GM108: Maybe Japan Is Finally Changing for Real ft. Jesper Koll

Jesper Koll · Monex GroupBearish

At current yen levels Toyota struggles against BYD; it wins only at much weaker yen.

China has been shut out of the US market, Japan's most profitable market, which helps Japanese carmakers. But the strong yen hurts Toyota's competitiveness. He jokes that at dollar-yen 200, Toyota could beat BYD. At 101 to 110, Toyota has the real problem, and this would become a nightmare if a US recession coincided with the US government pressing China for direct investment and tariff concessions.

“at dollar yen 200, Toyota can beat BYD, the Chinese electric carmaker. Right? Now at dollar yen [101 to 110], Toyota has the real problem”at 32:41

Jesper Koll · Monex Group

Labor scarcity, not AI, will drive Japan's productivity growth by forcing firms to change pay and incentives.

Japan is not a high-GDP economy: average age is about 50 and one in three people lives off a pension, which drags on GDP. But investors should focus on macro dynamics and corporate earnings, where labor scarcity is a catalyst for change. Japanese firms historically paid by seniority and were risk-averse. Now human capital is scarce, so companies such as NTT are moving to pay-for-performance and meritocracy, and productivity growth will come from motivating teams, not from buying AI.

“the scarcity of labor is now a catalyst for changing internal rules, internal motivation, internal incentives.”at 8:02

Jesper Koll · Monex Group

Japan's public debt is not a macro problem because the private sector runs large surpluses.

Japan has excess capital and domestic banks have excess deposits, so it is not dependent on attracting foreign capital, unlike the UK with its balance-of-payments deficits. For every 100 yen of public debt added over the last twenty years, the private sector generated 140 yen of savings, which sit on corporate balance sheets and in household savings. Debt is a problem for the government budget, because interest now takes about a quarter of spending, and that rises with rates. But it is not a macroeconomic problem.

“for every 100 yen of public debt taken on over the last twenty years, the private sector has generated 140 yen of savings.”at 11:42

Jesper Koll · Monex Group

Japanese households and pensions are shifting savings into domestic JGBs, a trend he expects to continue.

Over three decades domestic fixed-income returns were pinned near zero, which pushed savings abroad. Now the 10-year JGB yields about 3%, and the 2% level triggered record household buying of JGBs, with savings moving out of demand deposits. At the margin, pension and insurance inflows are rising toward JGBs as well. He sees this as the end of a 12-14 year outflow cycle and expects the asset allocations of GPIF, pensions, insurers and retail investors to shift toward domestic assets within a year. He also argues fears of bond issuance outrunning domestic savings are vastly exaggerated.

“household savings, you know, going out of demand deposits actually going into the JGB market. Right? And that will continue.”at 15:35

Jesper Koll · Monex Group

Japan has exited deflation: output gap is positive and real wages are rising, so inflation is the problem.

When Abe took office, the output gap was about minus four, meaning deflationary slack. Today the gap has closed and turned positive. Wages are rising 5 to 5.5%, and real wages have grown for eight consecutive months. Companies now have pricing power. Takaichi's main problem is therefore inflation, not deflation, which is why her earlier opposition to rate hikes is shifting.

“the output gap is not just closed, but it's actually positive. Takaiichi's primary problem is the fact that there is inflation. Wages are rising five, 5.5%.”at 18:44

Jesper Koll · Monex Group

Each 10 yen of yen depreciation adds roughly 0.3-0.4 points to Japan's CPI.

Yen weakness against the dollar feeds straight into consumer prices in Japan. Each 10 yen of depreciation adds about 0.3 to 0.4 percentage points to the CPI. Oil and global food prices add to that and erode household purchasing power. Inflation is the top concern of 80-95% of voters, and that is why Prime Minister Takaichi asked for help on the yen.

“for every 10 yen of depreciation of the yen against the dollar, you're adding about 0.3 to 0.4 percentage points to the consumer price index here in Japan.”at 29:04

Jesper Koll · Monex Group

Japan's 2026 upcycle is broad-based and not AI-dependent, making Japan a bastion of stability.

Koll cites the Tankan survey, which shows the upcycle spreading across small and medium-sized companies and the services sector, not just large firms or industry. Because it is not concentrated in AI, Japan is less exposed than the US and Korea to an AI capex slowdown. He expects that if US cost of debt starts to cause problems, Japan will be in a very good position.

“So Japan is a bastion of stability because the breadth and the depth of the... The 2026, you know, economic upcycle, right, is not AI dependent.”at 45:50

Jesper Koll · Monex Group

Takaichi must show concrete public-private projects at scale in the 2027 budget to ease bond market fears.

Koll calls fiscal policy Japan's most structural issue. He says PM Takaichi talks a big game, but the 2027 budget is being compiled over the next two and a half months. He wants two or three concrete public-private partnership projects at scale, such as quantum computing or humanoid robotics, with a potential for high investment returns. Without them, he says, bond markets will fear pork-barrel spending.

