On Oct. 21, 2025, Sanae Takaichi became Japan's 104th prime minister and the country's first female leader. Takaichi is a member of the Liberal Democratic Party, which has recently lost public support due to political funding scandals and has suffered successive historic defeats in major elections. Takaichi, who served as a close aide to former Prime Minister Shinzo Abe and has clearly articulated conservative policy stances, is expected to rebuild the party's waning support and political strength in parliament. Expectations surrounding the first female prime minister also provided tailwinds, resulting in the highest approval rating for any recent prime minister in the cabinet.
In terms of economic policy, she has pledged to return to former Prime Minister Abe's policy, "Abenomics," which centers on aggressive monetary easing and fiscal stimulus to overcome a deflationary economy. She has prioritized addressing the high price increases and reviving the Japanese economy by announcing various economic measures through proactive fiscal spending. In Japan today, rising prices and stagnating labor income are some of the most critical policy issues that directly affect people's daily lives. Her clear commitment to fiscal expansion has broadened her support.
The stock market welcomed the new prime minister's resolute policy stance and high approval ratings, which caused stock prices to rise significantly. On Oct. 27, 2025 the Nikkei stock average, a key stock price indicator in Japan, surpassed the 50,000-yen mark for the first time. In early September, when the former Prime Minister Ishiba announced his resignation, it was approximately 43,000 yen. Thus, the index increased by about 17 percent in 50 days, though it remains highly volatile. While the new prime minister's proactive fiscal policy has greatly inflated investor expectations in the stock market, it has also caused the Japanese yen to significantly weaken in the foreign exchange market. During the same period, the yen-dollar exchange rate fell by about 5 percent. Despite hope of reviving Japan's sluggish economy, concerns over expanding fiscal deficits, as well as prolonged low interest rates, have fueled a "sell Japan" trend.
Although Japan's government debt-to-GDP ratio has gradually declined since peaking in 2020, it remains well above 200 percent, the worst among advanced nations. Even in the initial budget for fiscal year 2025, which incorporated a significant increase in tax revenue, the central government's general account still relied heavily on bond financing, with debt dependency at approximately 25 percent. In addition to rising social security costs due to an aging population, interest payments on government bonds have increased significantly in recent years owing to rising long-term interest rates. With social security and bond-servicing costs accounting for nearly 60 percent of total central government expenditure, many challenges remain in achieving fiscal consolidation targets. Further expansion in fiscal spending jeopardizes government debt sustainability.
Expanding fiscal deficits may temporarily stimulate the economy and encourage economic activity. Consequently, politicians calling for tax cuts and increased spending are often popular among citizens. Prime Minister Takaichi's economic policy outlined plans to expand subsidies for various industries and implement tax cuts such as reductions in gasoline taxes. A policy to increase public investment in economic security and national resilience was also proposed. Notably, in light of recent geopolitical changes, the policy pledged to increase defense spending to 2 percent of the GDP within this fiscal year. Prime Minister Takaichi emphasizes that expanding the fiscal policy will increase national income, improve consumer sentiment, and boost corporate profits, thereby increasing tax revenue without raising tax rates. However, this convenient virtuous cycle lacks the support of a solid economic theory, and no concrete roadmap has been presented to achieve it. Without a significant increase in tax revenue, aggressive fiscal spending leads to an increase in government debt, resulting in serious intergenerational inequality in burden sharing.
Amid a rapidly aging society with declining birth rates, the social insurance burden on working generations has steadily increased in recent years across healthcare, nursing care, and pensions. Recently, severe inflation and stagnant wages have exacerbated this situation. Although nominal wages have increased, inflation has grown faster, causing real wages to decline and exerting pressure on many households. Real wages have been negative for three consecutive years through 2024, and the situation remains severe in 2025 as well. Under these circumstances, it is only natural that dissatisfaction and anxiety about the future are growing among the young and working-age population. However, this does not justify increasing the fiscal deficit and passing the bill onto future generations.
A growing concern is that social divisions that have already been pronounced in many developed nations are spreading to Japan. In recent elections, while older generations largely supported established parties, younger and working-age generations strongly backed emerging parties that advocate tax cuts and nationalist policies. Strong support for tax cuts reflects dissatisfaction with heavy taxes and social insurance premiums amid rising prices and stagnant real wages. Recently, "protests to dismantle the Ministry of Finance" have been held every Friday evening in front of the Ministry in Kasumigaseki, Tokyo. These protests are directed at the Ministry's emphasis on fiscal discipline. The protests reflect the frustration of people who feel that "even by working hard, money just doesn't accumulate" and are directed at the Ministry of Finance, a powerful administrative body in Japan.
Xenophobic arguments put forth by new political parties are rapidly gaining support, particularly among young and working-age populations. The Sansei Party, whose basic policy is "We want our economy to be run by the Japanese people," has significantly expanded its support. The party advocates a fundamental overhaul of the immigration system, including limiting the inflows of unskilled foreign workers and tightening the conditions for permanent residency and family reunification for foreign workers. This stance appeals to Japanese national sentiment, increasing the party's social media access and drawing large crowds to street speeches. Young and working-age generations distrust established parties that do not listen to their concerns seriously. Concurrently, expectations are rising from emerging parties championing policies focused on the daily lives of ordinary citizens.
However, the policies advocated by the new parties will not solve Japan's underlying economic problems. Amid stagnant wages, tax cuts and subsidy payments will certainly increase after-tax income temporarily. Ultimately, however, someone must bear the costs of these fiscal expansions. Emerging parties avoid discussing where the money for these costs will come from. They ignore the inconvenient truth that if fiscal deficits continue to grow, their supporters — the young and working-age generations — will ultimately bear the burden.
Regarding anti-foreigner sentiment, emerging parties argue that our society can function adequately even if the population continues to decline substantially. However, given the severe labor shortages already occurring across various occupations, this claim is not realistic. Due to the rapid decline in the birthrate and the aging population, it is crucial to implement fundamental countermeasures to address the significant reduction in the working-age population. Labor-saving technological advances can partly help solve this problem. However, they are insufficient to resolve serious labor shortages. From a macroscopic perspective, expanding the acceptance of foreign workers is unavoidable.
With soaring prices and stagnating real wages, it is difficult to gain public support for strict fiscal consolidation, even though unrestricted fiscal expansion passes the burden onto future generations. Many people also feel uneasy about the rapidly increasing number of foreign workers in Japan, a country whose historically low proportion of foreign workers has been exceptional among developed nations. Japan's growing social divisions stem from a variety of complex and intertwined factors. These include deep dissatisfaction and anxiety about daily life, dramatic demographic change, generational divides, distrust of traditional politics, and the advent of new media. However, amplifying dissatisfaction and anxiety does not solve the underlying problems in Japan. We will not be able to solve these problems without paying temporary costs. The new prime minister must acknowledge these "inconvenient truths" and propose a reasonable economic model to prevent further social division.
Shinichi Fukuda
Shinichi Fukuda is a professor of economics at University of Tokyo. The views expressed here are the writer’s own. — Ed.
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