Sanae Takaichi’s Fiscal Policy

Ichiro Suzuki

Japan’s Prime Minister Sanae Takaichi has unveiled a ¥19 trillion ($122 billion) supplementary fiscal package to spur growth. This compares to FY2025 budget of ¥115 trillion ($741 billion). Running for the president of the Liberal Democratic Party in September, Takaichi stressed that she was going to seek growth more than anything, advocating ‘responsible fiscal policy’. About two-thirds of the ¥19 trillion package is going to be deficit-financed. The Japanese economy has come out of a stage of zero or little growth that persisted for almost three decades. It has started to grow again recently but only around 1%. It may be too much to expect more than that since Japan’s growth potential isn’t higher than that. 

The PM, however, wants to generate higher growth. Correctly diagnosing growth rate is capped by supply constraints, she wants to reform the supply side. A good move, it looked. What came out, however, hardly looked a departure from the traditional LDP politics of pork and barrel. To begin with, supply side reform is a great deal easier said than done. Margaret Thatcher, whom Takaichi admires, almost half a century ago revolutionized economic policy-making with supply side reform, swinging a sledge hammer down on the economy that was long afflicted with the British disease. Central to Thatcher’s revolution was privatization of government owned assets and selling their shares in the market, in addition to getting rid of a variety of regulations that constrained growth. She also cracked down unions hard to make the labor market more flexible and efficient. Thatcherism brought the British economy back onto a renewed growth path in the final two decades of the 20th century. 

Almost half a century after Thatcher’s rise to power, however, Takaichi faces a higher hurdle to give the Japanese economy a new lease on life. As it turned out, privatization of government asset was a low hanging fruit. Japan did it, too, beginning with telecom in the mid-1980s followed by railways, tobacco, post and highways in the next two decades. What’s needed for the Japanese economy is more aggressive deregulation, in the labor market above anything else, to free capital from unproductive areas. Upon assuming the responsibility of prime minister, she had exempted herself from work- life balance at a time when it was at last finding its place in Japan’s business world that has been known for notoriously long, and wasteful hours in the office. Work-life balance makes sense absolutely for the vast majority of workers who could be driven to death by excessive hours, but certain professionals had better not be always bound by too tight a cap on working hours. She wants to have it changed and that’s a good first step but labor reform has to go much, much further, to the point of making firing easier. Difficulty of firing workers limits new hirings, contributing to structural rigidity in the labor market. Shinzo Abe tried to do it ten years ago, but a proposed bill by him didn’t go through in the face of strong opposition from the unions and the parties that were close to them. 

Takaichi proposes to boost private sector investments, in an attempt to solve the problems of supply constraints that are one of the reasons behind the inflation this time. Investments by Corporate Japan have not been keeping up with their cash flow’s significant surge in recent years. They are no longer hoarding cash and buying back shares and paying out a greater amount of dividends. While this is good for shareholders and the market as a whole, absence of greater investments doesn’t allow the market to paint a brighter long-term picture of the economy. Takaichi proposes faster depreciation of invested assets, and this is definitely a step forward. Nonetheless, whether a kinder depreciation schedule creates an investment boom remains to be seen. Relatively lackluster investments are attributed to men (not women) who are running Corporate Japan. They are older and far more conservative than American counterparts, who are not only younger but also are ethnically diversified and hence are more willing to take risks. While it probably isn’t possible to close the gap on risk-taking culture, it is still worth trying to drive Japanese men to the direction of embracing greater risks. 

Outside of faster depreciation, Takaichi’s fiscal package is another spending largesse by the LDP. The Japanese economy is essentially in reasonable shape but she wants to boost demand. In the face of high gasoline prices that have been persisting for over three years, one of the taxes on gasoline is going to be abolished to lower its retail prices. While the household sector is going to be helped by the tax change, the economy is in no immediate need of stimulation to lift consumption in the face of inflation. Worse, lower gas tax promotes greater emission generation. Though Takaichi is staunchly conservative politically, her spending habit represents anything but conservatism. In Japan’s politics, there is no such thing as fiscal conservatism. Right or left, all politicians want to spend. Traditional conservatism may be taking a backseat in the U.S. since Trump has turned the Republican Party into a big spender. That said, a fair number of GOP politicians are still displaying their reservations on fiscal largesse. A habit to ask the government to so something for them has been deeply ingrained in voters in Japan, and politicians would always love to respond to them. The government hasn’t yet officially called the end of deflation that has persisted for two decades. In the meantime, asset prices have been rising already for over ten years and inflation is hitting consumers hard. It is speculated that a declaration of the end of deflation would deny the LDP an opportunity to come up with a new fiscal package, 

Not surprisingly, the financial makers are not impressed. The markets are showing displeasure with the PM, exerting downward pressure on the yen and upward pressure on long-term interest rates. The Bank of Japan has some reservation on raising interest rates aggressively. Governor Ueda has raised rates only once, in January, so far in 2025, against original expectations of more actions. He probably would like to act a little more decisively. Doing so would not please the PM while not doing anything would invite the markets’ wrath. ‘Responsible fiscal policy’ doesn’t look so responsible. 

About the author: Mr. Suzuki is a retired banker based in Tokyo, Japan.