DB CoTD From Mapping Prices to Mapping Power

DB CoTD: From Mapping Prices to Mapping Power...

A newly published piece from our FX strategist Mallika Sachdeva at the Deutsche Bank Research Institute here, asks a fascinating question: what if Japan is about to become "strong and rich" again? While the report is primarily about fiscal policy, industrial strategy and the yen, it also provides a compelling backdrop to one of the standout conclusions from our recently released Mapping the World's Prices 2026 (link here): Japan has quietly become one of the cheapest developed economies in the world.

The FX report argues that Japan may be embarking on its most ambitious economic transformation in decades. Drawing parallels with the Meiji Restoration of the late nineteenth century, policymakers are attempting to reverse years of underinvestment through a ¥370 trillion public-private investment programme spanning areas such as AI,

defence, critical minerals, shipbuilding and advanced technology. The goal is nothing less than restoring Japan as an investment-driven industrial powerhouse.

This matters because Japan's current affordability is largely the consequence of a long period of economic stagnation, subdued domestic demand and a currency that has weakened dramatically over the last decade. In Mapping the World's Prices 2026, we show that Tokyo is now among the cheapest major cities in the developed world across a wide range of metrics. Whether it's consumer electronics, restaurants, transport or housing, Japan offers a level of value that would have been almost unimaginable when we first published the report in 2012, when the yen was exceptionally strong and Japan ranked amongst the world's more expensive economies.

Mallika’s report's key insight is that this situation may not last forever. Japan is increasingly focused on boosting nominal GDP growth, encouraging investment and mobilising its enormous pool of domestic savings. As today’s CoTD shows, Japanese debt/GDP has been declining since nominal GDP began to rise markedly again at the start of this decade. However, global yields have been rising, with Japan notably more than other DM countries in the last year, and if Japan loses control of yields and r goes above g then all the good work is undone.

So, the ultimate impact of the new policy regime on USD/JPY will depend on the levers the government chooses to pull to manage yields. If GPIF is mandated to bring money back into domestic assets, this could be very bullish for the JPY. However, if the BoJ is coopted to support bonds through renewed JGB purchases, this could be very negative for the JPY. Consumer prices would go up relative to other cities but maybe more through inflation in this scenario.

Households hold roughly half of their $15 trillion financial assets in cash, while the giant GPIF pension fund has around half of its $1.8 trillion portfolio invested overseas. If even a portion of this capital is redirected back home to fund Japan's economic renaissance, the implications for domestic asset prices and the yen could be significant.