Issue:
November 2025 | Deep Dive
Sanae Takaichi faces myriad economic challenges. But her prescription is out of date, FCC event hears
Sanae Takaichi finally won her twisting and turning fight to become Japan’s first female prime minister. But given the scale of the challenges in front of her, this could turn out to be a poisoned chalice.
The economic and financial dimensions of the tasks facing Takaichi - Japan’s fourth prime minister in the past five years – were analysed at a Deep Dive event at the FCCJ on October 15.
Takaishi entered office during a period of political turbulence, and her Liberal Democratic Party (LDP) will likely need frequent compromises with its coalition partner, Nippon Isshin, and rival parties if she and her administration are to stay in power.
This in turn suggests that some of the more market-impacting policies of Japan’s "Iron Lady”, who models her approach upon that of former British Prime Minister Margaret Thatcher, will be diluted through political necessity.
Even so, a good deal is at stake with regard to how the rest of the world perceives the short to medium-term prospects of the world's fourth largest economy and its financial markets under Takaichi's leadership.
Will the Tokyo stock market - the world's second largest - continue its record breaking run? Will the giant Japanese Government Bond market come under further stress? And what of Japan's efforts to become a key global financial center?
These key questions are separate from concerns over whether a right-leaning Takaichi government could attempt to revise the postwar constitution, adopt a more aggressive posture toward China, and dilute Tokyo's relationship with the United States.
Deep Dive panelists Naomi Fink, chief global analyst at Amova Asset Management in Tokyo; Jesper Koll, expert director at the Monex Group; and economist and author Richard Katz offered views on these and other key issues.
They all agreed that while Takaichi models her policy approach on that followed by her mentor and former prime minister, Shinzo Abe, current economic conditions in Japan differ dramatically from those during Abe’s second time in office, which began more than a decade ago.
Japan is no longer suffering from deflation and instead has been experiencing price inflation for several years. The word that best describes its condition is “stagflation”, as economic growth is stagnating even as prices rise. That means “Abenomics” – fiscal stimulus, monetary easing and structural reforms – are a bad fit for today’s Japan.
“Abenomics was the right strategy [in Abe's time] starting in December 2012 but conditions are very different now," Fink said, adding that there had been nominal GDP and corporate profit growth since then, while unemployment had fallen.
Despite these positive trends, Takaichi is in favour of potentially deflationary moves to continue fiscal stimulus to the Japanese economy while urging the Bank Japan to delay further monetary tightening.
What is more, the yen was valued at around ¥100 to the dollar during Abe's tenure; it is now below ¥150, which means many imports have become far more expensive, adding to inflationary pressures in Japan. Another sign that any return to Abenomics would be inappropriate for a Japan that is facing inflationary threats.
Japan's fiscal position has improved since Abe's days, to the point where the government's primary balance – revenues versus expenditures less interest payments on debt – has moved closer to equilibrium. Renewed fiscal stimulus now would push the balance back to deeper deficit.
Japan has become "cheap", according to several yardsticks, Fink said. This include Tokyo stock prices which, despite a recent strong rally in the Nikkei 225 stock average, remain relatively low in terms of their ratio to corporate earnings. U.S. stocks, by contrast, are "far above their 20-year range. This another argument against stimulus to the economy and suppressing the value of the yen.”
Koll noted that while Abe was in office, Japan had a "negative output gap", which occurs when actual output is less than what an economy could produce at full capacity. It means that there is spare capacity, or slack, in the economy due to weak demand. But that gap has now closed.
Takaichi has shown signs of recognising these fundamental changes in the Japanese economy, but she still faces big challenges, Koll added.
"The people are angry at the elites because of inflation,” he said. “The real purchasing power, if you're a pensioner in Japan … has gone down by about 70% over the last 18 months alone. People are angry at the United States because it's become untrustworthy. And last but not least, everybody, of course, is scared because of technology, of AI taking over."
Katz said the LDP "is no longer capable of ruling [without the support of other parties], but the opposition is not yet ready to rule". That, he added, “is going to create kind of an economic mess" in Japan.
Japan, he explained, "is growing so slowly. Real per capita GDP keeps falling and falling and falling. In 1990, it was 15th in the world. According to the IMF, by 2030 it will be 26th and this is only partly because of demographics and aging. So Japan has a long-term growth problem, even at full capacity, it does not have the kind of productivity that can sustain growth and living standards, let alone its share of world GDP."
Anthony Rowley is a columnist and contributor for the South China Morning Post.
