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	<title>Economic Analysis | The Daiwa Institute of Research</title>
		<link>https://www.dir.co.jp/english/research/report/analysis/index.html</link>
		<language>en</language>

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			<title>Reading the “TACO” Index: Signs of President Trump’s “TACO” Behavior</title>
			<link>https://www.dir.co.jp/english/research/report/analysis/20260904_026038.html</link>
			<pubDate>Fri, 04 Sep 2026 10:50:00 +0900</pubDate>
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    ◆Since taking office in 2025, President Trump has pursued policies—such as raising tariffs and taking a hard line against Iran—that seem to disregard their impact on the markets and the economy. At the same time, he has repeatedly exhibited a pattern of behavior known as “TACO” (“Trump Always Chickens Out”), in which he softens his stance when concerns grow over market turmoil or a decline in his approval ratings. 

◆In this report, we have developed the “TACO” index to identify signs of such policy shifts. The “TACO” index is calculated based on the S&P 500, the US 10-year Treasury yield, the US Dollar Index, and his approval ratings; it rises as falling stock prices, rising interest rates, a weaker dollar, and declining approval ratings occur simultaneously. A rise in the “TACO” index can be interpreted as a period in which the administration is facing increasing pressure to revise or withdraw its policies.

◆Looking back at the historical trends of the “TACO” index, a common pattern has been observed across different policy areas—including tariffs, issues surrounding the Federal Reserve’s independence, and the situation in the Middle East—where policy responses have softened following an increase in the “TACO” index. In particular, the greater the impact of a policy on markets and households, the more likely it is that a rise in the index signals an impending policy adjustment.

◆The “TACO” Index is, after all, merely a mirror reflecting “external” pressures—namely, the market and voters—and has its limitations in that it is difficult to capture the political dynamics “inside” the administration. However, it can be considered a useful indicator for visualizing the “cycle of hardline stances and softening” inherent in the Trump administration’s policy management. Continuously monitoring the level of accumulated pressure indicated by the “TACO” Index could serve as a compass for identifying turning points in the Trump administration’s policy management.

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			<title>Key Takeaways from the Basic Policy on Economic and Fiscal Management and Reform, Part 3: Prioritizing the reduction of social insurance contributions for the working generation</title>
			<link>https://www.dir.co.jp/english/research/report/analysis/20260805_025965.html</link>
			<pubDate>Wed, 05 Aug 2026 14:15:00 +0900</pubDate>
			<description><![CDATA[
    
    ◆On July 21, 2026, the Sanae Takaichi administration adopted the "Basic Policy on Economic and Fiscal Management and Reform" ("Basic Policy 2026") for the 2026 fiscal year. This policy framework sets a new target for the "social security burden ratio," aiming to lower social insurance contribution rates for the working-age population. However, stabilizing these rates is no easy task given the ongoing rise in medical costs driven by factors such as the aging population and advances in medical technology. Reforms that go further than ever before—such as reviewing the co-payment rates for individuals aged 70 and older—are essential.

◆Regarding the refundable tax credit and a consumption tax cut on food and beverages as a “bridge” measure until its introduction, the statement went no further than noting that a policy decision would be reached by early August. The former is expected to be scheduled for full-scale introduction in FY2029 as a system of "finely tuned, income-linked benefits." It is viewed as a mechanism to strengthen income redistribution for Japan's working-age population, among whom poverty is becoming increasingly severe. While a consumption tax cut on food and beverages is also considered highly likely, it suffers from poor cost-effectiveness—as high-income households would also reap significant benefits—and there is a possibility that retail prices would not drop by the full amount of the tax reduction.

◆The immediate challenge for income-linked benefits is securing revenue sources. While a permanent revenue stream amounting to several trillion yen annually is estimated to be necessary, the fiscal situation is projected to deteriorate in the 2030s. To balance strengthened support for the working-age population with fiscal sustainability, it is crucial to prioritize and streamline social security benefits and to rigorously apply the ability-to-pay principle.

