Japan’s China row could be the GDP killer that sinks Takaichi

TOKYO — By taking a hard line on China, Japan’s Sanae Takaichi thinks she’s establishing her right-wing bona fides. In reality, she may be ensuring her premiership will be a brief one.

Takaichi wasn’t chosen by the Liberal Democratic Party (LDP) to stir a geopolitical hornet’s nest with China. She was picked to raise Japan’s economic game and to tame surging inflation. Unfortunately, Takaichi has yet to explain how she will lower living costs.

It’s still early days, of course. But 29 days should be enough time to begin articulating even the vaguest contours of a strategy to halt the rise in consumer prices. Instead, her new government is now preoccupied with geopolitical sparring with Chinese leader Xi Jinping over Taiwan.

It’s likely to be a costly distraction. Losing business from Chinese consumers and tourists is the last thing Japan needs, particularly with the economy contracting 1.8% year on year in the third quarter.

A Chinese tourism boom was one of the key economic success stories for Japan over the last decade. A significant portion of the tens of millions of inbound travelers who have been filling airline and bullet train seats, hotels, eateries and shopping galleries, thus boosting gross domestic product, come from China.

So far in 2025, roughly 23% of inbound tourists were mainlanders. Beijing’s warning against travel to Japan  – and a ban on employees of Chinese state-owned enterprises from traveling there – that Xi’s government issued this week has economists lowering forecasts for fourth-quarter GDP and wages.

At least 10 Chinese airlines have offered refunds for Japan-bound routes until December 31, Reuters reported, with one airline analyst estimating that around 500,000 tickets have already been canceled. Tourism accounts for around 7% of Japan’s GDP.

On Wednesday (November 19), Beijing upped the economic stakes with a new ban on all imports of Japanese seafood. In June, China had said it would resume Japanese imports from all but 10 of the country’s 47 prefectures, lifting a ban imposed in 2023 over Tokyo’s release of nuclear plant wastewater into the ocean.

Over 700 Japanese seafood exporters had applied to re-register for shipments to China after the ban was partially lifted.

All this in response to Takaichi saying on November 8 that a Chinese attempt to grab Taiwan by force would be a “survival-threatening situation” for Tokyo. She noted that if the US intervened to stop a Chinese blockade, Japan could be compelled to defend its ally.

That prompted Xue Jian, China’s consul general in Osaka, to write of Takaichi on social media that “the dirty neck that sticks itself in must be cut off.” The post was later deleted.

Moody’s Analytics economist Stefan Angrick warns that “a sharp drop in Chinese travel to Japan would sting.” A halving of Chinese tourist arrivals, Angrick says, would lower Japan’s GDP by 0.2 percentage points in short order. The coming spat is “hardly catastrophic, but an unwelcome drag for an economy already struggling to find traction,” Angrick says.

The last time Japan-China relations unraveled this quickly was in 2012, after Tokyo moved to nationalize contested islands that the Japanese call Senkaku in Japan and the Chinese call Diaoyu.

These uninhabited islands are thought to be resource-rich. At the time, heated rhetoric from China’s state media led to anti-Japanese protests in more than a dozen cities across Asia’s biggest economy.

Citigroup analyst Ryota Sakagami says that “if we assume similar impact on visitor numbers this time, the impact on Japan’s economy and corporate earnings would be incomparably greater, and we would assume hits for inbound-related names.”

Nomura Research Institute estimates the boycott could cost Japan more than US$14 billion annually. Related stocks in Japan have sunk since the warning was issued on November 14. The Japanese government sees the economy growing 0.7% this fiscal year, at best, after shrinking 1.8% year over year in the third quarter.

Yet the bigger worry is the distraction factor. A disciple of 2012-2020 Prime Minister Shinzo Abe, Takaichi plans to revive “Abenomics” and its emphasis on a weaker yen and looser fiscal policy. This will include pressuring the Bank of Japan to halt its rate hike cycle.

None of these steps will reduce Japan’s roughly 3% inflation rate, one well above BOJ’s 2% target. In fact, a renewed Abenomics push without bold reforms to increase productivity will only boost inflation further.

