a healthcare system they can rely on, an environment for raising children and learning, high-speed communications networks, and rich natural surroundings.

Regions with nature, healthcare, and communications infrastructure are more likely to capture new demand.

4. National Strategy

Private companies are not the only force that moves regional economies.

In recent years, national-level strategic investment in areas such as defense, resources, and renewable energy has also begun to move toward regional Japan.

Behind this is a change in the security environment.

Semiconductors, energy, food, and resources have become not only economic issues, but also national security issues.

That is why the government is investing in infrastructure and resource development from a long-term perspective.
But many of these things cannot be achieved in urban areas.

Defense bases require large amounts of land, airports, and ports, while offshore wind power requires sea areas, and coastal areas and remote islands play an important role in the development of seabed resources and rare earths.
Source:
Japan picks 16 airports, ports for defense use
Rare Earths near Minamitorishima
Offshore Wind Areas in Japan

Regions that were not evaluated highly from a purely economic perspective are beginning to be reconsidered from the perspective of national strategy.

National strategy also tends to continue over decades, which means related jobs and demand can flow into regions over a long period.

As a result, ripple effects can emerge across many areas, including ports, airports, construction, logistics, and energy-related industries.

Regions once seen as “remote places far from cities with few people” may be revalued as strategic bases that support security and energy supply.

Regions that the nation needs can gain new roles and new demand.

What Happens to Regions Without a Theme?

In regions that cannot capture demand from semiconductors, tourism, wealthy migration, or national strategy, the effects of population decline and aging are more likely to appear directly.

The real problem is not population decline itself, but the decline in demand.

When young people leave, the region loses workers and consumption at the same time.
As a result, the number of users supporting housing, shopping streets, public transportation, hospitals, schools, and other daily infrastructure also declines.

But even if the number of users falls by half, the cost of maintaining infrastructure does not fall by half.

Instead, the burden per person becomes heavier.

The same applies to regional industries such as regional banks, construction, real estate, retail, and elderly care.

Because the demand that once circulated within the region itself shrinks, economic activity gradually becomes thinner.

From here, the divide will increasingly depend not on whether the population is large or small, but on whether a region can attract new demand from outside.

This demographic pressure is nationwide.

But the difference between regions that are hit hard by it and regions that are less exposed to it will continue to widen.

What Surviving Regions Have in Common

The four themes discussed so far may look like separate stories at first, but they actually share one common point.

They can attract demand from outside the region.

Semiconductors and AI infrastructure bring investment from the state and corporations.

Tourist areas bring travelers from around the world.

Wealthy migration brings assets and consumption.

National strategy brings long-term budgets and jobs.

The point is that regions that are strong in the age of population decline are not necessarily regions with large populations.

They are regions that can draw in outside money, people, and activity.

That is why the regions likely to be valued from here share certain conditions.

Natural environment, transportation access, healthcare systems, high-speed communications networks, and energy supply capacity are among them.

In the age of population growth, these were ordinary forms of infrastructure.

But in the age of population decline, they become sources of competitiveness that attract people and capital.

When thinking about the future of regional Japan, what matters is not only population statistics, but also what kinds of demand the region is connected to.

That will become the new way to look at regional Japan.

Conclusion

As we can see, regional Japan is splitting into two groups: areas where themes are concentrating, and areas that are quietly shrinking.

To understand that split, we need to look at which regions have demand, assets, and national strategy.

We also need to look at how much people and capital are gathering there.

The future of regional Japan can no longer be explained by the word regional alone.

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Disclaimer: This article is provided for informational and educational purposes only and is not intended as investment advice. It does not constitute a recommendation to buy, sell, or hold any specific security. The views expressed are solely those of the author and are subject to change without notice.

Executive Summary

In Part 1,
I wrote from the view that rising interest rates are not automatically a tailwind for every bank.

Higher rates can improve lending margins.
But beyond that, there are small businesses and individuals who actually borrow the money.

If those borrowers are weak, the benefit of higher rates can turn into a delayed headwind.

Regional banks are the most exposed to that shift.

So what happens to regional banks once that headwind arrives?

I believe the restructuring of regional banks will not end with simple mergers.

Population decline, the lack of business successors, the shrinking of regional economies, and the declining value of branches caused by cashless payments are pushing regional banks into a phase where they can no longer survive by remaining just banks.

As a result, restructuring is likely to move in four directions:

• becoming consulting companies for regional businesses

• becoming regional infrastructure businesses

• moving toward elderly asset businesses

• concentrating on regions with strong themes

In other words,
regional banks are beginning to change their role from institutions that only lend money into institutions that help maintain the region itself.

In Part 2,
I will look closely at these four forms of restructuring.

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Two Burdens Facing Regional Banks

The reason regional banks are heading toward restructuring is not simply a lack of effort.

Society itself is changing.

As I wrote in Part 1,
regional Japan faces population decline, a lack of business successors, and rising pressure on small businesses.

On top of that, another problem is emerging.

The cash-centered era is beginning to end.

source:2025 Ratio of Cashless Payment Among

In 2025,
the cash-centered payment ratio was about 42%, continuing its decline from 2015.

The remaining 58% came from cashless payments such as cards, smartphone tap payments, and QR codes.

In Japan today, payment services can be introduced through apps, and a culture of not carrying a wallet is spreading.

In other words,
the era of relying on cash, counters, and ATMs is coming to an end, leaving regional banks caught between social change and the changing way people use financial services.

In that environment,
I believe restructuring is the only way for regional banks to survive.

This is the real subject of Part 2.

Defensive Restructuring: Branch Closures and Digitalization

The first change is the easiest to understand.

As mentioned above,
the ratio of cash payments has fallen sharply.

For regional banks,
the problem is that fixed costs remain.

Branch networks were once a strength in an era when the population was growing.
But in an era of population decline and cashless payments, they become a heavy fixed cost.

Regional banks are moving toward a situation where users decline while branches remain.

That makes major cost reduction unavoidable.

They are moving toward it as a survival measure.

Four Business Model Restructurings

Closing branches does not solve the real problem for regional banks.

The real question is: how do they operate after that?

The next restructuring can be divided into four areas.

1. Becoming consulting companies

2. Becoming regional infrastructure businesses

3. Moving toward elderly asset businesses

4. Concentrating on regions with strong themes

They will become banks that concentrate more deeply in places where funding demand remains.

Regional banks will move closer to those regions, companies, and assets.

That is how they survive.

1. Becoming Consultants for Regional Companies

Regional banks cannot survive just by reducing branches through digitalization.

What regional banks really cannot afford to lose is not branches, but borrowers.

Regional banks can no longer rely only on lending money, and need to turn business support into revenue.

Specifically,this includes business succession, M&A, recruitment support,
DX support, subsidy support, turnaround support, and overseas expansion support.

At this point, many people will probably think:

“Isn’t that the same as what megabanks do?”

That question is correct, and consulting is a defensive strategy to keep borrowers alive.