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			<title>Key Takeaways from the Basic Policy on Economic and Fiscal Management and Reform, Part 2: The 2030s Will Be the Litmus Test for “Responsible Active Fiscal Policy”</title>
			<link>https://www.dir.co.jp/english/research/report/analysis/20260729_025947.html</link>
			<pubDate>Wed, 29 Jul 2026 16:10:00 +0900</pubDate>
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    ◆The draft FY2026 Basic Policy on Economic and Fiscal Management and Reform (“Basic Policy 2026”) states that the Sanae Takaichi administration will formulate a Medium- to Long-Term Economic and Fiscal Plan (FY2027–FY2040) based on “responsible active fiscal policy.” It positions “a steady decline in the ratio of total central and local government debt outstanding to GDP” as the core fiscal management objective, and redefines the primary balance (PB) of the central and local governments as an “indicator to be checked toward reducing the debt-to-GDP ratio.” It also indicates that, depending on the business cycle and the need for crisis management investments and growth investments, a temporary deterioration in the PB may be tolerated.

◆In the Cabinet Office’s Estimates on the “Medium- to Long-Term Economic and Fiscal Projections under Japan’s Growth Strategy” (Cabinet Office; 24 June 2026), only one of the three scenarios—“Growth Strategy Achieved Case I”—shows the ratio of outstanding government bonds and other liabilities to GDP continuing to decline. This scenario assumes additional fiscal spending of 10 tril yen in real terms each fiscal year, along with a sharp expansion in capital investment and productivity growth outpacing that of the United States; under this scenario, the PB remains broadly in surplus. However, realizing this would require a major transformation of Japan’s economic and fiscal structure, as well as securing funding sources for measures managed under separate accounts/frameworks. Securing a permanent funding source for income-linked benefits scheduled for full-scale introduction in FY2029 is also a challenge.

◆In all three scenarios, from the early to mid-2030s the effective interest rate on debt is projected to exceed nominal GDP growth (i.e., the “Domar condition” no longer holds), which would act to push up the debt-to-GDP ratio. During the 2020s—when the “fiscal bonus period,” in which the debt-to-GDP ratio can decline even with a PB deficit, is expected to continue—it will be necessary to move the underlying PB trend toward balance or surplus to prepare for the 2030s. Rather than predicating fiscal policy on growth materializing, fiscal management should remain flexible with various contingencies in mind and be conducted so that the debt-to-GDP ratio declines steadily over time.

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			<title>Key Takeaways from the Basic Policy on Economic and Fiscal Management and Reform, Part 1: Can High Growth be Achieved Through Crisis Management Investments and Growth Investments?</title>
			<link>https://www.dir.co.jp/english/research/report/analysis/20260729_025945.html</link>
			<pubDate>Wed, 29 Jul 2026 14:40:00 +0900</pubDate>
			<description><![CDATA[
    
    ◆The Sanae Takaichi administration is expected soon to adopt the FY2026 Basic Policy on Economic and Fiscal Management and Reform (“Basic Policy 2026”) A word-cloud analysis of word frequency in the draft Basic Policy 2026 clearly shows that, compared with the previous year, the Takaichi administration’s economic and fiscal policies have been brought more clearly to the forefront. Another notable feature is the substantial reduction in descriptions of individual policy measures and projects.

◆As for Crisis Management Investments and Growth Investments, a signature policy of the Takaichi administration, public- and private-sector investment in 17 strategic fields is projected to exceed 370 tril yen cumulatively through FY2040. When grouped into six areas, the AI- and digital-related fields make up about half of the total, while the next largest grouping, bio- and materials-related fields, account for about one-quarter. The overall picture suggests a certain degree of prioritization, with clearer emphasis on fields receiving concentrated support and others receiving broader but thinner support.

◆The draft Basic Policy 2026 states that the government will aim to realize “Growth Strategy Achieved Case I,” the highest-growth case among the three scenarios estimated by the Cabinet Office. However, under this scenario, cumulative business fixed investment alone is expected to amount to about 410 tril yen, implying that private investment on its own would exceed the total projected amount of public-private investment. In addition, the growth rate of total factor productivity (TFP) is assumed to accelerate to +1.4% per year in the latter half of the 2030s. This would represent a pace of productivity growth exceeding that of the United States, and achieving it would require a major transformation of Japan’s economic and fiscal structure.

