Japan: Takaichi’s political foundation to revive part of Abenomics shaken after Komeito opts out

Japan’s political landscape is in flux. After Sanae Takaichi was elected as the President of the Liberal Democratic Party (LDP) on October 4th, her nomination as the country’s first female Prime Minister (PM) has been complicated by Komeito’s abrupt exit from the ruling coalition. While Takaichi’s future as the PM is subject to negotiation to form a coalition, her government might end up being short-lived.Takaichi’s conservative ideologies shaped from Abe protégé background signals a revival of Abenomics, although with a more expansionary fiscal twist, and a hawkish tilt on foreign policy.On the first arrow of Abenomics, the monetary policy, Takaichi fully supports lax monetary policy by the BoJ. In line with this expectation, the Yen sharply depreciated to above USDJPY=150 (Chart 1). However, as a weak Yen would lift import inflation and erode real wages, she is expected to tolerate one more rate hike to stabilize the currency. This is why we still expect on -and potentially last- rate hike by December.Regarding the second arrow, the fiscal policy is expected to be expansionary. Takaichi proposes tax cuts and financial supports to health care and local governments. She is also keen to expand defense spending to above 2% of GDP. Hence, her initiatives rely on lax monetary policy. In fact, Japan’s fiscal position has been improving as nominal GDP grew more the 10-year bond yield. While the BoJ terminated the yield curve control (YCC) in March 2024, the bond yield has been low, as the BoJ continues to purchase long-term government bonds at fast pace.On the third arrow, structural reform remains unclear. While Takaichi plans to promote business where Japan has a technological advantage and to develop human capital and R&D, they lack details on how to raise the stagnating labor productivity, which is essential to lift Japan’s potential growth rate. This is ironically similar to how Abenomics finally developed.On foreign policy, Takaichi is expected to deepen alliance with the US. She vows "unwavering support" for the U.S.-Japan security pact, emphasizing interoperability, Quad mini laterals, and the Free and Open Indo-Pacific (FOIP) strategy to counter threats from China and North Korea.Relations with China will likely remain tense but pragmatic. Her Nippon Kaigi ties and past Yasukuni Shrine visits have irked China, potentially reigniting historical frictions. However, she has softened rhetoric, hinting at dialogue on economic ties and waffling on future shrine visits to avoid escalation. Overall, her government may prioritize deterrence over confrontation, balancing security enhancements with selective cooperation.Meanwhile, Takaichi’s political foundation to implement these policies has been shaken after Komeito’s decision to dissolve the coalition (Chart 2). At the Extraordinary Diet session on the week of October 20th, she is still expected to be nominated as the new PM. The oppositions are unlikely to succeed to consolidate a candidate for the PM, as they have been inflexible to negotiate so far. Nevertheless, with only a relative majority, the stability of her government is uncertain and so are here policies.