Why Japan's Economy Is at a Tipping Point

Ray Dalio recently reported that much of the S&P 500’s 2025 gains came not from real growth, but from the dollar quietly losing value. Reportedly down 10% last year!

He’s not alone. Several BlackRock, Fidelity, and Bloomberg analysts say to expect further dollar decline in 2026.

So, even when your U.S. assets look “up,” your purchasing power may actually be down.

Which is why many investors are adding globally priced, scarce assets to their portfolios—like art.

Art is traded on a global stage, making it largely resistant to currency swings.

Now, Masterworks is opening access to invest in artworks featuring legends like Banksy, Basquiat, and Picasso as a low-correlation asset class with attractive appreciation historically (1995-2025).*

Masterworks’ 26 sales have yielded annualized net returns like 14.6%, 17.6%, and 17.8%.

They handle the sourcing, storage, and sale. You just click to invest.

Special offer for my subscribers:

Skip waitlist

_{*Based on Masterworks data. Investing involves risk. Past performance is not indicative of future returns. Important Reg A disclosures: masterworks.com/cd.}

In 2016, a Japanese company did something almost unheard of in corporate culture anywhere in the world—they issued a formal public apology. Their crime? Raising the price of a popular ice cream bar by 10 yen. That's about 6 cents.

For 25 years, the price hadn't budged. And in Japan, that wasn't unusual. It was the norm.

For three decades, prices in Japan stayed flat or actually fell. Deflation wasn't a bug in the Japanese economy—it was a feature. Consumers expected things to cost the same year after year. Companies feared raising prices because customers would simply walk away. The entire economic psychology of a nation was built around the idea that tomorrow's prices would be the same as today's.

That world is now ending.

The Japanese yen has weakened to levels not seen since the early 1990s. And when your currency weakens, everything you import gets more expensive—groceries, gasoline, raw materials, energy.

Japan imports most of its energy. So when global energy prices surged after the Ukraine war, Japan didn't just feel the impact. It imported inflation directly into its economy.

The numbers tell the story: by 2023, inflation in Japan exceeded the Bank of Japan's 2% target. By early 2025, Japan had the highest inflation rate among all G7 countries.

Read that again. Japan—the country synonymous with deflation for an entire generation—now has higher inflation than the US, UK, Germany, France, Italy, and Canada.

Rice, once a symbol of price stability in Japanese households, has surged since 2023. Energy costs are climbing. Transportation and housing are following. For a population that grew up expecting stable prices, this is a psychological shock as much as an economic one.

Sanae Takaichi, Japan's first female prime minister, now faces what some are calling a "once-in-a-generation cost-of-living crisis" as her first major challenge.

To understand why this matters so much, you need to understand what Japan has been through.

Rewind to the late 1980s. Japan was the economic miracle of the century. Business magazines ran covers asking when—not if—Japan would overtake America as the world's largest economy. Japanese companies were buying up real estate in Manhattan. The future seemed to belong to Tokyo.

Then the bubble burst.

Property prices collapsed. Stock markets cratered. And they kept falling for over a decade. What followed was something economists call a "lost decade"—which turned into two lost decades, then three.

Deflation set in. When prices fall consistently, consumers stop spending. Why buy today if it'll be cheaper tomorrow? Companies stop investing. Growth stagnates. Debt rises. An aging population makes everything worse because there are fewer workers and more retirees to support.

The Bank of Japan tried everything. They pushed interest rates to zero. Then they went further—into negative territory. They bought government bonds at unprecedented scale. They implemented something called "yield curve control" to keep borrowing costs artificially low.

For decades, Japan ran the most extreme monetary experiment any developed nation had ever attempted. And it mostly just kept things from getting worse.

Two global shocks did what 30 years of policy couldn't.

First, the 2020 pandemic lockdowns. Then, the war in Ukraine.

The combination created global supply chain chaos and energy price spikes. Japan, dependent on imported energy, absorbed these shocks directly. Pent-up consumer spending created what analysts called a "big wave" of inflation.

The Bank of Japan finally blinked.

In 2024, they raised interest rates for the first time since 2007. They scrapped yield curve control. The era of free money in Japan was over.

Here's where it gets complicated.

Japan carries the largest national debt of any advanced economy—over 200% of GDP. To put that in perspective, America's debt-to-GDP ratio is around 120%. Japan is in a league of its own.

When interest rates are zero, that massive debt costs almost nothing to service. The government can keep rolling it over indefinitely. But when rates rise, even slightly, the interest payments explode. Every percentage point increase means billions more in annual debt servicing costs.

The government is now caught in a policy trap with no easy exit. Raising rates fights inflation but makes the debt more expensive, potentially triggering a fiscal crisis. Keeping rates low helps manage the debt but lets inflation run unchecked, eroding household purchasing power. Pick your poison.

Meanwhile, real wages—what workers actually earn after accounting for inflation—are falling. Small business owners report needing to pay up to 1,500 yen per hour just to attract staff, yet those wages aren't keeping pace with rising costs. On paper, wages are growing. In reality, workers feel poorer because prices are growing faster. This is the squeeze that makes headlines about "economic recovery" feel hollow to ordinary people.

Japan's government is betting everything on something called a "virtuous cycle"—where rising prices lead companies to raise wages, higher wages give consumers more spending power, increased spending drives economic growth, and that growth justifies the higher prices that started the cycle.

It's elegant in theory. In practice, it requires every piece to fall into place at the right time.

There are some encouraging signs. Japanese households, for the first time in decades, are moving money from savings accounts into the stock market. New tax incentives make equity investments more attractive, and people are responding. In 2025, the Nikkei index hit a record high, breaking through levels not seen since the bubble era. Japanese corporations are posting strong profits, partly because the weak yen makes their exports more competitive on the global market.

The tourism boom adds another tailwind. That same weak yen that makes imports expensive makes Japan incredibly affordable for foreign visitors. Tourists from America, Europe, and across Asia are flooding in, spending billions that flow directly into hotels, restaurants, and retail shops. For a service economy, this matters.

But here's the catch: none of this automatically translates to higher wages for average workers. Corporate profits can soar while wages stagnate. Stock markets can boom while households struggle. The virtuous cycle only works if companies actually share their gains with employees.

Japan isn't going back to 6-cent ice cream apologies. The deflationary era is over.

The question now is what comes next. Japan could recreate the innovation and energy of its 1980s peak—an economy finally freed from the psychology of stagnation. Or it could face a future of growing inequality, where wages can't keep up with prices and households feel squeezed despite headline economic growth.

For investors, Japan is no longer the "boring" allocation in a global portfolio. It's a live experiment in whether a country can escape deflation without falling into the opposite trap.

For the rest of us, it's a reminder that economic psychology matters as much as economic policy. What people believe about prices shapes how they spend, save, and invest. Japan believed prices would never rise. Now they're learning to believe something different.

The next few years will show whether that's a blessing or a curse.

That's all for this edition. If this helped you understand something complex, forward it to a friend who'd appreciate it.