Japan’s PM Sanae Takaichi 'has a mandate and a plan'

Japan's Prime Minister Sanae Takaichi — (Image credit: Kiyoshi Ota / POOL / AFP via Getty Images)

The Chinese don’t seem keen on Sanae Takaichi, Japan’s new prime minister. According to Bloomberg, “thousands of Chinese travellers” are reconsidering trips to Japan in the wake of her comments that a crisis in the Taiwan Strait would be an issue for Japan’s own security.

They are in a minority. Across much of the rest of Asia there is a general view that a stronger Japan is a good thing for the region.

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Domestically, too, Takaichi is exceptionally popular.

Her supermajority gives her, in theory at least, the ability to do pretty much anything she wants. That’s particularly the case given the breadth of her support.

There is an idea that her election is a function of an increasingly right-wing ageing population. Not so. She has strong support from the over-50s, but exit polls showed she is popular among the under-30s, too. She definitely has a mandate.

So what’s she going to do with it? Good things – if the money pouring into Tokyo’s stockmarket is anything to go by.

Long-term readers will know we have been bullish on Japan for well over a decade.

But pretty much everyone has now jumped on our bandwagon. Being all in on Japan is now a consensus.

The Nikkei is up 9% so far this year – and surged to a record high in the few days after Takaichi’s victory.

A large part of the excitement is about political stability. There aren’t many democracies at the moment where a leader can say they have been elected so firmly and with such a clear set of policies. It is also about those policies.

Japan’s long-term problem has been lack of investment. The low growth rate in Japan's economy over the last 20 years or so has been in part about a lack of investment – a decline in the capital stock.

This is why Takaichi’s budget for 2026 had spending rising by 6.2%, and a $135 billion stimulus package passed (and will now be enacted) in November last year.

That fiscal expansion is to be connected to an industrial policy that pushes capital towards AI, semiconductors, quantum computing, defence and shipbuilding.

Expect a clear tailwind for all these sectors – and some healthy growth and inflation ahead, even without China’s tourists.

Two not-so-nasty headwinds for Japan's economy

There are – or so we are told – two nasty headwinds for Japan's economy: its whopping public debt levels, and its falling population.

The first is probably overhyped.

Government debt is running at 230% of GDP. But it isn’t the whole story. Japan’s government sector as a whole owns financial assets worth a whopping 140% of GDP (net net, that already takes Japan to a lower ratio than the UK). And this doesn’t even include the Bank of Japan’s holdings, which are about half of all the Japanese government bonds (JGBs) in issuance.

It does include a lot of domestic equities and deposits, and foreign-exchange reserves held by the ministry of finance.

Do the maths, says Gavekal Research, and you will see that it is all kind of fine.

The government pays around 1.5% of GDP out in interest on outstanding debt – an effective interest rate of around 0.7%. If the US foreign-exchange reserves of about 30% of GDP earn the Federal Reserve rate of 3.5% and the rest gets the Bank of Japan policy rate (0.75%) it all adds up to around 2.5% of GDP.

Look at it like that and “there is ample fiscal room to absorb higher debt servicing costs from existing resources alone”. Maybe there is nothing for the bond market to see here (until interest rates rise too much – that’s another column).

The second headwind also isn’t the problem you might think it is. The Japanese population has been falling for years and the working-age population started to decline a few years ago. But it coincides neatly with the rise of the technology required to replace people – AI and automation.

There is a huge space for automation in Japan.

One minor example: even in central Tokyo not all convenience stores have self checkouts.

On a rather larger scale there is plenty of room for manufacturing to go “dark”: Fanuc already has a factory that can run full time for 30 days with no human supervision at all (these factories are known as “dark factories” because robots don’t need lights during the night shift). Expect more of these.

At the same time, as the votes for Takaichi showed, the young are happy with things as they are. They don’t remember the deflationary years so well and they live in a world where they should inherit a couple of houses, where their wages and disposable income are rising fast (one popular company in Tokyo just put up new graduate salaries by 30%) and where everyone is nice to them. Being a scarce resource isn’t all bad.

The sharp rise in Japanese stocks suggests that much of the good news is priced in. That said, with rising flows as investors rotate out of the US it is perfectly reasonable to expect tech, industrials and defence stocks to maintain momentum.

There is also an excellent chance that, with the indices at all-time highs and the optimism following the election, Japan’s institutional investors will finally move some money out of fixed income and into equities, says Chris Wood of Jefferies. When that happens, the market will “rerate in terms of multiple expansion”.

Merryn Somerset Webb hosts the Merryn Talks Money podcast for Bloomberg. Find her on X @MerrynSW

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