TOKYO – One reason many economists were disappointed with Sanae Takaichi’s selection as Japanese prime minister last October was concern that economic policy isn’t really her thing.
Sure, the long-time Liberal Democratic Party lawmaker assumed the position of a reformer. She talked of tax cuts, reducing living costs and reviving the supply-side upgrade strategy championed by her mentor, Shinzo Abe.
Economists, it now seems clear, were right as the Iran war has Takaichi running back to her real passion: changing Japan’s constitution.
One could argue it’s a defensible pivot as US President Donald Trump upends the global order by starting at least one war. And as Trump redeploys missile systems from Japan and South Korea to the Middle East and grows ever more erratic on the world stage, Takaichi has reason to wonder if the US still has Tokyo’s back.
Hence, Takaichi is increasingly focusing on freeing Tokyo from the yoke of the US-written 1947 constitution, which bars it from fielding a conventional military, and ramping up military spending.
This week, she took another step toward boosting Japan’s military profile by positioning the nation as a major player in the global defense market. The LDP removed most curbs on weapons exports, allowing Tokyo to sell arms overseas for the first time since World War II. The move is also aimed at strengthening its defense industrial base.
The pivot is not without economic merit. Just last week, Tokyo and Canberra inked a deal for the first three of 11 advanced Japanese warships to be delivered to the Royal Australian Navy.
It’s a boon for the lead contractor on the deal, Mitsubishi Heavy Industries, and employment in Japan’s domestic manufacturing industry. The initial three Mogami-class frigates will be constructed in Japan with a budget of between US$10.5 billion and $13.2 billion. Many tech goods and circuitry are integrated into today’s military hardware, spreading the economic benefits.
Still, the real mandate that Takaichi’s LDP has received from voters since 2012 is bold structural reform, not just a fresh wave of corporate profits that won’t necessarily fatten paychecks. This is something for which Takaichi is likely to have very little time now that she’s gunning to amend Japan’s pacifist constitution — just like the late Abe before her.
Takaichi hasn’t specified which provisions she intends to revise. Odds are, the most likely — and most contentious — target is Article 9. It renounces war and bars Tokyo from using force in international disputes. The LDP has also proposed other amendments, including expanded emergency powers, education reforms and changes to electoral districts.
In years past, Abe had set a 2020 deadline for revising Article 9. He wasn’t able to get it done – or even to put a revision bill to a parliamentary vote before he stepped down in 2020. The question, though, is which Abe premiership Takaichi is more likely to emulate: 2006 to 2007 or 2012 to 2020?
Abe’s first go as prime minister was a rather forgettable one. Back in 2006, Abe was the preferred successor to the Japanese leader who did as much as any to revamp the economy in recent decades — Junichiro Koizumi.
From 2001 to 2006, Koizumi worked to reduce bureaucracy, cut wasteful public works projects and privatize the sprawling Japan Post. It ran one of the globe’s biggest savings banks, dwarfing local banks and making Japan less appealing to international institutions seeking growth markets. The postal savings bank long funded complacency and dodgy dealing as politicians tapped the bank’s funds to finance their pet projects.
Koizumi also oversaw efforts to prod banks to dispose of hundreds of billions of dollars in bad loans, thereby suffocating balance sheets and fueling deflation.
Then, Koizumi passed the reform playbook to Abe, who promptly shelved the process. Abe was far more interested in rewriting the post-war constitution. After 12 months of neglecting waning living standards, the LDP showed Abe the door.
Five years later, Abe was back — this time as Japan’s answer to Ronald Reagan and Margaret Thatcher combined. And for a while after the LDP retook power in 2012, “Abenomics” was the talk of the economics world.
Abe’s plan was bold. He pledged to cut red tape, create a more meritocratic labor market, rekindle innovation, empower women and strengthen corporate governance to restore Tokyo’s place at the center of Asian finance. While Abe succeeded on this last pledge, he mostly relied on aggressive central bank easing and a weaker yen.
It amounted to trickle-down economics, with Japanese characteristics. The Nikkei 225 Stock Average boomed; household incomes didn’t. As a result, Tokyo added more and more to the developed world’s biggest debt load, while the weak yen pumped up corporate profits.
