Sanae Takaichi: Japan's First Female Prime Minister and the Future of Sanaenomics

Sanae Takaichi, Japan's Prime Minister, has won a snap election with an enlarged majority. This victory ensures she will be in power for several years, allowing her to implement the key elements of Sanaenomics.

What is Sanaenomics?

Sanae Takaichi is a long-time advocate of "Abenomics," the economic policies initiated by the late Shinzo Abe. However, Sanaenomics is a remodelled version of Abe's "three arrows." Instead of arrows, it comprises three distinct pillars:

Easy Monetary Policy

Initially, Sanae believed that the Bank of Japan should not raise interest rates. However, this stance may need to change. Inflation and bond yields have risen, while the yen remains weak. This shift in economic conditions could force a reevaluation of her previous position.

Fiscal Spending

Sanae emphasises aggressive government spending, subsidies, and tax breaks. Her focus is on investing in growth industries and enhancing national security. A major stimulus package has already been approved, signalling her commitment to this approach.

Crisis-Control Investment and Structural Reforms

The original third arrow of Abenomics was "structural reforms." Takaichi's version, however, focuses on "crisis-control investment" in strategic fields essential for economic security. These fields include AI, semiconductors, energy, and defence. This approach is crucial for ensuring Japan's economic resilience in a rapidly changing global landscape.

Inflation at 2%

The goal of achieving a robust and lasting 2% inflation rate has been a key objective since January 2013. However, this target remains uncertain.

While the headline inflation rate has been above 2% for three years, underlying measures of inflation, inflation expectations, money growth, and real growth prospects suggest that low inflation has not yet been permanently conquered.

Bank of Japan Governor Ueda commented at the ECB Sintra Forum in July 2025 about the three main elements influencing the inflation trend.

Wage-Price Dynamics

First, underlying inflation is determined by wage-price dynamics. Currently, there is a wage-price spiral, amplified by resilient domestic demand. While underlying inflation is rising, it remains somewhat below 2%.

Tariffs and Deflationary Influences

Second, the effect of tariffs is expected to be negative, acting as a broadly deflationary influence. This aspect complicates the overall inflation picture.

Domestic Supply Shocks

Third, domestic supply shocks, particularly increases in food prices, are significant. Food prices account for about 50% of headline inflation. According to Ueda, components one and two will likely lead to a slow increase in underlying inflation to around 2% by the end of 2026 or the start of 2027. The third component, driven by food prices, is expected to subside towards the end of 2025.

The prospects for the policy interest rate depend on these three dynamics.

Ten-year inflation expectations remain around 1.5%. At the October 2024 IMF meetings, Governor Ueda remarked, “When inflation expectations are so low, it takes a long time to change them.” With significant uncertainty, he expressed a desire to proceed “cautiously and gradually.” This cautious approach has indeed been reflected in recent policy decisions.

Governor Ueda estimates the natural real rate of interest to be “somewhere between -1% and +0.5%,” but he acknowledges that each estimate comes with a considerable confidence interval. If achieving 2% inflation proves unreliable, perhaps a target of 1.5% is more realistic. This scenario suggests that nominal interest rates could end up between 0.5% and 2.0%.

Recent Developments in Bond Yields

One recent development impacts the assessment of interest rate trends. Bond yields, which have been subdued for a long time, have risen. This shift adds another layer of complexity to the economic landscape.

Sanae Takaichi made history by becoming Japan's first female Prime Minister (and President of the LDP) in October 2025. Her commitment to Sanaenomics reflects a significant shift in Japan's economic strategy.

Conclusion

In conclusion, the future of Japan's economy under Sanae Takaichi is poised for significant changes. Her policies aim to address both immediate economic challenges and long-term growth prospects. As we navigate this evolving landscape, it is essential to keep an eye on how these strategies will unfold and their implications for the global economy.

The G20 Tracker aims to become a go-to, easily accessible resource for anyone interested in the global economy, providing comprehensive and insightful analysis on G20 countries to help users understand the bigger picture beyond just the major economies.

By integrating these elements, we can better appreciate the complexities of Japan's economic landscape and the broader implications for the global economy.