Japan’s budget balancing act

Insight: Despite saying she would resist, Japanese Prime Minister Sanae Takaichi has succumbed to a temptation that routinely afflicts Japan’s leaders: launching a supplementary budget. She has more excuse than most, given soaring prices due to the Iran war — resource-poor Japan imports almost all its oil and nearly 90% of this comes through the Strait of Hormuz. Unsurprisingly, therefore, her JPY3 trillion ($19 billion) package is squarely focused on relieving energy costs. The centerpiece is a revival of government subsidies on electricity and gas bills from July to September, when air-conditioning demand peaks. The government will also replenish the contingency reserves it has been drawing on to cap retail gasoline prices. And it will establish a new dedicated reserve to fund further measures as the Middle East crisis continues.

Impact: While this package is undoubtedly popular, the question is how will it be financed? The prime minister promises there will be no need for additional bond issuance to pay for it due to stronger-than-expected tax revenues. That may be true mathematically, but with bond yields rising steadily (10-year JGBs have reached 2.7%), ratings agencies are warning that steeper financing costs could blow out the 2026/7 budget deficit beyond the expected 3.5% of GDP. The deeper problem is that fiscal expansion and monetary tightening are pulling in opposite directions: the Bank of Japan is considering raising its policy rate to 1% at its June meeting, which would further push up the servicing costs on Japan’s already heavy debt burden.

Chinese tech giants are offering annual pay packages starting from around $200,000 to lure Singapore-trained AI graduates, with top PhD candidates able to command far more. This marks a reversal of the old brain-drain story: China’s tech firms are no longer just losing talent to global hubs but actively recruiting from them to power Beijing’s AI ambitions. 

Insight: As one of the world’s hardest-hit regions by the ongoing crisis in the Middle East, Southeast Asia’s push into biofuels is becoming a real-world test of how far governments can successfully stretch domestic crop production in the name of energy security. Indonesia, Thailand, Malaysia, and Vietnam are all raising biodiesel and ethanol blending mandates, diverting more palm oil, sugarcane, cassava, and coconut into fuel production. This comes as households face new limits on cooking oil purchases in-store and exporters contend with rising costs, exposing how efforts to reduce dependence on imported energy sources are putting food security and export competitiveness under fresh strain.

Impact: Countries are rightfully diversifying fuel sources amid growing fragmentation in energy markets, treating domestic crops as strategic fuel reserves. But the trade-offs are mounting: higher biofuel mandates risk driving up food prices and raising costs for transport and industrial machinery, while also testing increasingly fragile supply chains. While biofuels were initially seen as being core to Southeast Asia’s decarbonization strategy, the challenge is now whether governments can continue to scale them without creating a new cost-of-living problem.

Insight: A country making headlines for its lack of children should not be seeing a boom in kids toy sales, right? Not Japan. A seemingly insatiable demand for "gacha gacha" capsule toys — toys that pop out of a hand-cranked machine — has taken hold. The market has quadrupled since 2021, reaching ¥196 billion ($1.2 billion) last year. The boom has been partly driven by the aftermath of Covid-19, with specialist capsule toy stores proliferating in vacant retail units owing to their low labour and energy costs. Around 1,400 such stores now exist.

Impact: More importantly, capsule toy popularity rides a broader "kidulting" wave. As grown-ups are increasingly unlikely to marry and have children, societal expectations have shifted and people feel freer to pursue hobbies later in life. Labubu dolls, Lego, and Pokémon trading cards have all benefited. As ever in consumer goods, social media has amplified demand, with the Instagram-friendly aesthetic of rows of capsule machines enticing customers. The rapid pace of product development — 700 new toys released every month — is also expected to sustain sales growth even as store numbers approach saturation. Gacha gacha’s growth is a reminder that demographic headwinds do not preclude consumer spending booms: they can simply redirect them.

China's carmakers have upended the global auto industry, and Western brands, squeezed by overcapacity and a costly EV transition, are racing to follow. From Volkswagen to Stellantis, multinationals are turning to Chinese factories as export bases for global markets, reversing the decades-long dynamic of foreign technological advantage over local partners. The FT examines the economics driving the shift, its implications for European manufacturing, and the dilemma Brussels faces in trying to limit Chinese technology without strangling its own car industry.

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