What to expect for Japan's economy under Sanae Takaichi, its 1st female prime minister

Key Points

• Sanae Takaichi has become Japan's first female prime minister, ushering in a potential shift towards market-friendly policies that emphasize defense spending and cheap credit.
• The Japanese economy is facing significant challenges, including rising inflation, stagnant wages, and a shrinking and aging population, which complicate prospects for economic growth.
• Takaichi is expected to adopt policies similar to her mentor, former Prime Minister Shinzo Abe, focusing on government spending and defense, while navigating complex party relations to implement reforms.
• Market optimism has grown, evidenced by a climb in the Nikkei 225 index, as investors anticipate Takaichi's continuation of low interest rates and economic expansion strategies.

TOKYO (AP) — Share prices have soared recently in Tokyo on hopes that conservative Japanese lawmaker Sanae Takaichi, who was chosen Tuesday to be Japan’s first female prime minister, will double down on market friendly policies, including hefty spending on defense and cheap credit.

The benchmark Nikkei 225 share index climbed close to the symbolically important 50,000 level, gaining 0.7% to 49,517.57. Takaichi, a motorbike and heavy metal enthusiast, prevailed in a lower house parliamentary ballot that gave her 237 votes, above the 233 votes required to win.

Here’s what might be expected from what has been dubbed “Sanaenomics:”

Inflation and wages are top concerns

Increases in consumer prices have surpassed the Bank of Japan’s 2% target range at 2.5% to 3%. So the central bank is gradually raising rates from their longstanding level near or below zero. Wages remain near the level they were at 30 years ago, only topping the 1997 average level in 2024 for the first time. Meanwhile, low rates have helped to keep the Japanese yen weak against the dollar, amplifying inflation since much of what Japan consumes is imported.

“I want to focus first on dealing with rising consumer prices,” Takaichi told reporters after she was elected head of the ruling Liberal Democratic Party earlier this month, putting her in line to replace departing Prime Minister Shigeru Ishiba.

Takaichi has indicated she opposes raising interest rates. The promise of continued cheap credit is one reason share prices have shot higher. But keeping rates low will hinder efforts to curb inflation and to strengthen the Japanese yen.

Echoing many of her predecessors’ promises, Takaichi also has vowed to deliver wage increases, without saying how she intends to do that.

Dealing with demography

Japan’s population has been shrinking and rapidly aging for years, leading to labor shortages and undermining the country’s potential economic growth.

Although she is an unabashed conservative on most social issues, Takaichi has said she favors giving tax incentives to companies that provide child care facilities to their employees and possible tax breaks for family spending on child care.

It’s unclear what more the government might do under any leader to counter the low birth rate, which partly reflects the financial difficulties of raising and educating children when wages fail to keep up with inflation. It also reflects a corporate culture that is not conducive to a family-friendly work-life balance.

Following in Abe’s footsteps

Takaichi is expected to emulate the policies of her late mentor, former Prime Minister Shinzo Abe. He stepped down in 2020 and was assassinated in 2022. His “Abenomics” approach included promises of cash handouts and boosting government spending, despite a national debt that is nearly triple the size of the economy.

Like Abe, she is hawkish on defense. Her political ascent has spurred heavy buying of shares in military-related companies such Mitsubishi Heavy Industries, Yaskawa Electric and Japan Steel Works.

Takaichi is bound to seek cordial relations with U.S. President Donald Trump, just as Abe did, and to strengthen Japan’s security alliance with Washington. They are expected to meet later this month.

Initially Takaichi said Japan might want to rethink its pledge of $550 billion to the Trump administration, part of a deal that helped lower U.S. tariffs on imports from Japan. She later said she would honor the agreement, despite public disapproval over handing over Japanese taxpayers’ money to Washington.

The future remains fraught

Takaichi will be confronting problems that have confounded Japan’s leadership for decades. Any major reforms would face resistance from entrenched vested interests. The tenures of Japanese prime ministers tend to be short and vulnerable to feuding between party factions and the hereditary political fiefdoms that control most seats in parliament.

To win Tuesday’s parliamentary vote, the Liberal Democrats forged an alliance with the Japan Innovation Party, a libertarian opposition group based in Osaka.

But Takaichi likely will need support from lawmakers belonging to other parties in the fractious and splintered opposition to pass legislation. They span the spectrum from the Japan Communist Party on the far left to the Sanseito and others on the extreme right.

Takaya Suzuki, who runs a restaurant and real estate business, supports one of the smaller nationalist-leaning opposition parties called The Conservative Party of Japan, whose policies are similar to Takaichi’s. He admires Trump and says he’s rooting for Takaichi.

But, he added, “Even if she tries her best, it’s going to be tough.”

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Yuri Kageyama is on Threads: https://www.threads.com/@yurikageyama