In other words,
regional banks are changing from institutions that lend money into institutions that help companies remain.

2. Becoming Regional Infrastructure Businesses

Digitalization leads to consulting as a survival measure.
But even that is not enough.

That is because regional economies are weakening.

As a result,
companies, land, transportation, and healthcare will become too much for local governments to handle alone.

This is where regional banks with real-time local information can show strength in infrastructure businesses that maintain local life and industry.

They can play a role in areas such as vacant-home renewal, tourism development, renewable energy, and financing for regional transportation, healthcare, and nursing care.

Because the region is shrinking,
this is where regional banks can become regional infrastructure businesses.

3. Moving Into Elderly Asset Businesses

Even if population decline and youth outflow reduce the number of successors, not all assets disappear from regional Japan.

For that reason, the next area to consider is the elderly asset business.

What becomes important is not only new borrowers, but the need to move assets that already remain in the region, such as deposits, land, and real estate.

In that situation,
inheritance, asset management, real estate disposal, business succession, and M&A become important points of contact.

This is not a wealth-management business, but a question of how assets left in regional areas are passed on to the next generation or the next business.

If young borrowers decline, regional banks have no choice but to look at the assets that remain.

Regional banks will move toward supporting the transfer of elderly assets.

4. Capital Concentrates in Regions with Strong Themes

So far, I have written about reducing branches, keeping companies alive, connecting the region, and turning attention to elderly assets.

But those things cannot be done in every region in the same way.
The demand that remains differs by region.

At the same time, places where money flows will not disappear completely.

For example,
semiconductor factories, tourism, logistics, factories, and port or airport areas.

In regions with these kinds of themes, funding demand can remain even in regional Japan.

That is because demand for construction, food services, parts, and equipment can emerge around them.

In other words, even if regional Japan as a whole weakens, funding demand does not disappear from every place.

Regional banks will place more lending capacity and personnel in regions where funding demand remains.

This is a realistic choice for keeping financial functions alive in weakening regions.

They will become banks that go deeper into places where funding demand exists.

Conclusion

Even when interest rates rise, the result depends on the strength of the region.

Regional banks restructure in order to respond to that difference.

Restructuring begins with branch closures and digitalization.

But the real question is what comes after cost reduction.

Regional banks will reorganize themselves around consulting, infrastructure, elderly assets, and regional themes.

That is why looking only at the bank is no longer enough.

You need to look at the region’s economy, industries, companies, assets, and population.

Regional banks are not simply shrinking.
They are changing their role to fit reality.

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Disclaimer: This article is provided for informational and educational purposes only and is not intended as investment advice. It does not constitute a recommendation to buy, sell, or hold any specific security. The views expressed are solely those of the author and are subject to change without notice.

Executive Summary

Rising interest rates are generally a tailwind for the banking sector.

For banks that struggled through Japan’s long era of ultra-low interest rates,
an environment where lending margins can improve is clearly positive.

But for borrowers, higher interest rates also mean higher borrowing costs.

When we look at Japan’s social structure,
not all banks can be optimistic in the same way.

Regional banks are different.

Megabanks have multiple sources of revenue,
including large corporate banking, overseas business, and securities operations.

Regional banks, by contrast,
are built around deep ties with local small and medium-sized companies and individuals.

When the local economy is strong, that closeness becomes a strength.

But when the local economy weakens,
that same closeness can become a lack of escape routes.

And that weakness is starting to become real.

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Bank Profits Are Built on Borrower Costs

Banks collect deposits and lend money to companies and individuals.
The difference between those interest rates is one of the basic sources of bank earnings.

But rising interest rates do not help banks alone.
Behind every bank, there is always a borrower.

For small and medium-sized companies,
higher borrowing costs reduce financial flexibility.
For individuals with loans, they reduce household flexibility.

Of course, not all borrowers suffer at the same time.

Companies that can pass on costs can absorb
the pressure, and individuals can absorb it if incomes rise.
But in weaker regions, the weight of higher interest rates tends to appear with a delay.

Japan’s Regional Economy Cannot Grow Stronger

1. Population Decline

Note:
“Regional Japan” refers to areas outside Japan’s three major metropolitan areas.
Calculated from Japan’s total population and the population of the three major metropolitan areas.

Source: Statistics Bureau of Japan, Population Estimates 2024

Population decline in regional Japan is already happening every year.
From 2015 to 2019, the decline was in the range of 200,000 to 300,000 people per year.
Since 2020, it has expanded to the 400,000 to 500,000 range.

What this population decline means is
that the base for bank accounts, housing loans, and salary deposits is shrinking.
If consumption falls as well, local company sales are also affected.

For regional banks, population decline is no longer a problem that will arrive someday.
It is already here.

2. Successor Shortage

When the population declines,
the number of people who can take over local companies also declines.

At the same time,
younger generations are increasingly moving to urban areas.

This is because jobs in fields such as IT and AI are more likely to be concentrated in cities.

The successor shortage among regional companies is becoming serious.
The average successor absence rate among Japanese companies is above 50%.

In other words, even nationwide, one in two companies has not decided on a successor.
Source: Teikoku Databank, National Survey on Successor Absence Rate 2025.

And this problem is heavier in regional areas.

Note: “Regional Japan” refers to areas outside Japan’s three major metropolitan areas.
Source: Teikoku Databank, Successor Absence Rate Survey 2025.

In 2025, all of the top 10 prefectures by successor absence rate were regional.
In addition, around 60% of regional prefectures had successor absence rates above 50%.

In other words, population decline and the outflow of younger generations are creating a serious successor shortage in regional Japan.

Without a next-generation manager, a company cannot plan for its future.

The more companies face that situation,
the more the number and strength of regional companies are eroded.

3. Small and Medium-Sized Company Bankruptcies

Population decline leads to weaker consumption,
and the outflow of younger generations leads to successor shortages.

At the end of that social structure are small and medium-sized company bankruptcies.

Source: Tokyo Shoko Research, Corporate Bankruptcies FY2025.

The number of corporate bankruptcies in Japan has increased for four consecutive fiscal years since FY2022, while small and medium-sized companies have consistently accounted for more than 98% of bankruptcies.

In FY2025,
the share of small and medium-sized companies reached 100% for the first time in 30 years.

This means that
the borrower base regional banks depend on is beginning to shrink nationwide.

When the population declines, local consumption declines.
When younger generations leave, both workers and successors decline.
As a result, local companies find it harder to secure both sales and people.

For regional banks, small and medium-sized companies are core borrowers.

That is why the decline of these companies eventually comes back to regional banks.

The Hard-to-Close Gap Between Megabanks and Regional Banks

Why does this matter more for regional banks?

Because megabanks and regional banks may both be banks, but their structures are different.

Source:
MUFG, Businesses and Network
SMBC Group, Business Segments
Mizuho Financial Group, Group Companies

Megabanks have broad revenue sources.
Large corporate banking, overseas business, securities,
trust banking, asset management, payments, and market operations.