Now that Takaichi is talking about dusting off the plan, investors have every reason to doubt her chances of success. The biggest concern is what economists call “opportunity cost.” This is the public benefits foregone by prioritizing one option over others.
As Takaichi focuses on her career-long goal of increasing Japan’s military footprint, she won’t be working to revive Japan’s animal spirits or increase productivity. Her team won’t be working to produce a Japanese answer to China’s runaway success in electric vehicles and artificial intelligence.
The mistake the LDP has been making these last 13-plus years is thinking time is on Tokyo’s side. It’s not. Thanks to this chronic neglect year after year, Japan is now grappling with stagflation.
As economies from the US to Europe struggle to avoid a dreaded scenario in which inflation rises ahead of economic growth, Japan is already there. Inflation is twice the rate of 1.1% GDP growth rate in 2025.
As the costs of oil and other commodities surge, Japan is having to import vital goods via a currency that’s down 1.4% so far this year. There’s some optimism, too. The most recent round of “Shunto” wage negotiations with unions went well, resulting in a 5.26% boost for permanent employees. Trouble is, a wage jump of that magnitude without a sudden burst of productivity growth would just exacerbate Japan’s inflation battle.
Events in the Middle East hardly help. If Japanese chieftains were reluctant to share profits with workers before the war began, they’re likely to be even less inclined now.
“If the Iran war is prolonged, inflation will rise substantially, while demand for labor could decrease, both of which will hurt real wages,” notes economist Richard Katz, who publishes the Japan Economy Watch newsletter. “It’s real wages that determine how much people can spend, and declining real wages have produced stagnant consumer spending since 2013.”
This reluctance owes to corporate Japan seeing government after government come and go after having talked big about raising the nation’s economic game. In that time, Tokyo’s debt-to-GDP ratio swelled to 260% and the population shrank year after year. In May 2025, this disconnect prompted Takaichi’s predecessor, Shigeru Ishiba, to warn that Tokyo’s deteriorating finances are “worse than Greece.”
Hence, fears of a “Liz Truss moment” in Tokyo. In late 2022, then-UK Prime Minister Truss destabilized the debt market by attempting to sneak an unfunded tax cut past bond traders. The extreme market turmoil remains a cautionary tale for Takaichi as her party mulls tax cuts without complementary efforts to increase public revenues.
As the economy loses altitude, so might Takaichi’s political capital to revise the constitution or even to hold office for very long. Indeed, Japan’s giant revolving door is always ready to spin anew, as it tends to do every 12 months or so. The vast majority of Japanese prime ministers since the late 1990s have served just one year in power.
This is the problematic cycle in which Japan finds itself. For one thing, Takaichi will have to last much longer than the 12 months before the political establishment truly gets on board with her broader agenda. Abe, for example, had nearly eight years in power — and yet he barely made a dent in his economic to-do list.
Now that the Iran war — and Trump’s unpredictability — have Takaichi returning to her ideological roots, odds aren’t great that Japan will tend to its economic frailties. As Japan’s first female leader, Takaichi is surely a trailblazer. Yet as a staunch supporter of Abenomics, she’s an advocate of status quo policies where new ideas are most needed.
Other than glacial implementation, the trouble with Abenomics is that it’s nothing new or innovative. It’s a list of steps Japan should’ve taken a decade or more earlier. Over time, the idea of doubling down on failure might not sit well with international investors who this year pushed the Nikkei to all-time highs.
Takaichi’s reliance on fiscal loosening, meanwhile, continues to keep the bond market on edge. Her rise to power has sparked what economist Yusuke Matsuo at Mizuho Securities calls “Takaichi trades.” These are bets on a weaker yen, a steeper Japanese government bond yield curve and higher stocks.
Yet this means increased tension with the Bank of Japan, which continues to lean toward raising interest rates. In December, BOJ Governor Kazuo Ueda’s board hiked the benchmark to a 30-year high of 0.75%. Now that Japan is in the stagflation zone and Takaichi is angling to loosen fiscal policy, the BOJ is in an impossible position.
But then so are the Japan bulls watching the opportunity costs of Takaichi’s preference for constitutional reform over economic retooling.
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The strawberry soldiers should remember Nanking !