In her first 110 days as prime minister, Sanae Takaichi has already begun to reshape Japan’s economy.
She has put forward aggressive government spending programs that aim to spur growth, but have also stoked jitters regarding Japan’s staggering debt levels. A proponent of fiscal stimulus to break a longstanding deflationary cycle, Ms. Takaichi pushed through a record supplementary budget last year. She has accelerated plans to increase military spending and to advance large state-led investments in artificial intelligence and semiconductor manufacturing.
A snap election being held on Sunday will serve in part as a referendum on whether the public approves of Ms. Takaichi’s economic agenda.
A central question for voters is whether her expansionary policies have pushed the nation’s balance sheet too far. Last month, Ms. Takaichi signaled she would move forward with discussions regarding a suspension of certain consumption taxes — a move that Japan’s Finance Ministry estimates could cost more than $30 billion annually. The proposal sent benchmark government bond yields surging as investors questioned Ms. Takaichi’s ability to fund the strategy.
One major boost for the administration is the Japanese stock market, which has shrugged off the volatility seen in the bond market. Japan’s major benchmark indexes, including the Nikkei 225, have traded at record highs under the Takaichi administration, fueled by a weakened yen and robust corporate earnings.
In recent years, the protracted cycle of deflationary stagnation that plagued the Japanese economy has begun to turn around, yet households have struggled to pay for the rising costs of some staples like energy and fresh food.
In a positive turn for Ms. Takaichi, the inflation that eroded the popularity of several of her predecessors is finally showing signs of moderating. Economists expect consumer prices for February to dip potentially to about 1 percent year-on-year for the first time in nearly four years. This easing is expected to allow wage growth to finally outpace price increases, bolstering Japanese household finances this year.
“Japan’s perennial deflation may finally be ebbing as wages grow in tandem with a healthy dose of inflation,” Bruce Kirk, Goldman Sachs Research’s chief Japan equity strategist, wrote in a recent note. “We have a virtuous cycle in place.”
Despite the domestic optimism, a significant shadow looms: the economic fallout from diplomatic tensions with Beijing. Following a comment from Ms. Takaichi last year regarding Japan’s stance on the defense of Taiwan, China halted Japanese seafood imports, restricted group tourism, and signaled export curbs on critical minerals vital to Japanese manufacturing.
Relations between Tokyo and Beijing have yet to show signs of warming. Some economists warn that the “double-hit” of a tourism drought and rare-earth export restrictions could potentially wipe out up to a year’s worth of projected growth for the Japanese economy.
River Akira Davis covers Japan for The Times, including its economy and businesses, and is based in Tokyo.
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