They can absorb the impact of rising interest rates through multiple businesses.

Regional banks, on the other hand,
are deeply tied to small and medium-sized companies and individuals.

Normally, knowing local companies, business owners,
and local business flows in detail is a strength.

But it also means they directly absorb the weakness of the local economy.

Conclusion

The same tailwind does not necessarily lead to the same result.

In a structure shaped by population decline,
successor shortages, and the decline of small and medium-sized companies,
the key question is whether borrowers can withstand higher interest rates.

Bank profits are built on borrower costs.

Regional banks,
in particular, are highly dependent on the local economy.

That is why I see the tailwind for regional banks turning into a delayed headwind.

In the next part,
I will look at how regional banks may try to survive,
not simply by benefiting from higher rates, but by adapting to a shrinking local economy.

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Disclaimer: This article is provided for informational and educational purposes only and is not intended as investment advice. It does not constitute a recommendation to buy, sell, or hold any specific security. The views expressed are solely those of the author and are subject to change without notice.

Executive Summary

Physical AI will be more than a simple response to labor shortages.

In Part 1,
I wrote that Japan is a country that needs “AI that works in the real world” because of aging, labor shortages, and social caution toward relying heavily on foreign labor.

But what truly matters is that Physical AI may begin to change
buildings, logistics, public spaces, and even urban structure itself.

In the past, elevators created high-rise buildings,
and automobiles created a road-based society.

In the same way, new technologies change urban design itself.

And while Japan faces challenges such as aging,
disaster response, and high standards for public services,
it also has accumulated strengths in robotics and precision machinery.

In other words, Japan is not only a country that needs Physical AI.
It may also stand on the side that supports its implementation in society.

Physical AI Will Bring Change to Japan’s Urban Structure

I believe that as Physical AI spreads, it will change Japan’s urban design itself.

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Disclaimer: This article is provided for informational and educational purposes only and is not intended as investment advice. It does not constitute a recommendation to buy, sell, or hold any specific security. The views expressed are solely those of the author and are subject to change without notice.

Executive Summary

Physical AI is a technology where AI moves outside
the screen and acts in the real world through robots and machines.

This industry will likely grow in Japan.
That is because Japanese society is reaching a point where it will need Physical AI.

Japan today is facing serious aging and labor shortages,
yet it still relies too heavily on physical labor and human effort on the ground.

To change that society,
Japan needs not only foreign workers, but also Physical AI.

Furthermore,
Physical AI is also important as part of Japan’s government policy direction.

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AI Is Moving Outside the Screen

First, what is Physical AI?
It is a technology where AI recognizes the real world,
makes decisions, and moves through robots and machines.

The first type of AI to gain major attention in recent years was text-focused AI,
especially large language models like ChatGPT.

After that came AI coding assistants,
which raised concerns about the future of some SaaS companies.

And now, AI is trying to move into the real world.

AI sees the real world, makes decisions,
and acts through machines and robots.

That is Physical AI.

Japan Will No Longer Function Through Humans Alone

Japanese society has two serious problems.
They are aging and labor shortages.

1. Aging

Source:World Bank / UN Population Division, 2024

As the chart shows, Japan is a deeply aging society.

In 2024, the share of people aged 65 and older was about 30%,
meaning nearly one in three people was 65 or older.

In the United States, the figure is about 18%.
Even in Italy, which is known as one of Europe’s aging countries, it is about 25%.

Compared with other countries, Japan is aging at an overwhelming level.
And this aging society continues to accelerate, with no clear sign of stopping.

2. Labor Shortages

Next is the labor shortage.
When aging advances,
what becomes necessary is not only nursing care and medical care.
People are also needed to support care, medical, and other essential services.

But in Japan, those people are becoming insufficient.

Source: Teikoku Databank, 2025

Looking at the numbers, the reality is clearly serious.
In 2025, there were 427 bankruptcies caused by labor shortages.

Since 2021, the number has continued to rise,
and from 2023 it has reached a record high for three consecutive years.

This means that, across 2025,
about one in every 24 bankrupt companies failed because of labor shortages.
Source: Teikoku Databank, National Corporate Bankruptcy Report 2025

Moreover, labor shortages are not only a problem for bankrupt companies.

As of January 2026, 52.3% of companies felt a shortage of full-time employees,
meaning more than half of companies saw labor shortages as a management issue.
Source: Teikoku Databank, 2026.1

Foreign Workers or Physical AI

Then, what is the way to solve Japan’s social problems?
In theory, there are two major options.

Greatly increase foreign workers, or supplement labor with Physical AI.

My conclusion is that the answer is to supplement labor with Physical AI.

Of course, Japan will continue accepting foreign workers.
Already, about 80% of Japanese companies want to accept foreign workers,
and companies are moving toward a situation where they cannot function without them.
Source:Reuters Corporate Survey, 2025

However, the fact that companies need foreign workers and the fact that
society as a whole can withstand a rapid increase are two different things.

In fact, about 60% of the public opposes a rapid acceptance of foreign workers.
Source:Yomiuri-Waseda Poll, 2025

In other words, there is a major gap between companies and the public.

This gap is large.
That is because increasing foreign workers
is not only a matter of increasing the labor force.

It is also a matter of making Japan’s living spaces more multicultural.
And it is the public that bears that cost.

Therefore, even if companies want foreign workers, if the public remains cautious
about rapid acceptance, the government cannot move easily.

Foreign Workers Are Not Just a Labor Issue

Why is it difficult to solve labor shortages only through foreign workers?
It is because Japanese society was not built on the assumption of mass immigration.

For companies, foreign workers can become an immediate labor force.
But it also means that Japan’s living spaces themselves become more multicultural.

In other words, Japan depends strongly on “unwritten rules.”
It runs on reading the atmosphere between people and on tacit understanding.
Source:Recruiting Immigrant Workers: Japan 2024

Furthermore, in the United States and Europe,
conservative governments and movements have been
gaining ground, and the Takaichi administration also won a
major victory as a representative of conservatives.

For that reason, it is hard to imagine that only Japan can rapidly
increase foreign labor and solve labor shortages without social friction.

That is why Physical AI becomes necessary.

Conclusion

As the discussion so far shows,
Japan’s structure will reach its limit without Physical AI.

As long as there is a gap in sentiment between companies
and the public, Japan is unlikely to become a country that
absorbs labor shortages through foreign labor alone.

And politicians cannot ignore that gap if they want to win elections.

In Japan, Physical AI will not end as a simple robot boom.

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Disclaimer: This article is provided for informational and educational purposes only and is not intended as investment advice. It does not constitute a recommendation to buy, sell, or hold any specific security. The views expressed are solely those of the author and are subject to change without notice.

Executive Summary

How will companies recover their AI investments?
The answer is already starting to appear.

SaaS, Security, Financial systems.
These are the kinds of businesses
that have long profited from fragmented efficiency.