◆Previous administrations, including that of Shinzo Abe, formulated growth strategies and worked to raise Japan’s potential growth rate, but the results were not sufficient. Progress in the growth strategy will be monitored regularly under the Council for Japan’s Growth Strategy; however, merely tracking the status of related measures and budgets will not be enough. What will be required of the Council is to examine how actual developments can be brought closer to the high-growth scenario described above, determine what measures are needed to achieve that, and reflect them in the growth strategy as appropriate.

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			<title>Middle East Situation Enters a New Phase; Persistently High Crude Oil Prices Likely to Expand the Outflow of Income Overseas</title>
			<link>https://www.dir.co.jp/english/research/report/analysis/20260724_025933.html</link>
			<pubDate>Fri, 24 Jul 2026 09:15:00 +0900</pubDate>
			<description><![CDATA[
    
    ◆The US and Iran announced that they had agreed to a memorandum. In response, crude oil prices fell, but they have remained above pre-attack levels, and it may take time for oil supply to recover in earnest. If crude oil prices stay elevated, there is concern that real income will flow overseas due to the deterioration of terms of trade (ToT).

◆The average ToT in April–May 2026 were down 5.1% compared with immediately before the outbreak of the conflict (Q4 2025), which is a smaller deterioration than during Russia’s invasion of Ukraine (down 9.3% in Q2 2022 versus Q4 2021). This is largely because temporary factors have been providing support—such as rising export prices for petroleum products due to tight supply–demand conditions in neighboring countries and rising memory semiconductor prices amid growing data center demand.

◆Looking ahead, these supporting factors are expected to run their course. Moreover, if supply constraints keep crude oil prices high, net exports may worsen due to sluggish overseas demand and a recovery in import volumes driven by progress in alternative procurement, potentially gradually strengthening downward pressure on real gross domestic income (GDI). Continued vigilance is needed regarding the impact of developments in the Middle East, including spillovers to corporate profits and employee income.

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			<title>Yen at its Weakest Against the Dollar in About 40 Years – What Impact Will This Have on the Japanese Economy?</title>
			<link>https://www.dir.co.jp/english/research/report/analysis/20260710_025894.html</link>
			<pubDate>Fri, 10 Jul 2026 13:55:00 +0900</pubDate>
			<description><![CDATA[
    
    ◆At the end of June 2026, the USD/JPY exchange rate briefly hit the 162-yen level, marking a low not seen in about 40 years. According to estimates using the DIR macroeconomic model, while a weaker yen and stronger dollar generally have a net positive impact on the Japanese economy under normal economic conditions, the benefits of yen weakness do not spread widely. For many companies and households, the increased burden resulting from rising import prices is likely to be more noticeable. Furthermore, it appears that the positive effects of yen weakness have been offset by factors such as companies’ progress in passing on price increases, downward pressure on exports due to the deteriorating situation in the Middle East, and a decline in the number of Chinese visitors to Japan caused by worsening Japan-China relations. Taking these factors into account, we estimate that a 10% depreciation of the yen against the dollar had a negative impact of approximately 0.14% on real GDP over the past year.

◆Movements in the USD/JPY exchange rate are often explained by the real interest rate differential between Japan and the US; however, since the fall of 2025, this relationship has weakened, and the yen has been depreciating against the dollar amid a narrowing real interest rate differential. The relationship between US real interest rates and the USD/JPY exchange rate has remained stable recently, and it appears that upward pressure on the yen resulting from rising interest rates in Japan has been limited. This is believed to stem from the fact that, while the Bank of Japan (BOJ) ’s monetary policy is in the process of normalization and it continues to raise interest rates, the current interest rate level remains low relative to the inflation rate and other factors, and is below the interest rate level appropriate for the actual state of the economy (the neutral rate). If this view accurately reflects the situation, the yen is likely to weaken against the dollar as long as expectations of rising US interest rates remain strong due to high inflation. On the other hand, even if the BOJ continues to raise interest rates, the yen may not reverse its current trend to one of appreciation for some time.

