Japan Institute for National Fundamentals

　
Japanese Prime Minister Sanae Takaichi’s messages have quickly penetrated a wide range of working generations through social media and gained high support. What public opinion expects Takaichi to do is not limited to quick actions to pave the way for various tax cuts.

The core of Takaichi’s policy lies in countering China. The reason why Takaichi was able to take a major step towards building a close relationship of trust with U.S. President Donald Trump at their meeting is that countering Chinese threats is now a common challenge for Japan and the United States not only in military and security fields but also in the economic field.

Resistance forces hindering economic revitalization

China, a dictatorship where the Communist Party controls the market economy, is threatening to dominate global markets not only for rare earths and other strategic resources and electric vehicles but also for artificial intelligence and other cutting-edge industrial fields. In response, the Trump administration has had a growing sense of crisis and called for reviving manufacturing. Nevertheless, Japan’s previous administration led by Shigeru Ishiba ended up doing nothing. As Japan’s domestic demand has stagnated for a long time under the austerity policy led by Ministry of Finance bureaucrats, Japanese companies have turned their backs on domestic markets and invested in foreign countries including China. Unless breaking away from the lost three decades, Japan will be swallowed by Chinese capital.

Takaichi’s economic policy known as Sanaenomics, named after her first name, Sanae, aims to put the economy on a revitalization track by investing in crisis management and strategic areas through public-private cooperation. What stands in the way of doing so is the resistance forces caught in the balanced budget dogma. In response to calls for tax cuts and fiscal stimulus measures, old media such as newspapers and television networks keep asking whether financial resources are available, seeming like a tired automatic answering device.

Fiscal consolidation debate is no longer necessary. Since the Ryutaro Hashimoto government set a goal of achieving a primary budget surplus (an excess of tax revenues over spending other than debt services) in fiscal 1997, the budget deficit and government debt have continued to increase amid zero economic growth and shrinking real wages. Nevertheless, the large-scale fiscal stimulus package to combat the COVID-19 recession in fiscal 2020, toward the end of the second Shinzo Abe government, supported the economy. Since fiscal 2022, tax revenue growth has accelerated amid price hikes, allowing the government to project a primary budget surplus in fiscal 2026. If the government continues an austere fiscal policy of sticking to maintaining a primary budget surplus, however, domestic demand will not increase.

Tax cuts will stimulate domestic investment

The Takaichi government advocates a “responsible proactive fiscal policy.” It means not a reckless expansion of fiscal spending, but a commitment to maintaining fiscal soundness as well. The primary budget surplus goal will not be abolished, but set for multiple years rather than a single year. This is because the government cannot ignore the possibility that financial markets could react to domestic economic media that are warning loudly that if the fiscal discipline goal is removed, government bonds will lose credibility.

The point is whether the Takaichi government’s tax cut and growth investment policy will be able to expand domestic demand and greatly stimulate domestic business investment. The key will be whether Takaichi will be able to continuously exert strong leadership.

Hideo Tamura is a Planning Committee member at the Japan Institute for National Fundamentals and a columnist for the Sankei Shimbun newspaper.