AI is likely to cut across them horizontally.
It can read them, interpret them, and integrate them.

As a result, the profit structures of
these businesses may be reconstructed by AI.

The semiconductor industry is
attracting attention not only because demand is rising.
It is also because people are beginning to look beyond that demand,
toward the profit structures on the side that may be changed.

Companies and industries are no longer looking only at whether AI can create new value.
They are also starting to look at which existing business profits AI may absorb.

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The focus on semiconductors is not just demand, but structure.

The simplest explanation for the expansion of AI infrastructure is this:

As AI spreads and more data centers are built, more semiconductors are needed.
Therefore, semiconductor demand is likely to grow.

But that explanation is not enough.
The current level of excitement cannot be explained by demand growth alone.

If the market were only looking at semiconductor demand,
this would simply be another capital investment cycle.

Demand rises, It goes too far, Then it adjusts.
That would be the whole story.

But what is actually happening is not just an expansion of demand.

It is a reallocation of profit structures across industries.

In other words, the attention on the semiconductor industry is
not based only on “what will increase.”

It is based on a deeper structural question:
Where will the profits move from?

Why Can Companies Invest So Much in AI?

Trillions of yen are being invested one after another
because companies have a clear image of how those investments can be recovered.

And that recovery is not just about adding a little new revenue.
To explain investments of this scale, a much larger source of recovery is needed.

That source is the profit of existing businesses.

In other words, companies and industries are no longer looking only at what AI can create.
They are also starting to look at which existing business profits AI can absorb.

The essence of AI investment is not only about building the future.
It is also about rewriting the flow of profits that already exists.

That is why today’s AI investment is not just a growth investment.
It is being made with the expectation that companies can recover value not
only from expansion, but also from restructuring.

AI Is Starting to Absorb Existing Businesses

The frightening part of AI is not that it outperforms one specific function.
It is that AI can bring together functions that were previously separate.

Those separate functions are, in many cases, existing businesses.

In fact, things that were once thought to be almost unbreakable are
now becoming sources of concern.
The restructuring of single-function SaaS,
Security fields with exposed weaknesses.
And old financial systems that are becoming targets of cyberattacks.
Source:
Restructuring of single-function SaaS
Security fields with exposed vulnerabilities
Old financial systems exposed to cyber risk

What these have in common is that value protected by complexity
and specialization is beginning to be interpreted from the outside by AI.

This is a serious change.
AI is not simply adding one new service.

It is becoming something that can retake fragmented profits from a higher layer.

AI Can Coexist With People, but Companies Are Different

Humans become stronger when they use AI as a tool.

Companies, on the other hand, make profits by turning certain inefficiencies, inconveniences, or separations into products.

In other words, part of corporate revenue comes from
things that have not yet been integrated.

AI reconstructs that.

As a result, people become more comfortable,
but companies that built revenue on top of that inconvenience may come under pressure.

In other words, for companies,
AI becomes not an assistant,but a competitor.

This may appear especially quickly in Japan.

The largest AI investments are being made by global companies,
and Japanese users and businesses already rely heavily on global services.
If those services become more powerful through AI, the shift does not need to wait for a domestic replacement.
It can enter directly through the tools people already use.

That is why Japan may see this restructuring faster than it first appears.

That is the essence of today’s AI investment.

Conclusion

The attention on the semiconductor industry
is also the beginning of something ending.

I do not think the key point is AI growth rates or rising semiconductor demand,
but which existing business profits AI can absorb.

And it is that the first existing businesses to be shaken
are not necessarily weak industries.

Rather, areas protected by complexity and specialization,
areas that were said to be “not easy to break,” are more likely to be affected by change.

In other words, what happens from here is not simply
the growth of a new industry,but the restructuring of existing businesses.

This is not a bright growth story.

Through AI, the functions and revenue structures of
existing businesses are quietly beginning to be reorganized.

That is the structure behind the semiconductor industry.

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Disclaimer: This article is provided for informational and educational purposes only and is not intended as investment advice. It does not constitute a recommendation to buy, sell, or hold any specific security. The views expressed are solely those of the author and are subject to change without notice.

Executive Summary

As AI spreads, demand for semiconductors increases, and more data centers are built.
As a result, demand for power expands.

That is why, after the semiconductor industry,
data centers and power tend to come into focus.

But in Japan, what tends to matter is not always the main area itself.
It is often the side that supports the expansion of demand.

This structure tends to appear especially clearly in Japan.

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Looking Beyond the Obvious

Semiconductors, data centers, power, and battery storage.
These are now often described as the main areas of the AI era.
Source: Japan’s Agency for Natural Resources and Energy, “Seventh Strategic Energy Plan”

Because data centers are necessary in order to make use of semiconductors.
And if data centers increase, large amounts of power become essential.
Battery storage also becomes important in order to supply that power in a stable way.

However, in Japan, interest is spreading into the
surrounding areas that become necessary as
power demand and infrastructure investment increase.

For example,
connection, control, cooling, and wiring are areas
that rarely appear on the surface, but are essential.
In this article, I will refer to these industries collectively as the power equipment industry.

When a main area expands, Japan tends to ask,

“What is actually needed?”

That is why attention begins to move toward the side that makes the expansion of the main area possible.

This structure has already started to appear.

Why Is the Power Equipment Industry Attracting Attention?

Because the power equipment industry does not end with just one theme.

For example, the main areas of semiconductors, data centers,
and power are each often judged by their own individual demand.
Of course, each of these is an impactful theme, but the story tends to end there.

On the other hand, the role of
the power equipment industry can expand more easily
because several themes overlap, such as data center expansion, power stabilization,
and demand for surrounding equipment and components.

This also works in the opposite direction.
If new sources of demand continue to overlap, the importance of the industry can rise.
At the same time, if constraints and concerns overlap, that view can also weaken.

In Japan especially,
industries where several layers of demand overlap are easier to explain as having industrial breadth than industries discussed through only one source of demand.

Why Does This Pattern Appear Strongly in Japan?

This does not mean Japanese companies cannot become main players.
But in a massive theme like AI, many of the companies that hold the center are
in the United States. Japan has strength in a different place.

That place is
surrounding components, surrounding technologies, and supporting equipment.

Japanese companies have long built strength in the areas
that actually keep industries moving, such as materials, components,
equipment, control, and quality management.

So Japan tends to move toward the supporting side not
because the main area is weak, but because Japanese companies have strength there.

Even if Japan cannot fully win in the main area,
Japanese companies can still be competitive
in the areas required for that main area to grow.
Source: Japanese corporate rankings

That is why, in Japan,
attention tends to gather not only around the main area itself,
but also around the side that supports its growth.

The Same Structure Appeared in the AI Boom

We are clearly in an AI boom. Many companies announced services using AI, but the industries using AI did not change dramatically right away.

The industries that actually came to the front were semiconductors and data centers.

