Japan Backs Takaichi in Landslide—Can She Revive the Economy?
After a landslide election win, Japan’s economy faces tough choices. Can Sanae Takaichi fix sluggish growth, rising debt, and inflation fears?
Japan's Prime Minister, Sanae Takaichi, took the gamble of calling a snap election—and it paid off.
She and her Liberal Democratic Party (LDP) have the kind of overwhelming majority—316 out of 465 seats—that very few leaders have achieved recently. In fact, Japan has a history of changing prime ministers.
The question now is what Takaichi will do with it. Can she achieve what the Japanese economy has failed to achieve for decades: accelerate growth?
Japan faces a long list of problems: slow growth, the world's largest public debt, and an aging and declining working-age population.
Some experts believe Takaichi has a chance to change this; she can transform how Japan runs the world's fourth-largest economy—and how the markets perceive it.
Tomohiko Taniguchi, a policy advisor and former speechwriter for the late Prime Minister, Shinzo Abe, says she will steer Japan in the right direction.
"If successful, it will be a great case study for aging societies around the world."
Where will the money come from?
Takaichi campaigned on the promise of increased spending, including investment in specific industries, to boost growth.
This was a change from her predecessors. She promised to reduce taxes so people could spend more, and said growth was a priority over savings.
But markets were skeptical about how she would fund these plans. Her overwhelming majority has reassured investors—and this was reflected in the market's positive reaction to her victory Sunday night.
Investors are conducting "Takaichi trades," buying Japanese stocks and selling yen and government debt. Notably, the yen has also appreciated—for some investors, a strong currency is a good thing.
But it's more complicated than that.
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When Takaichi took office in October, government bond yields—essentially the interest Japan pays to borrow money—rose.
This is a major concern for investors because of Japan's high public debt. Higher spending and lower taxes—which Takaichi is promising—mean the government needs to borrow more money.
Japan's bond market is one of the world's largest, so even small changes in Tokyo can impact global markets, affecting borrowing costs, investment decisions, and the currency.
Investors are also closely monitoring interest rates as the Bank of Japan attempts to move away from decades of very low rates to control inflation.
For example, the price of rice is expected to double by 2025. Rising prices are a shock to a country accustomed to stable or falling prices.
This was the core of the message that propelled Takaichi forward: voters feel poor and prices feel high. After all, this was one of the issues that cost his predecessor his job.
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Takaichi's proposed tax cuts may ease households' hardship in the short term.
But Keiichiro Kobayashi, an economics professor at Keio University, warns that this is a dangerous path: "Increasing spending will only fuel inflation and the cost of living."
Instead, he says, the government should allow the Bank of Japan to raise interest rates to combat inflation, while simultaneously reducing government spending, which would appease investors.
Because when interest rates are low and government spending is high, Japan becomes less attractive to foreign investors, reducing demand for the currency and weakening it.
A weak yen increases the cost of imports, especially energy and food, but it can help exporters compete with cheaper Chinese goods.
This is a delicate balancing act that Takaichi cannot avoid if he wants the growth he has promised.
But the challenges go beyond the market.
A Missing Piece of the Puzzle
Japan's population—and its workforce—has been declining for years. It is now one of the world's oldest societies, putting immense pressure on public services like healthcare and social care.
Japan is already facing a severe labor shortage in construction, care work, agriculture, and hospitality. Fewer workers mean lower output and, therefore, weaker growth.
Immigration could ease this pressure. Official data shows that the government has quietly relaxed some regulations in recent years, and the number of foreign workers has increased. But Japan still has far fewer foreign workers than Europe or North America.
Takaichi has indicated she will likely do little to change this because immigration is highly sensitive, especially among her conservative base.
She and her allies say Japan should rely on technology, automation, and greater participation by women and older workers to boost productivity.
Economists warn that this may not be enough. Japan still needs more foreign workers – just as other advanced economies have long relied on them to power their economies.
Experts say that opposition to immigration is part of a broader hesitancy toward change, which has previously hindered innovation and reform.
What about China?
But Japan needs to change—and quickly, as China has already surpassed it in scale and industrial capacity, while Vietnam and other Asian economies are catching up.
Beijing is also Tokyo's largest trading partner. This is crucial to Takaichi's plan because domestic demand will take time to recover—until then, Japan will have to rely on trade to drive growth.
But ongoing tensions with Beijing, including a dispute over rare earth exports, have exposed Japan's weaknesses in strategic supply chains. Naoki Hattori, Chief Japan Economist at Mizuho, says these tensions could also destabilize production in electric vehicles and defense equipment.
Meanwhile, Prime Minister Takaichi has prioritized reducing Japan's dependence on China in vital sectors such as rare minerals and pharmaceuticals. She is also trying to persuade Trump, and has agreed to increase the defense budget, a controversial move under Japan's pacifist constitution.
She thanked Trump for his "kind words" of support, saying she looks forward to visiting the White House this spring and that "the potential of our alliance is unlimited."
Taniguchi says Takaichi rejects "equidistance" between the US and China, and considers an alliance with Washington crucial to Japan's security and economic strength.
But Japan cannot afford to choose sides so directly.
Professor Kobayashi says strengthening ties with both powers is prudent, especially because China's property crisis and slowing domestic growth could alter Beijing's influence in the region.
Takaichi's approach appears to follow the strategy of his mentor, Shinzo Abe: massive spending to boost growth and low interest rates to support investment.
Abe was dealing with falling prices, a strong yen, and a much less powerful China. Takaichi's challenges are more serious: Japan is aging, its economy is still growing very slowly, and the world is in a very different place.
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