Commentary: How Japan’s New Prime Minister Is Rewriting the Abenomics Playbook

Japan marked a significant milestone on October 21, 2025, when Sanae Takaichi was elected as the country’s first female prime minister. This historic event occurred at a time when Japan’s economy faces critical challenges—namely, the need for structural reforms and adapting to global and domestic economic shifts. Consequently, there is keen attention both domestically and internationally on the new administration’s policy strategy and economic outlook. [para. 1][para. 6]

Japan’s economy has recently seen a departure from prolonged stagnation, especially in terms of inflation. Since April 2022, Japan has maintained a consumer-price index (CPI) growth of 2-4% year-over-year, signaling the end of its deflation era. Average wage growth, a crucial indicator of domestic economic health, hit over 5% in both 2024 and 2025, the highest in nearly 30 years. Corporate profits and investments have also improved. [para. 2][para. 8]

However, the structure underpinning this inflation is uncertain and appears to be driven mostly by short-term factors such as increases in food, energy, and import prices. For instance, the 3.1% CPI growth recorded in July 2025 was primarily fueled by these sectors, while core inflation (excluding energy and food) was just 1.6%. The new wage-price dynamics, although evolving, remain fragile; adverse external shocks—such as unfavorable trade policies from the U.S.—could dampen corporate willingness to raise wages or invest, further stressing the inflationary mechanism. [para. 9][para. 12]

Overarchingly, Sanae Takaichi’s economic policy—often dubbed “Sanaenomics”—builds upon the foundation of Abenomics, pioneered by former Prime Minister Shinzo Abe. Takaichi retains Abe’s “three arrows”: accommodative monetary policy, expansionary fiscal policy, and structural reforms. However, her approach introduces new emphases: a stronger focus on structural guidance, strategic investment, and enhancing productivity and resilience. [para. 3][para. 4][para. 14][para. 16][para. 18]

In monetary policy, while Takaichi supports a loose financial environment to maintain economic stability, she shifts away from using it as the central tool to drive growth. Her focus is more on its role in maintaining financial stability. [para. 19] On fiscal policy, she transitions from Abe’s short-term stimulus toward a longer-term, efficiency-driven approach, prioritizing key sectors such as semiconductors, energy, advanced manufacturing, and scientific research. Accordingly, fiscal expansion under Takaichi is more targeted toward building industrial capacity and national competitiveness. [para. 20] In structural reforms, the priority moves from broad labor and corporate governance improvements to measures that strengthen domestic industry, supply-chain security, and economic resilience. [para. 21]

Despite the thorough policy blueprint, several uncertainties threaten the ultimate success of Sanaenomics. Major challenges include achieving a balance between fiscal discipline and investment efficiency, ensuring capital investments translate into productivity, and fostering innovation without breeding policy dependence. The reliance on state-led investment poses risks—if poorly managed, this could result in capital misallocation and low output returns. [para. 22][para. 23][para. 24]

For financial markets, persistent fiscal expansion is likely to add pressure to government bond yields and, coupled with a slow normalization of monetary policy, could weaken the yen in the short run. However, as global monetary conditions change, notably with the U.S. Federal Reserve’s expected rate cuts, medium- to long-term support for the yen should emerge. The performance of Japanese assets, especially equities, holds significant spillover potential for Asian markets, positioning Japan as a signal for broader Asian capital market recoveries and attracting global investors to other regional assets, particularly in places like Hong Kong. [para. 25][para. 26][para. 27]