In other words,
attention did not go to companies simply riding the AI boom.
It went to the areas that were indispensable to the boom.

Because, at the beginning,
it was difficult to know which companies would use AI well and turn it into profits.
But if AI spreads, semiconductors and data centers become necessary.

That is the side that supports the boom.

The current flow is the same.
The question is not only power or battery storage itself.

The question is: who supports that world?

Conclusion

In general, after semiconductors and data centers, power tends to come into focus.
But Japan tends to move one step further.

As a result, people tend to place importance not only on the main area itself,
but also on the side that supports the expansion of that main area.

If the United States is strong in the center of the story,
Japan can be said to have strength in the areas needed to make that story work.

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Disclaimer: This article is provided for informational and educational purposes only and is not intended as investment advice. It does not constitute a recommendation to buy, sell, or hold any specific security. The views expressed are solely those of the author and are subject to change without notice.

Executive Summary

Concerns about the SaaS industry are not a temporary fluctuation.

The real problem is that the two assumptions
that had supported its competitiveness are shaking at the same time.

Internally,its ability to turn expectations
into compensation is weakening, making it harder to attract talented people.

Externally,giant companies are using AI to absorb SaaS functions,
reducing their meaning as independent products.

SaaS is exposed to pressure from both
internal “talent outflow” and external “functional substitution,”
a structure in which it is pressured from both sides.

This structure will have a major impact in Japan.

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SaaS Companies Attracted Talent Through “Upside Potential”

The strength of SaaS companies was not only the quality of their products.

High growth rates and future upside.
And the ability to turn those expectations into compensation.

These three elements supported the SaaS industry for a long time.

Talented people do not simply gather in places with high salaries.
They gather in places with the greatest upside, where
compensation, stability, and room for growth come together around the belief
that “if I join this company, the future will be bigger than it is now.”

In other words, part of their competitiveness was
not in the product itself, but in their ability to distribute upside as compensation.

“Internal Pressure”: AI Concerns Break the Talent Model

This talent model is built on the assumption that the company will grow.
However, when expectations for growth decline, its appeal weakens.

That is because its persuasiveness as future compensation falls.

As a result, companies gradually become unable to hire,
people leave, and eventually the quality of the organization declines.
This change is not obvious, but precisely because it is not obvious, it is serious.

The SaaS industry will likely weaken gradually from the inside.

Giant Companies Are Beginning to Absorb SaaS Functions

So far, I have discussed internal pressure,
but external pressure also exists.

That is,
the very assumption that SaaS had been able to exist
as an independent product is beginning to collapse.

Until now, SaaS created value by deeply refining business functions.

But now, the world’s giant companies are beginning to
use AI to absorb the value of those functions.
Furthermore, they do not need to sell them as independent products,
and can incorporate them directly into existing business platforms,
contracts, customers, and screens.

In other words, the real threat to the SaaS industry is
not that AI will intensify competition with new specialized players,
but the change in which the value that had existed as independent products is beginning to be absorbed into larger platforms.

“External Pressure”: Commoditization Will Change the Industry Map

What happens if this trend continues?

It is rapid commoditization.

At that point, the question will no longer be whether the function exists,
but whether “it is necessary to introduce a separate product just for that function.”

The more this commoditization accelerates,
the more important it becomes who provides it rather than differences in the function itself.
And in Japan, the structure in which the provider is heavily weighed tends to appear strongly.

Japanese companies are very afraid of failed implementations.
Furthermore, in a phase where wage increases and
inflation are progressing at the same time,

they tend to place more weight on price justification and trust
in the provider than on functional differences.

As a result, the hurdle for introducing systems from companies with
“low prices” and “trust” falls significantly.
That is why, in Japan, the entry of giant companies is
a serious external pressure for the SaaS industry.

Conclusion

What is breaking this time is not short-term valuation,
but expectations for the future itself.
I explained why those expectations are likely to peel away
structurally over the long term.

Today’s SaaS companies are
in a situation where both the organizational strength
that supports expectations and the product value
that justifies those expectations are being eroded at the same time.

The real threat to the SaaS industry
is not the headwind from a single piece of news about AI concerns,
but the reality that it will continue to be pressured from both the inside and the outside.

If the news about AI concerns settles down,
there may be moves to restore valuations in that opening.
But in theory, I do not think optimism is possible,
and I see the industry heading toward a harsher evaluation.

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Disclaimer: This article is provided for informational and educational purposes only and is not intended as investment advice. It does not constitute a recommendation to buy, sell, or hold any specific security. The views expressed are solely those of the author and are subject to change without notice.

Executive Summary

The attention given to the trading house industry cannot be explained only by Buffett’s remarks.
The essence lies in the structure that “an industry long difficult to understand finally began to receive attention.”

Berkshire was merely the trigger that noticed this distortion.
After that, the trend of improving capital efficiency and shareholder returns led by the Tokyo Stock Exchange overlapped with it,
and Japan’s trading houses came to be positioned as “a symbol of Japan.”

In other words,
it was not a temporary factor called Buffett,
but the beginning of a change in the axis of valuation.

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Why Were Trading Houses So Difficult to Understand?

The biggest reason is that the world simplified trading houses by seeing them as “resource companies.”

Companies whose performance is influenced by resource prices.

Strong when prices rise, weak when prices fall.
That understanding is partly correct.

However, actual trading houses are conglomerates that include food, logistics, real estate, power, and other businesses.
This structure made the overall picture difficult to see.

They are not simple enough to be understood as resource companies, and too complex to be understood as diversified companies.

As a result, the world could not fully grasp the whole picture, and trading houses remained insufficiently understood for a long time.

They Support Japan on an Extraordinary Scale

Here, I introduce the number of affiliated companies of the five major trading houses whose shares Berkshire reported holding.

Note: Publicly available information only
Source:
Mitsubishi Corporation: consolidated subsidiaries and equity-method affiliates, as of December 31, 2025
Mitsui & Co.: consolidated companies, as of September 30, 2025
Itochu Corporation: subsidiaries, affiliates, and joint ventures, as of March 31, 2025
Sumitomo Corporation: consolidated subsidiaries and affiliates, as of September 30, 2025
Marubeni: consolidated company, subsidiaries and affiliates, as of March 31, 2025

As you can see, the scale of each company is extraordinary.

Furthermore, when we look at each of their businesses, the breadth becomes clear.

Note: This chart is a simplified presentation of each company’s major business areas and does not reproduce the official business segments exactly as they are. The business classifications are based on each company’s disclosures.

As you can see,
Japan’s major trading houses are not companies where it is enough to ask “what do they do?”
They cover such a wide range of businesses
that it almost feels faster to ask “what do they not do?”
Japan’s major trading houses cover almost every kind of business.

What this number of companies and businesses means is
not simply that they are companies with many subsidiaries and many businesses.

It means that behind what Japanese people take for granted,
“the stability of daily life and an environment where high-quality products are within reach,”
there is support from trading houses.

