The Great Reversal: The Weak-Yen Bubble Begins to Turn, and Japan's Price Tags Are Rewritten

By Jiro Kido - Investor

I have argued for some time that an excessively weak yen would eventually trigger a reversal. Now, as we move through the second half of 2026, I believe Japan may finally be standing at the entrance to that reversal. The Bank of Japan has entered a rate-hiking cycle, while pressure from the United States against excessive yen weakness has intensified. For Japanese equities, which have been propelled by three powerful engines - a weak yen, low interest rates, and aggressive fiscal policy - this is not simply a change in the direction of the currency. It could mark the beginning of a reversal in the entire policy framework that has supported Japanese asset prices.

The same medicine for a different patient

I am not arguing that Abenomics itself was a mistake. The real problem is that the economic environment in which Abenomics was launched was completely different from the one Japan faces today. At the time, Japan was trapped in prolonged deflation and suffering from an excessively strong yen. Under those circumstances, aggressive monetary easing designed to correct yen overvaluation and restore corporate earnings and equity prices carried sound economic logic.

But when the Takaichi administration presented itself as the heir to Abenomics and pushed what came to be called "Sanaenomics," Japan was already at the opposite extreme: the yen had become historically weak.

The same medicine produces very different results when the patient's temperature is different.

Administering ever-larger doses of a medicine originally prescribed for extreme yen strength to a Japan already suffering from severe yen weakness inevitably means that the side effects will outweigh the benefits.

The weak-yen bubble

One of those side effects is what I have repeatedly called the "weak-yen bubble."

A weaker yen inflated the yen-denominated overseas earnings of Japanese exporters. It pushed equity prices higher. It enlarged nominal GDP. Rising corporate profits and inflation boosted tax revenues. Those higher-than-expected tax receipts then provided political justification for further fiscal expansion.

But I do not believe this means that Japan's underlying economic strength suddenly improved to the same extent.

To a significant extent, Japan simply shortened the ruler with which it was measuring itself.

When the value of the yen falls, corporate earnings measured in yen appear larger. Nominal GDP appears larger. Tax revenues appear larger. Equity prices appear larger.

A discount sticker on Japan Inc.

There was another enormous price Japan paid for yen depreciation: Japan itself became cheaper to the rest of the world.

Prime urban real estate, hotels, logistics facilities, land, forests, and tourism assets may have appeared increasingly expensive to Japanese buyers, but to investors holding dollars, Japan was effectively on sale. If the exchange rate moves from 100 yen to 150 yen per dollar, an asset whose yen price remains unchanged becomes roughly one-third cheaper in dollar terms.

Japan thought it was weakening its currency to strengthen its exporters. In reality, it also placed a huge discount sticker on Japan Inc. itself.

I believe the economic cost of that decision deserves far more serious consideration.

The forbidden fruit cannot last forever

But Japan cannot continue eating the forbidden fruit of currency depreciation forever.

The BOJ has already moved toward monetary normalization, and the direction of policy is clearly toward higher rates. Now there is another force: the United States. If Washington itself wants to correct excessive dollar strength and becomes increasingly unwilling to tolerate excessive yen weakness, the Japanese government's freedom to maintain the combination of a weak yen, low interest rates, and aggressive fiscal expansion will inevitably narrow.

To me, this is one of the most important changes for Japanese equities in the second half of 2026.

This is not simply about foreign-exchange intervention. It is about whether Japanese politicians retain the same ability to influence financial conditions and sustain a policy mix that simultaneously supports yen weakness and higher equity prices.

When the gears turn in reverse

If that ability diminishes, the gears that have driven the market forward begin turning in reverse.

A stronger yen reduces the yen value of overseas earnings. Slower corporate profit growth reduces the upside surprise in corporate tax revenues. As inflation moderates, the nominal boost that has supported tax receipts also begins to fade.

Yet if the Takaichi administration continues pursuing large-scale fiscal spending and tax cuts, another market begins to speak: the Japanese government bond market.

In fact, long-term yields have already risen to historic levels.

This means the next phase may not conform to the old textbook assumption that a stronger yen automatically produces lower interest rates. If concerns over fiscal sustainability remain, the yen can strengthen while JGBs sell off.

Yen buying, falling equities, and rising interest rates.

I believe the real reversal begins when those three forces appear simultaneously.

Slow at first, then all at once

I am not saying that Japanese equities will collapse tomorrow. In fact, the initial process is likely to be slow.

If the yen strengthens from 160 yen to 155 yen, the market will probably describe it as a "healthy appreciation of the yen." At 150 yen, investors may argue that cheaper imports will support household consumption. AI, semiconductors, defense, power infrastructure, and a handful of other themes may continue supporting headline indices, creating the impression that the market remains structurally strong.

But beneath the surface, something else will be changing.

