Japan’s new leader revives Abe’s economic vision – with a twist

Sanae Takaichi, a hardline conservative with nationalist views, was elected as Japan’s first ever female prime minister on October 21. Known as a protege of the assassinated former Japanese prime minister, Shinzo Abe, she is assertive on defence, hawkish on China and is keen to bolster Japan’s regional role.

Experts say it’s possible that Takaichi will leverage her ties^[1] to Abe as she attempts to curry favour with the US president, Donald Trump^[2]. Ahead of Trump’s recent visit to Japan, where he met Takaichi for the first time, he described Abe^[3] as “one of my favourites”.

As part of a trade deal signed in July, Tokyo promised to invest^[4] US$550 billion (£413 billion) in the US in exchange for lower tariffs on Japanese goods. Takaichi reportedly wants Japan^[5] to have greater influence over these investments and to ensure they also benefit Japanese companies and contractors.

A key part of Takaichi’s leadership campaign was her pledge to revive^[6] Abe’s economic vision of high public spending and cheap borrowing, which became known as “Abenomics”. This economic programme was introduced in late 2012 as part of a strategy to counter China’s growing economic and political power.

The aim was to revitalise Japan’s stagnant economy through the “three arrows” of monetary easing, fiscal stimulus and structural reforms. The first arrow saw Japan’s central bank implement extreme measures, such as low or negative short-term interest rates, to make it cheaper for consumers and companies to borrow money and spend.

Japan’s central bank also purchased financial assets, including equities and long-term government bonds, aggressively. The hope was that this would make the private sector expect a subsequent rise in the price of goods and services, encouraging more investment. And selling bonds to the central bank should give banks more money to lend.

Abe’s second arrow involved the government increasing its spending by funding infrastructure projects or offering financial incentives like tax breaks for companies. And the third arrow introduced labour market deregulation, corporate governance improvements and policies encouraging women’s participation in the workforce.

In some respects, Abenomics was a success. The programme quickly led to sharp rises in stock prices, while unemployment dropped^[8] from 4% in the first quarter of 2012 to 3.7% in 2013. However, it was also accompanied by various negative side effects.

These included ballooning public debt and a significant devaluation of the yen against other major currencies, which increased the cost of imported goods. The central bank’s low interest rate policy also allowed numerous poorly performing “zombie” firms to survive by reducing the cost^[9] of servicing their debt.

At the same time, Abenomics largely failed to improve domestic investment by private firms. Corporate managers remained pessimistic about Japan’s long-term economic outlook despite cheap borrowing opportunities, largely because of the country’s ageing society and depopulation.

Meanwhile, the rising profitability of large firms prompted them to make massive overseas investments. This contributed to a further hollowing-out of the Japanese economy by relocating domestic production and manufacturing jobs overseas.

Takaichi’s economic vision is similar to Abenomics. It shares nationalist and anti-China undertones with Abe’s programme, and also involves structural reforms and the bold use of fiscal and monetary tools. But her brand, which has been called “Sanaenomics”^[10], should be seen as building on Abe’s programme.

Abenomics placed particular emphasis on aggressive monetary easing. On the other hand, Takaichi’s approach tilts more towards the use of expansionary fiscal policy and large-scale investment.

Japan’s inflation rate^[11] is currently hovering around 2.7%, which is much higher than the rates seen under Abe. These are not conditions where a central bank would typically implement loose monetary policy.

A core part of Takaichi’s economic programme, which has earned praise^[12] from US treasury secretary Scott Bessent recently, is government investment in what she calls “crisis management”.

Here, she is referring to investment in sectors that are important for national security such as food, energy and defence, as well as strategic industries like semiconductors, AI and electric vehicle batteries. She has framed this investment as necessary to reduce Japan’s foreign dependence.

However, public investments alone cannot sustain continuous growth. The key question is whether such spending can stimulate larger private sector investments, which would subsequently boost the economy. This will require overcoming the longstanding risk adversity of Japan’s corporate and financial sectors.

One way to achieve this will be restoring cooperation between the public and private sectors. Japan’s rapid economic growth from the 1950s to 1970s was driven by public-private partnerships^[13], which involved the government collaborating closely with private companies to finance and develop national strategic industries.

Such partnerships can shift certain risks, particularly regulatory and financial risks, to the public sector. This can make projects more financially viable for firms, encouraging them to invest more. The Japanese private sector has massive cash at hand, and whether these firms are willing to use it for domestic investments will decide the outcome of Sanaenomics.

There are several other risks associated with Sanaenomics. Among these are the fact that expansionary spending will add to Japan’s immense existing public debt.

Credit rating agencies currently view Japan’s sovereign creditworthiness as relatively stable^[15], but this could change as domestic and international investors grow concerned about a deterioration in the country’s fiscal situation.

At the same time, the Takaichi administration’s nationalist stance could deteriorate Japan’s relationship with China, its largest trading partner. Takaichi has consistently framed China as a strategic threat, advocating for supply chains that bypass China during her tenure as Japan’s first minister of economic security.

To Trump’s delight, she has also now pledged to dramatically increase Japan’s defence spending. More friction with China will only act as a drag on the Japanese economy.

References

1. ^{^} leverage her ties (www.nytimes.com)
2. ^{^} Donald Trump (theconversation.com)
3. ^{^} he described Abe (www.theguardian.com)
4. ^{^} promised to invest (foreignpolicy.com)
5. ^{^} Japan (theconversation.com)
6. ^{^} pledge to revive (www.asiae.co.kr)
7. ^{^} Kiyoshi Ota / EPA (epaimages.com)
8. ^{^} while unemployment dropped (fred.stlouisfed.org)
9. ^{^} reducing the cost (www.bloomberg.com)
10. ^{^} “Sanaenomics” (www.malaymail.com)
11. ^{^} Japan’s inflation rate (www.macrotrends.net)
12. ^{^} has earned praise (www.bloomberg.com)
13. ^{^} public-private partnerships (www.tandfonline.com)
14. ^{^} Mahathir Mohd Yasin / Shutterstock (www.shutterstock.com)
15. ^{^} relatively stable (www.spglobal.com)