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			<title>Uncertainties for the Japanese Economy Caused by the Naphtha Problem</title>
			<link>https://www.dir.co.jp/english/research/report/analysis/20260707_025886.html</link>
			<pubDate>Tue, 07 Jul 2026 15:10:00 +0900</pubDate>
			<description><![CDATA[
    
    ◆Since the de facto blockade of the Strait of Hormuz, concerns over supply shortages have been growing not only for crude oil but also for naphtha, which is refined from crude oil. Although domestic production accounts for about 40% of naphtha supply, more than 90% of the crude oil used as feedstock is sourced from the Middle East. When combined with naphtha imports from the Middle East, Japan relies on the region for over 80% of its naphtha supply. Naphtha is a key input in the upstream part of the supply chain, and supply disruptions or price spikes in naphtha lead to reduced production and higher prices across a wide range of products.

◆Although production is proceeding through alternative sourcing from outside the Middle East and the use of oil reserves, domestic naphtha sales volume in April fell sharply by -36% compared to the same month last year. Against a backdrop of tight supply and demand and concerns about future supply, naphtha prices in May surged by 83% compared to the beginning of 2026, and prices for upstream products have also soared.

◆If naphtha prices were to remain 80% higher, estimates suggest that input prices—which reflect business-to-business transactions—would rise by 1.1%, while consumer prices faced by households would increase by 0.23%. While the rise in input prices is largely driven by upstream chemical products and petroleum products—including naphtha—the impact on consumer prices extends across a wide range of goods. Furthermore, if the tail risk of a 50% reduction in naphtha supply were to materialize, real GDP would be pushed down by approximately 0.43%, primarily in the chemical sector.

◆To mitigate the materialization of tail risks and curb the surge in naphtha prices, it is important—until logistics through the Strait of Hormuz recover—to continue pursuing alternative sources of crude oil and naphtha to ensure a stable supply, and to alleviate supply concerns by facilitating the smooth flow of goods.

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			<title>Could the Sharp Drop in Passenger Car Exports to the Middle East Pose a Risk to the Japanese Economy?</title>
			<link>https://www.dir.co.jp/english/research/report/analysis/20260707_025884.html</link>
			<pubDate>Tue, 07 Jul 2026 10:00:00 +0900</pubDate>
			<description><![CDATA[
    
    ◆Since the effective blockade of the Strait of Hormuz, attention has focused on issues related to the procurement of essential goods from the Middle East; however, exports to the Middle East are equally affected by the resulting logistics disruptions. Before the deterioration of the situation in the Middle East, automobiles accounted for half of all goods exported to countries surrounding the Strait of Hormuz, so restrictions on navigation through the Strait have a significant impact on the automotive industry.

◆As of the time of the writing of this report, while the number of Ro-Ro (Roll-on/Roll-off) ships carrying automobiles passing through the Strait of Hormuz has dropped to near zero following the US and Israeli attacks on Iran, the number of Ro-Ro ships passing through the Bab el-Mandeb Strait and the Suez Canal on the Red Sea side has been on the rise. However, new car exports to Saudi Arabia—which is also a Red Sea coastal nation—stood at zero in April, suggesting that, as of April, progress had not been made in securing alternative routes from Japan to countries surrounding the Strait of Hormuz.

◆If new car exports to the Middle East were to decline by 95% and domestic passenger car production were to fall accordingly, the resulting drag on real GDP is estimated to be about 0.35%. As of April, domestic passenger car production has been sustained by strong domestic sales and exports to Europe, Canada, and Mexico; however, if these supporting factors were to disappear, the Japanese economy would face significant downward pressure.

◆It is expected to take some time for logistics through the Strait of Hormuz to return to pre-Iran attack levels, so it will be necessary to continue expanding automobile exports to regions outside the Middle East. It remains unclear whether the US and Iran will reach a final agreement to end hostilities, and the possibility of another blockade of the Strait of Hormuz cannot be ruled out. To capture automotive demand in the Middle East despite this high level of uncertainty, the Japanese government should support companies’ efforts to secure alternative routes that bypass the Strait of Hormuz.

