Commentary: Can Japan’s New Premier Fix the Country’s Old Problems

Sanae Takaichi, after winning the Liberal Democratic Party leadership, is on track to be Japan’s first female prime minister. She aims to revitalize Japan with policies such as tax cuts and cash handouts. However, her proposals are seen as lacking the bold economic vision of former Prime Minister Shinzo Abe's "three arrows" policy and have not inspired the same level of confidence in a new economic direction for the country. 3

Japan’s economy has suffered for three decades, failing to recover fully since the burst of its 1980s asset bubble. Despite being the world’s third-largest economy and a key technological and manufacturing player, recurring stagnation, low growth, and low inflation mark its economic landscape, with government interventions largely falling short of significant revival. 3

Demographic issues, intensified global competition, slow industrial adaptation, and rigid labor markets have worsened Japan’s underlying economic problems in recent years. 3

Japan’s GDP growth has averaged about 1% per year over the past decade, and in early 2024 it entered a technical recession. This low growth traces to a shrinking population, limited corporate investment, and weakening global competitiveness of traditional industries, while emerging sectors remain underdeveloped. 3

Since 2022, Japan has experienced a return of inflation, prompting companies to raise wages—2024’s “shunto” labor negotiation saw wage hikes exceeding 3% at major firms—but sustainability of this trend is uncertain. If wages cannot keep up with rising prices, household purchasing power will erode, threatening domestic demand. 3

Japan’s public debt exceeds twice its GDP, the highest in the world, with social spending on an aging population further straining fiscal resources. This debt burden limits the government’s crisis-response capacity and leaves little room for new stimulus. 3

The yen’s sharp depreciation since 2022 benefitted exporters but increased import costs and consumer prices, shrinking Japan's global economic standing and leaving the Bank of Japan struggling to balance currency and economic stability. 3

Japan’s demographic crisis is central to its challenges: a low birthrate (below 1.3) and over 28% elderly population lead to a shrinking workforce and rising welfare costs, resulting in intergenerational inequality and reduced future growth potential. 3

Industrial stagnation and conservative corporate culture hinder Japan’s innovation. Production offshoring has hollowed out domestic supply chains and drained talent. Companies prefer cash reserves over aggressive R&D investments, limiting long-term growth. Rigid employment practices and increasing reliance on non-regular workers suppress overall wages, consumer confidence, and birth rates. 3

Monetary easing has entrenched expectations for low inflation. While “Abenomics” attempted a structural shift, progress has been slow due to entrenched interests, leaving Japan in “reform inertia.” 3

In key technologies, Japan is losing ground to China, South Korea, and Western rivals. While solid-state batteries offer hope for resurgence, delays in market adoption and external pressures limit this potential. Broadening international cooperation, particularly via ASEAN and Northeast Asia, is crucial for Japan’s industrial reinvention. 3

Takaichi’s policy focus includes fiscal restructuring—cutting wasteful spending, investing in future-oriented sectors, and reforming taxes to encourage innovation. Yet, any effective reform must navigate deep structural contradictions among demographics, labor, and fiscal systems. 3

Decades of stagnation have created “reform fatigue” among the public, with only 41% optimistic about reforms in a 2024 poll. For Takaichi to succeed, she must build consensus, communicate the necessity of reforms clearly, and implement deep, long-term changes rather than rely solely on short-term stimulus. Lasting success will depend on sustained commitment to overcoming Japan’s structural issues. 3