The recent turbulence in global markets has raised some serious questions, especially with Japanese stocks seeing their biggest drop since 1987, and the VIX index, a key measure of market volatility, has hit its highest level since the COVID-19 pandemic. What’s driving this sharp shift in market sentiment? Was this just an isolated incident, or could it signal the start of a broader downturn? And more importantly, where does the Japanese economy go from here? Shigeto Nagai, former Bank of Japan official, and Head of Japan Economics at Oxford Economics, gave his insights in this interview with SFC Markets and Finance.
The ruling Liberal Democratic Party’s (LDP) landslide election victory on Sunday doesn’t change our expectation of a primary fiscal deficit of 2%-3% of GDP in FY2026-FY2028 – we still see the deficit only starting to decline from FY2029. We also keep our view that the 10-year Japanese government bond (JGB) yield will be at 2.3% at end-2026 and 2.5% at end-2027 and beyond.
In our upcoming February forecast update, we’ll stick to our expectation of a primary fiscal deficit of 2%-3% of GDP in FY2026 and FY2027, but now think it will remain at that level in FY2028, only starting to gradually decline in FY2029 and beyond.
The Bank of Japan (BoJ) kept its policy rate at 0.75% at its January meeting. Although our current baseline expects a final rate hike to 1% in mid-2026, the bank could move earlier if the yen weakens further.