“I need to see at least two or three concrete examples of what these public private partnerships actually look like and that they are at scale.”at 1:00:17

Jesper Koll · Monex Group

Japanese equity dividend yields now double Wall Street's as Tokyo exchange governance reforms take hold.

About two and a half years ago, CEOs and boards began prioritizing shareholders. The Tokyo Stock Exchange reforms pressured companies trading below price-to-book of one, and that produced dividend and buyback changes. Japan's equity market dividend yield is now double the Wall Street level. Corporations used to hoard cash and build lazy balance sheets, and that is now changing. He argues this makes income from risky equities far more attractive relative to domestic bonds.

“if you run a company and your price to book is below one, we're gonna shame you. ... Japan's equity market dividend yield, is now double of what it is on Wall Street.”at 14:27

Jesper Koll · Monex Group

Japan's governance is improving through a generational CEO shift and pragmatic conglomerate restructuring.

Koll cites the average outgoing listed-company CEO age of 67 and incoming age of 52 over the past 18 months. He argues the younger generation is unburdened by the bubble-era 'we are the best' mentality and is pragmatic about cutting divisions. Only 37% of listed Japanese companies earn their primary revenue from the sector they are listed under, versus about 80% in the US, which he calls a conglomerate problem. He says managers are rejecting activist and private equity demands for dividends and buybacks in order to fund R&D.

“I'm actually gonna say as number one is the generational change... the age of the outgoing CEO of a listed company on average was 67. The age of the incoming CEO on average is 52.”at 52:36

Jesper Koll · Monex Group

Industrial consolidation into regional and national champions is the biggest reason to be bullish on Japan.

Koll argues that consolidation over the next two or three years will be the main driver of Japanese assets, not GDP or top-line growth. He says Japan has too many players in some sectors, such as car makers, and that the country is moving toward a more oligopolistic structure with regional and national champions. He expects capital returns to surprise on the upside as a result.

“So this industrial consolidation, right, is, you know, in my opinion, over the next two or three years, the single biggest reason to be bullish on Japanese assets. It's not GDP growth.”at 56:04

Jesper Koll · Monex Group

Bank of Japan will move faster and lift its policy rate to 2.25-2.5% by next summer.

Governor Ueda is reprivatizing the JGB market, which had been dominated by the Bank of Japan under yield curve control. Private-sector share of liquidity has risen from under 20% to 80-90%, and every bank has built JGB trading teams. Wages are growing faster than inflation and the national economy is gaining traction. That confidence lets the BOJ move faster over the next six to nine months. He agrees with Scott Bessent that the BOJ is behind the curve and expects it to move toward a neutral rate.

“over the next six to nine months, you're gonna see the Bank of Japan actually moving faster rather than slower. And I expect that by next summer that the Bank of Japan policy rate is gonna be at two and a quarter to 2.5%.”at 24:39

Jesper Koll · Monex Group

BoJ moves ahead of the curve, flattening Japan's yield curve; policy rate reaches 2.25-2.5% by next summer.

Koll expects the main theme over the next six to nine months to be a flatter yield curve, not a continued rise in long-end yields. He argues the long-end rise narrative, which rests on inflation and debt-issuance concerns, is overdone. The Bank of Japan is getting ahead of the curve rather than lagging it, and he expects the policy rate to reach 2.25-2.5% by next summer.

“I actually think over the next six to nine months, the big theme is gonna be a flatter yield curve... by next summer, you know, the Bank of Japan policy rate is gonna be between two and a quarter and 2.5%.”at 57:15

Jesper Koll · Monex Group

Japan is the only industrialized economy able to run a coordinated industrial policy, with the state backing projects.

The US is good at tariff pressure but outside forcing investment and tech transfer it lacks coordinated industrial policy. Japan's program is a 14-year industrial restructuring plan worth 370 trillion yen, about 60% of GDP. It is structured as public-private partnerships where the government provides 10-15% of capital and private firms provide the rest. Private contributions are expected to be significant in the next budget, which he argues should ease fears of bond issuance.

“Japan is the only industrialized economy actually capable of running a proper industrial policy.”at 33:48

Jesper Koll · Monex Group

Japan dominates high-tech component supply such as speed reducers and photoresist, not consumer products.

Koll argues Japan's edge is in analog-world components rather than mass consumer products. He cites Japanese firms supplying about 75% of the speed reducers used in robots, about 75% of China's photoresist supply through two companies, and 47% of the components in a Boeing jet. He says Japan's industrial strength lies in the middle layer of the supply chain, which makes it hard for the West to replicate.

“Well, 75% of the speed reducers, right, that you actually use are supplied by Japanese companies. ... about 75% of the supply of photoresist is done by two Japanese corporations.”at 47:42

Jesper Koll · Monex Group

Japan is well placed in physical AI because its manufacturers own the IP to turn AI into real-world machines.

Japan is not in the AI race, but it is very much in the game of physical AI, which turns virtual intelligence into the real world. Japanese manufacturers have the engineering capability and the intellectual property. With the yen weaker, they are also very competitive in global markets, and this is where Japan should be a key beneficiary.