Food, supermarkets, real estate, electricity, and water.
This cannot be seen from financial statements alone, but when you live in Japan, you can see that breadth in daily life.

In other words, they carry the supply networks that support Japan’s living infrastructure.

Only Berkshire Saw Trading Houses from a Different Perspective

Even when Japanese trading houses were excellent companies in the past,
no one could explain their reality in an easy-to-understand way.

As the discussion so far shows, the businesses handled by Japanese trading houses
are far more diverse than most people imagine.

The trigger that changed that impression was Berkshire.

The explanation was simple,
Buffett said that “Japanese trading houses have the same structure as Berkshire.”

With that one statement,
even if people could not fully understand the structure of Japanese trading houses,
it almost certainly gave them a sense of reassurance.

For people, the diversification of trading houses was “difficult to understand.”
But for Berkshire, it was “resilience.”

That “resilience” means
not depending on one industry or one economic cycle,
having multiple sources of earnings, and being able to reallocate the profits generated from them.
That structure is Berkshire itself.

Because of this influence, the complexity of trading houses became an opportunity to be understood from a different angle.

It Was Not Only Berkshire That Pushed Trading Houses Into the Spotlight

In fact, a few years after Berkshire’s shareholding disclosures, there was a major reform in Japan’s stock market.

In 2023, the Tokyo Stock Exchange asked all listed companies to manage their businesses with awareness of capital costs and stock prices.
Source: Tokyo Stock Exchange material published on March 31, 2023

This was not merely an institutional change. It was an event that pressed the Japanese market to explain “how profits would be used and how they would be connected to shareholder value.”

For Japanese companies, the low awareness not only of sales and profits, but also of capital costs and return on capital
had long been described as a structural problem.
Source: The Ito Review, 2014

Within this trend, trading houses became easier to explain than before.

Through this reform, they became the clearest embodiment of the market’s new standard of conglomerate business groups × shareholder returns,
and this became a tailwind that pushed them further into the spotlight.

Conclusion

Understanding trading houses is
not simply about understanding one industry. It is also about understanding how Japanese companies have expanded their businesses
and how they have been involved in supply networks and the foundations of daily life.

Trading houses cannot be dismissed as merely a temporary object of attention.
That is because they are a rare industry deeply embedded in the Japanese economy.

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Disclaimer: This article is provided for informational and educational purposes only and is not intended as investment advice. It does not constitute a recommendation to buy, sell, or hold any specific security. The views expressed are solely those of the author and are subject to change without notice.

Executive Summary

Many people believe that Japan’s banking sector is shaped by interest rates.

Rising interest rates tend to create expectations for an improved earnings environment,
while falling interest rates tend to work in the opposite direction.

However, what is actually being watched is not the level of interest rates itself.

The focus is on
the Bank of Japan’s policy stance that comes before it.

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What Assumptions Define Japan’s Banking Sector in 2026?

The background is the Bank of Japan’s cautious stance toward raising interest rates.

At present, a rate cut has not been indicated,
nor has the possibility of further rate hikes been denied.

Rather, while interest rates are still seen as moving in an upward direction,
there is now a view that the pace of that progress will be slower than previously expected.

In this kind of environment,
the position of the banking sector cannot be fully understood through corporate earnings or the current policy rate alone.

The focus is on the extent to which the Bank of Japan will proceed with
interest rate normalization going forward.

This structure becomes easier to understand by tracing the movement of Japan’s banking sector
from the aftermath of the IT bubble collapse to the present.

In Fact, the Banking Sector Changes Across Three Phases

Here, history is viewed not as a simple timeline, but as a recurring pattern.
This makes the structure easier to grasp.

Since the 2000s, the environment surrounding Japan’s banking sector has
changed broadly across three phases.

1. The Phase in Which the Assumption of Normalization Becomes Unstable

The position of the banking sector tends to change when
the assumption that “normalization will continue” becomes unstable.

One example is the period from 2015 to 2016.

At the time, the weakness of the economy and prices led to an awareness of the need for additional easing,
and that eventually became reality.
The introduction of negative interest rates made the change in assumptions clear.
Source: Policy in 2015 and 2016

What matters is not the numerical result of a rate cut itself,
but the fact that a direction away from an environment with interest rates was indicated.

The recent environment is also close to this pattern.
As of 2026, the Bank of Japan has maintained the direction of raising interest rates.

At the same time, keeping rates unchanged has been chosen against the backdrop of price trends and the situation in the Middle East,
and the assumptions around the pace of normalization are being revised.

2. The End of an Emergency and the Start of Normalization

The environment changes significantly when
“the end of an emergency” overlaps with “the start of normalization.”

The periods after the collapse of the IT bubble and after the COVID shock are typical examples.

In 2003, financial anxiety receded due to the measures to rescue
Resona, non-performing loans declined,and
the economy continued to recover, eventually leading to the end of quantitative easing.
Source: IMF, “Japan: Financial System Stability Assessment” 2003
Source: Financial Services Agency, “Status of Non-Performing Loans as of March 2003”
Source: Cabinet Office, “Monthly Economic Report, March 2006”

What matters is not the decision to end quantitative easing itself,
but the fact that, before that decision, the perception had formed that the worst period was being left behind.

Similarly, from 2021 to 2023 after the COVID shock,
the end of the emergency came into focus as the economy recovered.
From 2024 to 2025, the end of negative interest rates and the resumption of rate hikes
gradually advanced the transition toward normalization.
Source: Cabinet Office, “Monthly Economic Report, 2023”
Source: Bank of Japan, “Statements on Monetary Policy Meetings, 2025”

In this phase as well,
the key is not the individual policy decision itself,
but how clearly the direction toward normalization has been established.

3. The Phase in Which a Global Shock Rewrites the Assumptions

There is, however, an exception.
That is the phase in which a global shock occurs.

This includes the collapse of the IT bubble, the global financial crisis, the Lehman shock, and the COVID shock.

In such cases, previous assumptions and gradual changes temporarily lose their meaning,
and the environment itself changes significantly.

In this phase, the banking sector is viewed less through changes in the earnings environment
and more through the stability and reliability of the foundations that support the financial system.
Source: Bank of Japan, “Financial System Report, April 2008”
Source: Bank of Japan, “Financial System Report, April 2020”

The Bank of Japan’s Stance Can Be Read Through Its Pattern of Behavior

Where, then, does the Bank of Japan’s stance appear?

As seen so far, 2026 is a phase in which assumptions are beginning to change.
When this point is viewed through the Bank of Japan’s pattern of behavior,
there is a feature that has been consistently observed over time.

To organize it simply, the important points can be narrowed down to two.

1. The Direction Is Not Easily Reversed

The first point is that the direction of policy is unlikely to be reversed over a short period of time.