Opinion polls suggest consumers are already fed up with inflation — and reining in spending as a result. The fact that Takaichi, right out of the gate, is focused more on China relations than domestic retooling suggests she’ll be yet another short-timer.

Japanese leaders don’t tend to last long. Over the last two decades, the vast majority of prime ministers have served for just 12 months. That’s how long Takaichi’s predecessor, Shigeru Ishiba, got.

Ishiba was Japan’s 10th prime minister since 2006. Eight came and went within 365 days. And with Asia’s biggest revolving door spinning again, the clock is already ticking on Takaichi’s government.

Like Abe early on, Takaichi is enjoying a decent boost in her approval rating. Part of the support is based on the milestone she represents: Japan’s first female prime minister. Also, her talk of taking Abenomics to the next level has excited the masses.

Memories are often short in Japan’s politics, however. The extent to which Abenomics backfired on Japan is a case in point. Takaichi marks the fifth government since 2012 to plan to prioritize a weak yen over bold steps to increase competitiveness.

Hindsight shows how aggressive quantitative easing took the pressure off politicians to level playing fields. It took the onus off CEOs to innovate, restructure and swing for the fences.

Yet the yawning gap between what Abenomics promised and where Japan finds itself in 2025 is impossible to miss. All that BOJ easing, coupled with some success in improving corporate governance, recently drove the Nikkei 225 Stock Average above 50,000 for the first time ever.

Trouble is, promises over the last 13 years to reduce bureaucracy, modernize labor markets, rekindle innovation, increase productivity, empower women and reclaim Tokyo’s place at the center of Asian finance fell largely by the wayside.

During that time, China invested aggressively to put itself at the forefront of artificial intelligence, robotics, biotechnology, electric vehicles, renewable energy, semiconductors and other technologies of the future.

When China’s “DeepSeek shock” upended the AI universe last January, Japan Inc had no response. Chinese EV maker BYD’s grabbing ever more global market share, often at Japanese auto giants’ expense, is its own existential crisis for Takaichi’s economy.

Even quantitative easing remains a cautionary tale. It’s been 24 years since Japan pioneered QE — 26 years since it cut rates to zero. Yet Tokyo remains trapped in the quicksand of free money.

The US Federal Reserve, the European Central Bank, the Bank of England and other central banks that tried QE all found exits. Not Japan, though.

Now, there’s an open question whether today’s 0.5% benchmark rate can survive the Takaichi era, as short as it’s likely to be. She’s called the BOJ’s determination to hike rates “stupid.” At the same time, US President Donald Trump’s tariffs are hitting Japanese growth. Could the BOJ’s next move be to ease?

Yet with average wage gains trailing inflation, generally speaking, amid a once-in-a-generation stock boom, Japanese households aren’t likely to approach 2026 with much optimism. And Takaichi’s talk of hastening wage gains and cutting taxes is likely to spook a Japanese bond market already on edge.

In last month’s election, Takaichi’s LDP didn’t win an outright majority in either house of parliament. The price for allying with a coalition partner is cuts in consumption and other taxes, a step sure to increase a debt that’s already 260% of GDP.

Already, the “bond vigilantes” have been triggered by chatter about tax cuts and increased stimulus spending. In September, such fears pushed Japanese government bond (JGB) yields to their highest levels since 1999.

Bond investors are worried about something else, too. As the LDP pushes Japan Inc to boost wages, Japan still has one of the worst productivity rankings among 38 Organization for Economic Cooperation and Development members. Any wage increase that’s not matched by improved worker efficiency will only exacerbate inflationary pressures.

The longer inflation persists, the less likely it is that Takaichi will be prime minister come November 2026. To avoid that fate, Takaichi must do better than Abe did with bold supply-side reforms to make the economy more resilient and efficient.

Granted, it’s indeed possible that her tough-on-China schtick pays off with voters. Only time will tell. But Takaichi risks repeating the same mistake Abe made during his first stint as prime minister from 2006 to 2007. He, too, prioritized national security issues over the economy, only to be shown the door 12 months later.

If Takaichi is going to stay around long enough to make her mark with legislative accomplishment, she’d be wise to reprioritize the economy and deemphasize crossing rhetorical swords with Beijing.

Follow William Pesek on X at @WilliamPesek