Why Sanae Takaichi’s version of Abenomics may end up doing little to help Japan’s economy

Perhaps because of that television career, Takaichi has a gift for dominating the news. In a campaign speech, she once complained about foreign tourists and criticized them for kicking deer in her hometown of Nara. Last week, urged by an opposition lawmaker to take back the statement lest it created a backlash against foreigners, she refused. “I cannot withdraw it," she said. “It is a fact that such regrettable behaviour by foreigners has become more noticeable."

On 7 November, she said that an attack by Beijing on Taiwan or a blockade of the island by China would require a military response from Japan. Inevitably, this has sparked an unseemly row between the two countries, with a senior Japanese official travelling to China this week to smooth things over.

Takaichi’s surprise win in October of the PM nomination from the Liberal Democratic Party of Japan was a result of a campaign that seemed to promise almost all things to all people—lower taxes, higher government spending and fierce nationalism. Before she became premier, Takaichi often visited the Yasukuni shrine, which is viewed as revelling in Japan’s militaristic past. If she does so now as PM, it would roil ties with countries such as China and Korea.

Yet, it is Takaichi’s handling of Japan’s economy that will likely determine her legacy as PM. She takes over at a time when inflation in Japan is higher than it has been in several decades. Her pressure on the Bank of Japan not to raise rates just as it was poised to do in October risks extending an era of loose money and fuelling inflation.

Late in October, Takaichi cleared an important first hurdle—flattering US President Donald Trump, who was on a state visit to Tokyo, to secure trade amity with the unpredictable US administration.

She had the advantage of being a protégé of the late Japanese premier Shinzo Abe, who was assassinated in July 2022 and was a golfing buddy of Trump. In addition to the obligatory pledge to nominate the US president for the Nobel Peace Prize, Takaichi gifted him Abe’s putter and a gold-leaf golf ball.

A Ford pick-up truck was incongruously parked outside the palace where they met. Japan has promised billions of dollars in US investment and increased purchases of US soybean, natural gas and even pick-up trucks unsuited to Japan’s roads. Trump praised Takaichi’s “very strong handshake" and pronounced her the first woman PM to be a “big deal."

As political debuts go, so far, so cinematic. In the medium term, however, Takaichi’s steadfast loyalty to Abenomics—monetary easing, fiscal stimulus and structural reforms—promises to be complicated by the fact that even by the standards of developed economies, Japan’s debt levels are vertigo-inducing; its debt-to-GDP ratio is more than 250%.

Pressuring the Bank of Japan (BoJ) not to raise interest rates, even as inflation climbs to 3% and appears to be getting entrenched in wage discussions between labour unions and employers, makes for illogical populist economics.

Stock markets have rallied since her election was announced, but bond yields have risen too, given that she is turning her back on the fiscal discipline of her predecessor.

But as Wall Street Journal’s economics commentator Greg Ip observed soon after she was elected party leader, a more ominous signal was emanating from the market for gold.

Ip wrote, “On Saturday, Japan got a new prime minister. On Tuesday, gold topped $4,000 for the first time. It wasn’t a coincidence." He pointed out that markets were correctly assessing her version of Abenomics as yet another sign that a populist leader in a country with massive public debt, like in the US, would likely succeed in getting the central bank to do her bidding. The BoJ’s decision not to raise interest rates in October suggests this is already happening.

Since assuming office, Takaichi has continued down this risky path. This month, her government appointed more dovish economists to the Council of Economic and Fiscal Policy, which is Japan’s top advisory economic panel and includes BoJ governor Kazuo Ueda. Among the appointees is former BoJ deputy governor Masazumi Wakatabe, whose five-year term at BoJ coincided with huge purchases of government bonds to reflate the stagnant Japanese economy.

Other members of this panel skew heavily in favour of more stimulus. “Given how this council discusses key economic and fiscal policies, we appointed members who are suitable under the Takaichi administration after consulting with the prime minister," said Minoru Kiuchi, economic revitalization minister, who heads the council, at a news briefing, according to Reuters.

This is a not-so-implicit way of saying that the woman who models herself on being Japan’s Margaret Thatcher prefers yes-men.

Takaichi’s more nationalist stance vis-a-vis China will garner headlines, as will her oddly backward views on being opposed to married couples having different surnames. But her inability to resist the temptation to interfere with central bank independence might prove to be the biggest story of all.

The author is a former Financial Times foreign correspondent.