Additional thoughts on this.
This is very, very bad for Japan. He will be strat bombing Japan a year ahead of schedule - in fact, he's already started. However, it is still pretty early in 1944, and I don't think he has the capability to 'rubble' Japan quite yet with most of my fighter defenses in the area. The bad part is that once he does, he will be able to do so with a vengeance.
Greyjoy played this brilliantly. I definitely underestimated him (although, I must say, he is a VERY strong opponent). 'Innexperience': not any more - he is clearely a brilliant human being, and able to pick things up really quickly. I pegged himd for a US Grant (good and determined but direct), and he turned out to be a Robert E. Lee (brilliant and indirect, except on July 3, 1863). Greyjoy is constantly innovating, and always giving me nasty surprises. Some worse than others...
I am building up in Hokkaido and bringing troops home to Japan. I doubt I can ever get him out of Hokkaido, but at least I can prevent him from dumping those units in Honshu. And I can put pressure on his troops in Hokkaido and tie up his troops there. If he pulls troops out, I might be able to counterattack.
The only thing I realistically see that I can do to counter this is try to use up his supply and hit his lines of communication. At the very least, I can force him to devote effort to protecting this LOC. Subs, CV raids, and surface raids are all options, but I want to be very careful not to use up the IJN in a useless venture. IMO, Japan's job is the keep the fleet alive as long as possible. Even if outnumbered 4:1, it can still slaughter poorly planned and defended landings, and it forces the allies to be wary and advance on a single (or at most 2) axes. Supported by land-based air, I think the KB can remain an important factor for the entire game - if not stopping the allies, slowing them down by keeping them honest.
Greyjoy has already knocked out the closest R&D factory, and will likely try for more. We have moved most of the Japanese fighters to the home islands, but at least with the allied carriers still in the area, he is unlikely to mount any other invasions. I still can't be complacent (again), lest this lead to a collapse on other sectors.
Despite the situation being dismal, I do see some silver linings in this:
1. With the allied focus in the North, he probably can't do much elsewhere.
2. Hokkaido is an execellent place to reduce Japan from. But it isn't a great location from which to mount subsequent invasions of Japanese territory (Honshu excepted).
3. While fighting in the air over Japan, I get to take advantage of fighting on home ground (many pilots saved)
4. I get to use heavily built up air bases, including 3 level 10 airbases (Tokyo, Hiroshima/Osaka)
5. I get to use all the Japanese static base forces for eng/aviation support and all the home island restricted land and air units which otherwise would be sitting there useless.
6. I got the 10 or so depot division emergency reinforcements, providing enough free troops to defend Japan without having to move too many home.
7. (very minor) coastwatchers are now reporting Allied shipping activities in Hokkaido, reducing the need for recon/naval search.
8. With the fighting so close to home, this will be a massive boon to Japanese shipping (and thus fuel savings). No need to transport supplies and troops to far flung bases. Reinforcements arrive on site in Japan ready to fight.
9. I think my best chance for victory is that, because of this move, he will be delayed in other sectors enough that I might be able to end the war holding the Philippines, Singapore, part of the DEI, or something like that. This could be pretty useful points-wise.
So, while I definitely would not wish him to be in Hokkaido and this situation is bad for Japan, I don't think the situation is hopeless yet. And it should be fun for both of us for a while to come. But this move means that Japan will probably lose in the long run.