Corporate exchange-rate assumptions will change. Earnings-per-share forecasts will change. Foreign investor positioning will change. Carry trades will begin to unwind. And the equity risk premium investors demand for owning Japanese stocks will change.

Markets have a peculiar characteristic. While change happens slowly, almost nobody reacts. Then one threshold is crossed, and everybody reacts at once.

I describe that moment as the point when the restraint finally snaps.

When earnings forecasts built on a weak yen begin to be revised downward, when tax-revenue upside disappears, when continued fiscal expansion drives long-term yields higher, and when foreign investors finally reassess Japanese equity valuations, factors that previously appeared unrelated suddenly become part of the same trade.

That is when investors may realize that what they were buying was not simply Japanese corporate growth.

They were also buying a three-part policy package: a weak yen, low interest rates, and an implicit policy put.

Why I remain cautious

That is why I remain cautious about Japanese equities in the second half of 2026.

I am not talking about a short-term correction of 5% or 10%. If the valuation regime created by the "weak-yen bubble" itself begins to change, the adjustment could last not months but years.

And the most dangerous assumption in such an environment is the old belief that "if stocks fall, the government will do something," or "if markets weaken, the BOJ will rescue them."

If inflation remains, the BOJ continues normalizing rates, Washington pressures Japan to correct excessive yen weakness, and the JGB market demands greater fiscal discipline, the policy arsenal available during the next equity downturn may be far smaller than investors have become accustomed to.

What should Japan do?

So what should Japan do?

There is one point I want to make.

Japan cannot remain a country that sells itself to the world by making its currency cheaper.

It must become a country capable of selling what only Japan can provide - and selling it at a premium.

The government is attempting to develop AI and semiconductors as strategic growth industries through massive public-private investment. I do not oppose that effort. But Japan must ask itself, with complete realism, whether it can defeat the giant technology companies of the United States and China simply by competing with them on capital expenditure.

Even the Japanese government acknowledges that the gap in private-sector AI investment between Japan and leading overseas economies has widened.

No matter how many trillions of cheap yen Japan stacks on the table, once those yen are converted into dollars, the gap with the global leaders will not narrow.

Japan as the "hospital of the world"

So what does Japan already possess that can represent a genuine comparative advantage?

I have thought about this for years, and one of my answers is healthcare.

Japan possesses world-class medical expertise, nursing skills, diagnostic capabilities, medical technology, and a level of hospitality that cannot adequately be described by the fashionable word omotenashi. It is a culture of attention to detail that extends into almost every aspect of patient care.

And yet, paradoxically, the institutions supporting that expertise are under increasing financial pressure. Hospitals are caught between government-controlled medical reimbursement rates and rising labor and operating costs. Doctors, nurses, and other highly trained professionals are often working within a system that does not adequately reward the value of their human capital.

I believe Japan should consider a national strategy to become the "hospital of the world."

This does not mean dismantling universal health insurance. Quite the opposite. It could become one way of preserving it.

Japan could maintain universal coverage for its own population while building, outside that system, a large international healthcare market in which advanced Japanese medical services are provided to overseas patients at international market prices.

And instead of attracting global capital merely to purchase Japanese land, Japan could attract it into hospitals, medical technology, research, medical devices, regenerative medicine, nursing, and elderly care.

If part of the income earned from international patients were ultimately recycled into the domestic healthcare system, Japan's aging population would no longer have to be viewed only as a national liability. It could become the source of expertise that gives Japan a first-mover advantage in one of the largest industries of the coming decades.

Turning a super-aged society into a strength

Japan is experiencing a super-aged society earlier than any other country in the world.

Then why not sell the solutions?

The rest of the world is aging too. The problems Japan has spent the past 30 years struggling to solve are precisely the problems many other countries will soon confront.

Healthcare, nursing, elderly care, rehabilitation, and medical AI could become areas in which Japan's demographic weakness is transformed into an economic advantage.

There, I believe, lies a growth strategy fundamentally different from trying to defeat the United States and China in a brute-force AI capital-spending race.

Waiting for the price tags to be rewritten

Japanese equities may face a major turning point in the second half of 2026. I am wary of the reversal of the "weak-yen bubble."

But that does not mean I am bearish on Japan itself.

Quite the opposite.

If Japan can move away from an equity market that requires the forbidden fruit of currency depreciation and ultra-low interest rates to rise, and return to a market where companies are valued for their genuine ability to earn globally, then the adjustment ahead may be a necessary rite of passage.

I am not waiting for a crash.

I am waiting for the price tags to be rewritten.

When the earnings inflated by yen depreciation are stripped away, when the equity prices manufactured by policy are stripped away, and when what remains is the true value of the companies themselves, that may become the greatest opportunity to buy the next decade of Japan.

Japan must stop selling itself cheaply.

It must learn to sell, at a premium, what only Japan can offer.

That, I believe, is where the real second half for Japanese equities begins.