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			<title>The Rise of Agentic AI and the Polarization of AI Costs</title>
			<link>https://www.dir.co.jp/english/research/report/analysis/20260625_025864.html</link>
			<pubDate>Thu, 25 Jun 2026 16:15:00 +0900</pubDate>
			<description><![CDATA[
    
    ◆The pricing structure for generative AI is currently becoming increasingly polarized. While free and low-cost chat functions remain, there is a growing trend toward premium plans and pay-as-you-go pricing for high-performance models and business automation features. Most recently, US-based Anthropic had planned to transition “Claude Fable 5,” which it launched on June 9, to a pay-as-you-go model (however, service has been suspended since June 12 following an order from the US government). The industry is shifting toward a structure where costs are kept low for light-duty applications, while demanding appropriate compensation for high-load, high-value-added uses.

◆One factor behind this trend is the rapid expansion in the use of AI agents. Because AI agents internally repeat processes such as task planning, search, code execution, and retries, the volume of information processed by the AI tends to grow significantly, even if the user sees only a single output. Furthermore, AI service providers are under pressure to recoup their massive investments in AI infrastructure, which is likely why they decided to implement this pricing structure change.

◆Meanwhile, it appears that companies—as users—are increasingly willing to pay more for AI services. As the range of tasks that AI can handle expands, companies are shifting their comparison framework from viewing AI as a “tool” to viewing it as a “human worker,” making it easier for them to justify paying premium prices for high-performance models and agent capabilities.

◆Japanese companies need to view generative AI not merely as a chat tool, but as an external computing resource that supports business processes. Building on this understanding, they must establish a cost-effective management framework by visualizing usage, selecting models based on specific use cases, and optimizing the combination of external AI services and their own management infrastructure.

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			<title>Can the Japanese Economy Achieve Sustainable Growth? —Examination of Future Scenarios Using the DIR Macroeconomic Model</title>
			<link>https://www.dir.co.jp/english/research/report/analysis/20260619_025847.html</link>
			<pubDate>Fri, 19 Jun 2026 11:50:00 +0900</pubDate>
			<description><![CDATA[
    
    ◆The main downside risk to Japan’s economy in the near term is the situation in the Middle East. However, even if this risk subsides, Japan still needs to address medium- to long-term challenges such as low productivity, a declining labor force, and economic security risks. Based on our medium-term macroeconomic model, if the current economic structure is maintained, economic growth is expected to remain below +1% per year through FY2040. While the labor force continues to shrink and excess savings persist in both the corporate and household sectors, the ratio of government debt outstanding to GDP is projected to turn upward in the latter half of the 2030s. Consequently, it is difficult to characterize this outlook as a scenario of sustainable economic growth.

◆When constructing three alternative scenarios, the most desirable is one that integrates proactive behavioral changes in the private sector, strengthening of supply capacity, and fiscal consolidation. Under a stable price environment, potential growth would remain stable in the low +1% range on an annual basis, making sustained economic growth in Japan achievable. Both the public and private sectors should aim for a transition to such an economic structure. In addition to enhancing support for sectors with relatively large room for investment expansion—such as healthcare and welfare, and information and communications—there is a need to promote crisis management investment and growth investment, which are key policy pillars of the Takaichi administration, in a more targeted manner. This should be done with a strong emphasis on cost-effectiveness, while maintaining close attention to the primary balance and ensuring appropriate prioritization.

◆One factor behind the lack of clear behavioral change among firms is the limited entry of companies with strong investment appetite—namely, low levels of new business formation and entrepreneurship—which has led to stagnation in industrial dynamism. The startup rate in FY2024 fell to its lowest level since FY1981. In addition, the profitability gap between Japan and the United States, as reflected in the gross profit margins of listed companies, is observed mainly among mature firms that have been in operation for more than 30 years. In addition to strengthening support for startups, it is also important to promote initiatives that encourage greater risk-taking among such firms.

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