Japan’s Debt and Its New Leader
Key Takeaways:
The snap election and supermajority give the Prime Minister strong political capital to pursue an ambitious economic and defense agenda
The Japanese government is attempting to revive economic growth through Increased defense spending, temporary tax cuts, and subsidies
Japan faces deep structural issues including an aging and shrinking population, declining labor force participation, and a historically weak yen raising import costs
On February 8th, Prime Minister of Japan, Sanae Takaichi, held a snap election, obtaining a supermajority for the Liberal Democratic Party. The move allows Takaichi to implement her party’s agenda with ease. Her platform pushes for bringing back growth in the economy through spending as well as strengthening Japan’s relationship with the U.S. Her economic plans entail increased investment in the defense, temporary consumption tax cuts, and subsidies. These policies are a reaction to the long stagnant economy Japan has faced over the past decades. Following the asset bubble burst in the late 1980s, Japan’s economy has faced low growth, deflation, and weaker consumer spending. The years following the bubble led to the Bank of Japan trying several methods of boosting the economy, many of which were new at the time. The aging demographic has led to lower labor output and the population declining since its peak around 2009. The yen has declined substantially, leading to higher import costs. However, coupled with Takaichi’s plans for fiscal stimulus to the economy, comes the risk of weakening the yen more and further indebting the country. Japan’s current debt to GDP ratio stands over 200 percent. More recently, Japan has been squeezed by China after Takaichi made comments about defending Taiwan. In response to the comments, China restricted access to critical minerals for Japanese companies. Takaichi did walk back her comments, standing firmly in her views, a reason for her broad approval among the people of Japan. Throughout the last three decades, Japan has provided a looking glass into the struggles of large debt, no growth, and a decreasing population. The United States has a similar debt problem to Japan, however it is less severe than Japan’s. If Japan reaches a point where they can no longer meet their debt payments, it will cause a large shockwave among developed countries. Takaichi’s time in office will provide more insight into the handling of large amounts of national debt. The United States should watch Japan’s development throughout the next few years if it wants any chance of controlling its own debt problems.