“Japan is very much in the game of physical AI, actually translating virtual intelligence into the analog world, into the real world.”at 5:57

Jesper Koll · Monex Group

The dollar will collapse if the US falls into recession and the Fed cuts rates sharply.

Whatever the current cyclical view of the US, the next big dollar collapse comes if and when America enters recession. In that scenario the Fed would cut rates by 200 basis points within three or four months, and the dollar would fall. He says the carry trade is hard to quantify and much of the discussion is speculation, so the real risk sits in this recession scenario rather than in unwinds.

“The next collapse of the dollar is gonna come if and when America falls into recession... America will cut rates by 200 basis points within three or four months, and that's where the dollar is gonna be collapsing.”at 25:59

Jesper Koll · Monex Group

Japan's state-backed chip fabs are being built far faster than TSMC's overseas fabs.

The Sony-TSMC joint venture in Kumamoto was built in 22 months, versus a typical 36, and it is a sign of how fast Japan's coordination works. The Rapidus national project in Sapporo will start producing advanced chips in about two years, though whether its technology works at scale is still unknown. By contrast, TSMC's Arizona and Leipzig projects began around the same time and are still not running, partly because of permitting and other delays.

“we get a joint venture between Sony and TSMC to build a state of the art semiconductor factory out of nowhere in Kumamoto... get this done in twenty two months when normally it takes about thirty six months”at 35:09

Jesper Koll · Monex Group

Lifting Japan's arms export restriction is the most important step for its industrial competitiveness.

The voluntary constraint on Japan's dual-use and arms export industry was lifted in February this year. He calls this the single most important step for Japanese industrial competitiveness. Australia's decision to buy frigates, three of which will be built in Japan, is an early example. Adelaide will also gain technology transfer and shipbuilding capacity.

“the voluntary constraint that Japan had on its dual use and arms export industry was lifted in February this year. And that for Japanese industrial competitiveness is the single most important thing.”at 36:51

Jesper Koll · Monex Group

A large-scale revival of Japan's nuclear power is a long way off because of strong political resistance.

Koll says political resistance to reviving nuclear power at scale is very strong. A seismic-data scandal at Chubu Electric, which supplies Nagoya, led to resignations and worsened the outlook for restarts. As a result, the government is leaning on renewables and, more importantly, gas to raise Japan's energy supply capacity. He sees energy sufficiency as Japan's biggest challenge.

“the resistance against a revival of nuclear power at scale, right, is very, very strong. ... So this is a long way off.”at 38:34

Jesper Koll · Monex Group

Japanese corporate AI adoption is slow now, but diffusion will accelerate very rapidly.

Survey data show 27% of listed Japanese companies have no designated AI strategy, versus under 2% in the US and under 3% in China. Koll concedes adoption is slow initially, comparing Japan to its fax-machine habit, but argues diffusion will speed up sharply. He cites Sakana AI as a domestic leader and says the free market of models will make adoption make sense quickly.

“Of listed companies, 27% of them have no designated specific AI strategy. Right? In The United States, it's less than 2%. In China, it's less than 3%.”at 40:37

Jesper Koll · Monex Group

AI token costs are rising for firms deploying AI, so their technology costs are skyrocketing.

Koll rejects the common view that compute costs have fallen sharply. For a firm like JPMorgan that gives employees AI tools, usage drives token spending up, so its technology cost rises. He notes that simple queries can use cheaper models, which lowers token expense for those tasks, but the enterprise-wide cost picture is one of rising spend.

“Everybody says, oh, the cost of compute has dropped like a stone. Well, no. If you're JPMorgan, if you're a company that actually empowers its employees with AI, your cost of technology has skyrocketed because of the cost of token.”at 42:59

Jesper Koll · Monex Group

US economic activity is heavily dependent on the AI-related capex cycle.

Koll estimates that somewhere between 40-60% of US activity over the past 12 to 18 months has been AI-related, and that this activity is very concentrated in capital markets. He contrasts this with Korea, where about 90% of the activity improvement is AI-related, and Japan, where it is under 20%. He uses this to argue the US is exposed to any slowdown in the capex cycle. He hedges the figure, asking the host to check the numbers he is using.

“the estimates are that somewhere between [40-60%] of US activity... is AI related. ... So The US is very dependent on the... AI related, you know, capital expenditure cycle.”at 44:28

Jesper Koll · Monex Group

Germany's lack of governance reform, plus EU rules, makes industrial policy practically impossible.

Koll argues Germany's downfall stems from never having governance reform. As evidence, he cites Volkswagen's board coercing engineers to lie about diesel emissions, which he says would never have happened in Japan at that scale. He adds that the EU regulatory regime makes industrial policy practically impossible, and he notes Italy's recent revival as coming from disregarding EU demands.

“the German mistake, in sharp contrast to Japan, is that Germany never had governance reform. ... the board of Volkswagen coerced its engineers to lie about the diesel emissions.”at 50:32