Since the 2000s, changes in the external environment have occurred repeatedly,
including US-China tensions, Trump tariffs, Russia’s invasion of Ukraine, the Taiwan situation, and the Middle East situation.
Source: Bank of Japan, “Statement on Monetary Policy Meeting, July 31, 2018,” during US-China tensions
Source: Bank of Japan, “Statement on Monetary Policy Meeting, September 19, 2019,” during the Trump tariff period
Source: Bank of Japan, “Statement on Monetary Policy Meeting, March 18, 2022,” during Russia’s invasion of Ukraine
Source: Bank of Japan, “Statement on Monetary Policy Meeting, September 22, 2022,” during Taiwan risk
Source: Bank of Japan, “Statement on Monetary Policy Meeting, October 31, 2023,” during the Middle East situation

In many cases, these events lead to responses such as
“watching developments” or “making adjustments,”
but they are unlikely to immediately reverse the direction of policy itself.

In fact, the direction clearly shifted only in limited phases,
such as from 2000 to 2001 and from 2006 to 2008.
Source: Announcement in 2001
Source: Announcement in 2008

Both were cases in which changes occurred on a scale that shook the underlying assumptions themselves,
such as the collapse of the IT bubble and the global financial crisis.

Therefore, when evaluating changes in the external environment,
it is necessary to distinguish whether they are the kind of factor that overturns the assumptions behind policy, or whether they remain temporary adjustment factors.

2. Its Pattern of Behavior Contrasts with the FOMC

The second point is that its pattern of behavior differs from that of the FOMC.

In general, the FOMC tends to indicate its policy direction relatively clearly
and adjust flexibly depending on conditions.

By contrast, the Bank of Japan tends to take a longer observation period
and proceed gradually while confirming how policy is being transmitted.
Source: Explanation of the FOMC
Source: Explanation of the Bank of Japan

This difference is not merely a matter of institutional design,
but can also be understood as stemming from the decision-making process itself.

The Bank of Japan’s judgments tend to place strong emphasis on the accuracy of change
and to move forward step by step.

As a result, when short-term changes occur in the environment,

the structure is not one in which the direction is immediately reversed,
but one in which adjustments are made after a certain period of observation.

Conclusion

For Japan’s banking sector, which has long adapted to a low-interest-rate environment,
the impact of changes in interest rates on the earnings environment is not small.

However, what matters more is not the resulting level of interest rates itself.

Rather, in the surrounding context,
the key question is the extent to which the Bank of Japan is aiming to move toward “an environment with interest rates.”

That direction and its sustainability are likely to become the basis
for judging the current position of the banking sector.

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Disclaimer: This article is provided for informational and educational purposes only and is not intended as investment advice. It does not constitute a recommendation to buy, sell, or hold any specific security.

The views expressed are solely those of the author and are subject to change without notice.

Executive Summary

The atmosphere surrounding Japan’s defense has changed significantly over the past few years.

Defense spending was once not viewed as a budget that would naturally keep increasing. Even if it was necessary, it was not easily seen as something that should be actively expanded.

What greatly changed that assumption was the target of 2% of GDP announced in 2022.

This policy meant that Japan, which had long maintained a restrained posture after the war, had redrawn the baseline itself.

However, expanding defense spending is likely to connect directly with problems that are distinctive to Japan.

The question is not whether Japan’s defense has changed.

It is how far this represents a historic turning point, and where it begins to collide with Japan-specific constraints.

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Japan’s Defense Was Not a Focus Area

For a long time in Japan, defense spending was not a budget that people assumed would naturally increase.

For many Japanese people, defense was a cost, not growth.

The reasons were an exclusively defense-oriented policy, pacifism, Article 9 of the Constitution, and a long period of economic stagnation.

In that atmosphere, Japan’s defense went largely unnoticed.
Source: Ministry of Defense, “The Constitution and the Right of Self-Defense”

Even if it was necessary, it was not easily viewed as an item that should be actively expanded. For Japan, war was something that tended to be seen as distant.

The symbol of this was the 1% ceiling introduced in 1976.

More precisely, it was a guideline to keep the total amount of defense-related expenditures for each fiscal year within 1% of GNP, or gross national product, for that fiscal year. This was not a limit on national spending as a whole, but a political restraint rule applied only to defense spending.
Source: History since 1976

Therefore, for a long time, Japan’s defense was not “an obvious focus area whose level of attention would naturally rise.”

This assumption should not be forgotten.

Then Why Did It Become a Focus Area?

The answer that drew attention lies in the geopolitics of 2022.

In its National Security Strategy and related documents, the Japanese government positioned Japan as facing the most severe and complex security environment since the end of World War II, against the backdrop of China versus Taiwan, North Korea’s nuclear missiles, and Russia versus Ukraine.

What emerged from this was a target based on 2% of Japan’s fiscal 2022 GDP, which was about ¥560 trillion. That 2% was approximately $75 billion, or around ¥11 trillion, in annual security-related expenditures by fiscal 2027.

In other words, Japan set a target for the overall budget needed to protect its security.
Source: Cabinet Secretariat, “National Security Strategy”

At the time, the 2% figure was also widely recognized as the defense spending target for NATO member states. For Japan as well, 2% was easy to use as a declaration that “from here, things will seriously change.”
Source: NATO’s 2% benchmark

So this was not merely an increase in the budget.
It was a political number that signaled a revolution.

That is why the defense industry attracting attention was not a coincidence.
It can be seen as a story about a change in Japan’s national baseline.

Sanae Takaichi Achieved the Five-Year Plan in Three Years

Source: UNdata

What this chart shows is simple.

Over the 20 years from 1976 to 1996, defense spending gradually increased and remained around 1% of GDP.

Over the 25 years from 1997 to 2022, defense spending was flat. Across the 46 years since 1976, it continued to stay around 1% of GDP.

From 2023 onward, it increased sharply. Toward the target set in 2022 of about $75 billion, or around ¥11 trillion, in annual security-related expenditures by 2027, defense spending reached about $55 billion, or around ¥9 trillion, in 2025, rising 1.7 times from 2022.

In short, what had originally been described as an increase over five years can be seen as having been brought forward by two years under the Sanae Takaichi administration, with defense spending alone accounting for about 82% of the roughly $75 billion target that had been set.

Can This Jump Be Called Growth?

This is where the main point begins.

At first glance, this remarkable jump may look like a positive story.
But in Japan, that is not necessarily the case.

That is because in Japan,
the discussion of “increasing defense spending” immediately becomes a question of who will pay for it.

When you live in Japan, this feeling is quite strong.

When people hear that defense spending is rising,
what many people first imagine is not that the country will become stronger.

Rather, they think pessimistically,
“Will taxes go up?” “Will the burden be pushed onto future generations again?”

On top of that, as the population continues to age and the birthrate continues to decline, the anxiety over who will support that burden in the future is quite heavy.

And precisely because spending was raised all at once, it becomes difficult to keep raising it at the same speed.

If defense spending were built up at the same pace, the burden on the public would appear even heavier.

What is currently being shared by ten people may have to be carried in the future by a much smaller working-age population.

