Sanaenomics Ignores Voter Needs

Out Of Touch LDP May Not Name the Next Prime Minister

Source: https://www.esri.cao.go.jp/en/sna/data/sokuhou/files/2025/qe252_2/gdemenuea.html

Nothing shows how out of touch is the Liberal Democratic Party (LDP) more than its selection of Sanae Takaichi as party chief, the arrogance that drove away the Komeito Party, and a “Sanaenomics” that ignores voters’ top concerns. The party has lost its lock on the Prime Minister’s post.

I was struck by the LDP’s willful blindness in January when I asked a senior LDP Diet member. “What message were the voters sending when they denied the LDP a majority in the Lower House?” With a complacent smirk, he replied: “There was no message. Voters were just upset about the campaign finance scandals, and that will soon wear off. We’ll win the coming Upper House election.”

The LDP’s right wing is still in denial, insisting that it lost its majority because Prime Ministers Fumio Kishida and Shigeru Ishiba turned their backs on Shinzo Abe’s “authentic conservatism.” The voters beg to differ. In an Asahi poll on why the LDP lost, 81% said it was due to problems with the LDP overall, while only 10% blamed Ishiba. The right wing also tells itself that voters recall Abenomics with fondness. In reality, a Jiji Press poll in 2021 found that only 15% wanted Kishida to continue Abenomics.

Losing the Komeito

Without the arrangement whereby disciplined Komeito supporters vote for the LDP in single-seat districts where the Komeito was not running, the LDP would lose 20% of the seats it has been able to win up to now. Why, then, did the LDP spit in Komeito’s face? Instead of acceding to Komeito’s insistence on reforms to prevent a repeat of illegal contributions, Takaichi named one of the top culprits as second-in-command in the LDP party posts. This has cost Takaichi 24 votes in the Lower House when members choose the new Prime Minister. Had the LDP selected Shinjiro Koizumi, the two parties could have worked out a deal.

The Unreality of Sanaenomics

Even though inflation is the chief concern of voters, and even though prices have outrun wages in six of the seven years since 2019, Takaichi was the only candidate who refused to offer any plan to bring down inflation or lift real wages. On the contrary, Takaichi, while no longer calling the Bank of Japan (BOJ) “stupid,” insisted that it would be “premature to relax our guard by concluding that deflation has ended, because we are in a state of cost-push inflation. I believe we must pursue demand-pull inflation, where rising wages drive increased demand and gradually push up prices.” And yet she then said that wages are “something private companies decide.” She also ruled out a temporary cut in the consumption tax on food, even though prices on the latter have soared a whopping 25% since early 2022. Tax cut proposals by opposition parties were a key reason they beat the LDP in the past two elections.

Her advisors say she could “tolerate” a small hike in January, if that is a one-shot move. Currency markets, reacting as if Takaichi can dictate to the BOJ, have driven down the yen from the ¥148-150 range to ¥152-154 (see chart below). But I think the market is overestimating Takaichi’s power to override the BOJ’s cherished independence. Economist Paul Sheard—author of The Power of Money—told me, “Market participants may view BOJ Governor Kazuo Ueda as weak, don’t see him standing up to Japan’s would-be ‘Thatcher.’ My guess is they will be disabused of that notion fairly soon.”

Source: WSJ

Although Takaichi has been called a serious policy wonk, to me, she seems lost in a world of unreality reminiscent of Donald Trump. She spouts myths that justify serving the needs of assorted vested interests. For example, she vows to make Japan 100% self-sufficient in energy to ensure security. Yet, she supports the continued use of coal and natural gas power plants. Where does she think the coal and natural gas come from? She supports hybrids against electric vehicles and intends to reduce subsidies for the latter, ignoring that gasoline requires oil imports. She plans to cut aid to solar power, exclaiming that she opposes “further covering our beautiful land with foreign-made solar panels.” She wants more nuclear energy, even though reactors need new uranium every 18 to 24 months. And then there is the biggest fantasy of all: that fusion power will be commercially viable by the 2030s. Despite great progress, most experts don’t foresee fusion becoming a commercial reality for at least another 30 years at the earliest.

She declares, “We will protect the automotive and related industries at all costs,” including supporting a weak yen despite its injury to consumers.

Sanaenomics Vs. Abenomics on Monetary and Fiscal Policy

Takaichi brings a similar unreality to her campaign to resurrect Abenomics. Although I’ve always been highly critical of Abenomics, my problem was not the content of Abe’s three arrows. It was his failure to turn rhetoric into much action beyond gunning the money supply to depreciate the yen, as well as his steady hikes in the minimum wage.

Takaichi is fighting Abe’s last war: conquering deflation. Japan now suffers from stagflation: rising prices combined with flat wages and consumer spending. Addressing one problem makes it harder to address the other. Simplistic was how Shigeto Nagai, head of Japan economics at Oxford Economics, described her. “Many of the Abe faction have lost their parliamentary seats,” he pointed out. Among those remaining, “Most understand that the original Abenomics wouldn’t work anymore.”

Similarly, Takaichi views Abe’s second arrow, fiscal stimulus, as a magic bullet, claiming that a “high-pressure economy” generated through lots of government spending would raise wages. Really? Why, then, has so much fiscal stimulus left real wages no higher than in 1990?

