Core Viewpoint - Since 2026 (as of January 16), the Japanese yen has depreciated by 0.9% against the US dollar, while the Japanese stock market has surged by 7.1%. This contradiction arises from the inability to explain yen movements solely through traditional frameworks of interest rate differentials, influenced by three factors: the weak sustainability of narrowing interest rate differentials, imbalances in the international balance of payments, and uncertainties in Japan's economic recovery. Conversely, the rise in the Japanese stock market is driven by new fiscal expansion, inflation boosting corporate profits, and the global AI expansion cycle, reflecting differentiated pricing of structural contradictions in the Japanese economy across different asset classes [4]. Group 1: Reasons for Yen Depreciation - The sustainability of narrowing US-Japan interest rate differentials is weak, as the Bank of Japan's guidance on future interest rate paths falls short of market expectations, and the contradiction between Japan's expansive fiscal policy and tight monetary policy raises concerns about fiscal sustainability, potentially slowing the pace of interest rate hikes [5]. - There is a structural imbalance in the international balance of payments, with trade facing challenges, and the yen still has arbitrage opportunities. The US-Japan trade agreement may lead to increased capital outflows due to investments in the US, while foreign capital continues to flow out of Japanese securities [5]. - Although there are signs of recovery in the Japanese economy, structural contradictions remain, and the upward trend is unclear [5]. Group 2: Drivers of Japanese Stock Market Rise - The Nikkei 225 index's rise since 2025 is primarily driven by three factors: high inflation in Japan and moderate economic recovery [6]. - The expectations of the Suga administration's expansive fiscal policy have instilled confidence in the market [6]. - The global AI wave has led to strong exports in related industries [6]. Group 3: Outlook for Japanese Assets in 2026 - The Japanese stock market is expected to maintain high levels, with three areas of focus: a decline in inflation and an increase in real income levels for residents, which may lead to a rebound in the consumer sector [7]. - The global AI expansion phase is still ongoing, and demand for semiconductor equipment is expected to further increase [7]. - The implementation of fiscal policies is favorable for the rise of sectors such as artificial intelligence, semiconductors, shipbuilding, aerospace, and military industries [7]. Group 4: Yen Outlook for 2026 - The yen may continue to face pressure in the first half of the year, with high uncertainty in Japan's economic fundamentals and a slow pace of interest rate hikes. The new fiscal budget review in 2026 may further amplify selling pressure on Japanese bonds, leading to fluctuations at low levels for the yen. However, in the second half of the year, as the Federal Reserve enters a period of intensive rate cuts, the narrowing of US-Japan interest rate differentials may provide slight appreciation potential for the yen [8]. - The yield curve for Japanese government bonds may exhibit a bear steepening trend in the first half of the year, driven by fiscal risk premiums, with long-term yields rising more than short-term yields. In the second half, the curve may shift to bear flattening, dominated by monetary policy tightening, with short-term yields rising more than long-term yields [8].