That kind of pessimism is a very natural temperature in Japan.

In other words, achieving the target itself makes the next increase more difficult.
This is the distinctive weight Japan faces.

The Next Benchmark Is 3.5%

After hearing the discussion so far, almost anyone would wonder, is 3% or 4% possible?

In fact, the United States side demanded annual defense spending equivalent to 3.5% of GDP.
However, Japan has not released a concrete plan.

And as the chart above shows, Japan’s defense spending as a share of GDP in fiscal 2026 is about 1.5%, meaning 3.5% would require more than doubling it.

To state the conclusion first, the hurdle is high in the short term.

This is not a story of “raising it a little.”
It is a story of jumping almost to a different level once again.

To repeat, the reason is clear.
The population is declining, aging is advancing, and pressure from social security costs remains heavy.
And the growth rate is not high.

Furthermore, Japan’s political culture is not structured in a way that allows defense expansion to proceed without social friction.
Source: Public opposition

In other words, it can be said that this would involve political, fiscal, and social hurdles even heavier than the jump to 2%.

Ignoring this and thinking, “America is saying it, so next comes 3.5%,” overlooks what is happening inside Japan.

Conclusion

It is true that Japan’s defense industry has changed.
It is also true that defense spending has been raised to
a historically high level, and that the United States is applying further pressure.

Perhaps many people believe that
this pressure will make Japan continue to change.

However, regarding the scenario in which that pressure truly materializes,
I consider it optimistic when Japan’s fiscal situation, demographic structure, social security system, and public opinion are taken into account.

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Disclaimer: This article is provided for informational and educational purposes only and is not intended as investment advice. It does not constitute a recommendation to buy, sell, or hold any specific security. The views expressed are solely those of the author and are subject to change without notice.

Based on public information and official statements.

Executive Summary

In Japan today, a flow is beginning to take shape that makes it easier to justify rate hikes,
such as “rising prices and wages” and “solid performance among some companies.”

Yet in reality, every time people say, “This time, they will raise rates,”
the BOJ continues to take a cautious stance.

But if you live in Japan, this movement does not feel that strange.
What really feels strange in today’s Japan is not the fact that rates are not being raised.
It is the idea that rates can be raised.

That is because the BOJ is not simply looking at whether inflation is occurring.
It is looking at whether it might stop the flow away from deflation that has finally begun.

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Surface-Level Explanations Do Not Reveal the Essence

The BOJ’s surface-level explanations are easy to understand:
“We want to assess the sustainability of wage increases.”
“The rise in service prices cannot yet be called sufficiently strong.”
“There are also uncertainties such as the situation in the Middle East and higher crude oil prices.”

These explanations are difficult to reject, but they are not enough by themselves.

That is because all of them can serve as “reasons not to rush a rate hike,”
but they do not explain why the BOJ is being so cautious.

In other words, the BOJ is not acting only on “what is theoretically correct.”
The essence is more complex. It is acting based on “what would break the flow that has existed until now.”

This difference is significant.

The BOJ Prioritizes “Policy That Does Not Break Things” Over “Correct Policy”

To repeat the point,
the BOJ now appears to be moving not so much by choosing the most theoretically correct policy,
but by watching how far it can go without breaking the Japanese economy.

The former is an approach that looks at inflation, wages, and the output gap,
and adjusts policy according to the textbook.

The latter is an approach that looks first not at the rate hike itself,
but at what could be damaged in a chain reaction once rates are raised.

That is why the BOJ is more likely to judge not “should we raise rates,”
but “if we raise rates here and now, what can we avoid breaking?”

What is happening in Japan now is not a strong economic expansion.
It is a state in which society as a whole is only half a step out of the deflationary world that lasted for nearly 30 years.

If this point is misunderstood, the BOJ’s caution becomes difficult to understand.

The Constraints on Rate Hikes Are Not a Single Factor

In Japan today, rate hikes always come with side effects.

They involve
government finances, the yen and the United States, the financial system, households, and corporate behavior.

Take the exchange rate, for example.
Normally, when geopolitical risk rises, the yen tends to be bought, but that has not happened this time.
Tensions in the Middle East have caused crude oil prices to surge,
and for an energy-importing country like Japan, that instead puts downward pressure on the yen.

The burden on households from higher prices is also heavy.
It is also hard to say that companies are expanding aggressively.

That is why the BOJ’s decision-making is not determined by a single line of reasoning,
such as “companies have raised wages, so rates should be raised.”

It becomes a very Japanese conditional judgment over whether everything can withstand it at the same time.

The BOJ and the FOMC Have Different Axes

When compared with overseas central banks, Japan’s uniqueness becomes visible.

Of course, the FOMC does not ignore politics or markets.

But basically, it makes decisions around data such as the labor market, inflationary pressure, inflation expectations, and financial conditions.
Source: FOMC policy judgment

By contrast, Japan looks at data, but not only data.
The BOJ today is watching a flow in which wages, corporate behavior, prices, and consumption
have finally begun to change little by little. It is watching the flow in the middle of that change.
Source: BOJ policy judgment

That is why Japan’s policy judgment is not based on a single data point.
It is strongly focused on whether “change is beginning to take hold, or whether it will stop again.”

Wages Are Rising, but the Sense That People Have Become Wealthier Is Weak

Looking only at the numbers for wage increases in Japan, there has certainly been progress.
But the lived experience of ordinary people is completely different.

Even if salaries rise a little, food is expensive. Eating out is expensive.
Electricity bills are rising. The burden of social insurance premiums also feels heavy.

Japanese households have a strong tendency to save because of the long period of deflation.
That is why, even if the nominal amount on a pay slip has increased,
there are not many people who feel that life has become easier than before.

There is a gap: even if the statistics show improvement, the actual feeling across the Japanese public is not one of recovery.

If wage increases do not quickly translate into consumption,
the BOJ cannot say with confidence that “demand is genuinely strong.”

Companies Also Do Not Fully Believe That Japan Has Escaped Deflation

The same is true for companies.

Even when Japanese companies generate profits,
they do not necessarily move into an expansionary mindset of “first accumulating cash,” “investing cautiously,” or “not raising wages all at once.”
In other words, they are not rushing into expansionary thinking.

That is because
managers always have the thought in their minds that “things may get worse again.”
This is not simply conservatism.

Because they have spent a long time watching conditions improve only to return again,
it is still difficult for them to fully bet on the changes now taking place.

Companies themselves also do not fully believe that Japan has escaped deflation.

Conclusion

The constraints that appear scattered are all pointing in the same direction.

But precisely because what the BOJ is trying to protect is fairly clear,
it cannot move easily.

And this brings us back to the original question.
“Why is the BOJ cautious?”

The reason is that
it fears that the 30-year equilibrium that has finally begun to break could return to where it was.

What matters for the BOJ today is not the timing of a rate hike itself,
but not cutting off the flow away from deflation with its own hands.

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