Moreover, she champions a weak yen while denying that this is one of the primary causes of high prices. In fact, 80% of the rise in prices since 2021 has come from the import-intensive categories of food and energy. Nonetheless, one of her chief advisors, Takuji Aida, chief economist at Credit Agricole, contends that a weak yen is good for the economy. “We’ve developed a defeatist mindset, thinking that a weaker yen is bad. That’s a major mistake…At ¥140-150, it becomes viable to manufacture goods domestically. This exchange rate level is helping drive the capital investment cycle upward and also serves as a buffer against U.S. tariffs.” This is the failed Abenomics policy of driving the yen weaker in the hope that a resulting surge will trickle down to more investment and higher wages.

Worse yet, Takaichi believes she can combine low interest rates with bigger budget deficits. In reality, bigger deficits will exacerbate inflation and put pressure on the BOJ to respond with higher interest rates. The bond market sent 10-year rates up a bit when she was selected. Aida brushed off such realities.

Tone Deaf

Takaichi’s nostrums are not only economic gibberish; they’re also politically tone deaf. She denies inflation is a problem, even though 73% of survey respondents want the government to prioritize measures to combat rising prices, the highest percentage since the 1973 oil shock. Equally tone deaf is her ruling out even a temporary cut in the consumption tax, even on food.

Takaichi’s Third Arrow Vs. Abe’s

In 2021, during her first run at the premiership, Takaichi outlined a revealing difference between herself and Shinzo Abe. Abe aimed his third arrow at a “growth strategy that brings out the vitality of the private sector.” By contrast, her bull’s eye is “bold crisis management investment and growth investment” in key technologies and industries. The government would pour in money via public-private partnerships in each field. Like Trump, Takaichi claims this is essential to national security.

Abe’s view was the correct one. If only he had done something beyond some corporate governance reforms. Japan’s industrial policy has been most successful when it accelerated market developments, as in autos and electronics during the high-growth era, or else when the state took the initiative in technologies with too long a time horizon for private finance, e.g., R&D on solar power and electric vehicles in the 1970s. By contrast, industrial policy has failed many times when the state tried to substitute for the private sector, e.g., the failed efforts in fifth-generation computers, uranium reprocessing, a fast-breeder reactor for nuclear power, and Takaichi’s personal poster child, the state-funded Rapidus. The latter’s goal is to leapfrog other countries by producing mass-market 2-nanometer semiconductors by 2027. The government is pouring upwards of ¥4 trillion ($27 billion) into this effort. Experts doubt it will ever be profitable, as even experienced firms like TSMC and Samsung find it challenging to turn laboratory successes into viable commercial products.

Her targets are widespread: artificial intelligence, semiconductors, perovskites [thin film for solar power], all-solid-state batteries, digital, quantum, nuclear fusion, materials, synthetic biology and biotechnology, aviation and space, shipbuilding, drug discovery, advanced medical care, transmission and distribution networks, port logistics, etc. But it goes beyond that to a semi-autarkic view that “To ensure all manufacturing industries can properly produce goods domestically is the absolute foundation of economic security.”

While Abe certainly engaged in vote-seeking protectionism and techno-nationalism in certain sectors, he was an internationalist when it came to economic and security policy, rather than issues of history. A prime example is the Trans-Pacific Partnership (TPP). Abe’s agricultural protectionism greatly delayed a timely agreement between Tokyo and the Obama administration, one reason that TPP could not be signed until 2016, when election-year politics precluded ratification in the US Senate. However, when Donald Trump bowed out of TPP, Abe played a key role in making sure that the TPP came into existence in the hopes that the US would eventually sign on. Abe presided over an increase in foreign workers, something that Takaichi is backing down on—sometimes with the use of Trumpian rhetoric as well as exaggerations and falsehoods about immigrants and tourists. Competition with the rising xenophobic Sanseito party only partly explains this. Takaichi even defended Trump’s “America First” policies.

Takaichi Lacks Abe’s Clout

If Takaichi does manage to become Prime Minister, she’ll find it difficult to carry out her ideas.

Shinzo Abe was king of his castle; she is not. A year ago, she said a temporary cut in the consumption tax was an idea worth considering. Today, however, she has ruled it out by appointing fiscal hawks to top posts, including those who have served as Finance Ministers. This includes making LDP baron Taro Aso the new LDP Vice President and Shunichi Suzuki as LDP Secretary-General. Clearly, they overruled her.

She has also walked back her talk of renegotiating parts of the tariff and investment pact Trump imposed on Ishiba. During a recent TV debate, Takaichi was the only candidate who said there were unequal elements to the pact. Having been reined in, she now says, “I will not overturn what Japan and the U.S. have agreed upon.”

Takaichi would also have to compromise with the opposition parties on a myriad of issues, having reduced the LDP’s Diet minority to an even smaller minority. Otherwise, she’ll be unable to pass the budget and other legislation.

But neither can the fiscal hawks impose their will when that conflicts with economic realities. Japan runs budget deficits, not simply because politicians like to hand out goodies, but primarily because stagnant wages have addicted Japan to budget deficits and growing trade surpluses, as I detailed in this post. Over the past decade, government spending provided half of all GDP growth. Another 20% came from growth in the trade surplus spurred by the weakening yen (see the chart at the top). Consumer spending was negligible. In Trump’s world, export-led growth will be difficult, thereby increasing the political pressure to run big budget deficits.

How this combination of factors shapes the policy mix is going to make the political scene, shall we say, interesting.

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