Japan's new Prime Minister, Sanae Takaichi, faces a daunting challenge early in her tenure: the persistent decline in real wages, which threatens to unravel her economic agenda, known as 'Abenomics'. This issue has come to the forefront just weeks after she took office, with real wages falling for the ninth month in a row, according to data released by the labor ministry. This trend, which started in 2021, highlights the strain on households' purchasing power, despite nominal wages showing a slight increase.
Takaichi, Japan's first female prime minister, has pledged to revive the spirit of 'Abenomics', a policy framework introduced by the late Shinzo Abe. This approach is built on three key pillars: an ultra-easy monetary policy, aggressive fiscal stimulus, and structural reforms. However, her plans to tackle the economic challenges, including a proposed spending package worth 13.9 trillion yen, are already facing scrutiny and potential pitfalls.
The spending package, reportedly over 10 trillion yen, includes subsidies for electricity and gas bills and support for small and medium-sized businesses to increase wages. While these measures aim to help households cope with rising prices, they could potentially clash with Japan's broader efforts to combat inflation. Headline inflation has consistently exceeded the Bank of Japan's 2% target for 41 months, reaching 2.9% in September. Household spending during that month fell short of expectations, rising only 1.8%.
Marcel Thieliant, head of Asia Pacific at Capital Economics, warns that Japanese voters' top concern is inflation, and populist measures like energy subsidies or cash transfers could exacerbate these inflationary pressures. Additionally, Justin Feng, Asia Economist at HSBC, raises concerns about the potential impact of an oversized stimulus package on Japan's fiscal credibility, given its already high debt-to-GDP ratio, which stood at almost 250% in 2023.
The persistence of high inflation could force Takaichi to reconsider her stance on an expansionary monetary policy, which favors keeping interest rates low. This approach could weaken the yen and increase the costs of imported goods. Experts like Jesper Koll, Expert Director at Monex Group, believe that if inflation remains above 2% in the coming months, it could significantly impact the popularity of Takaichi's cabinet, as inflation is a top concern for the Japanese people.
The Bank of Japan (BOJ) finds itself in a delicate position. Despite keeping its benchmark interest rate unchanged at 0.5% for six consecutive meetings, Governor Kazuo Ueda has stated that the central bank is not lagging in its response to inflation. However, Takaichi has signaled a more cautious approach, indicating that sustainable inflation has not yet been achieved and that the central bank should proceed with caution in raising interest rates.
The BOJ has stated that it will increase rates once it sees a "virtuous cycle" of rising prices and wages. However, analysts like Justin Feng believe that the new political landscape has raised the bar for the BOJ to tighten monetary policy. Despite this, Feng adds that the process of policy normalization will continue, and future rate hikes are a matter of timing rather than a question of if they will happen. Capital Economics forecasts the BOJ's policy rate to reach 1.5% by 2027.
Containing inflation is a critical task for the Takaichi administration, and some BOJ board members have called for raising rates to combat inflationary pressures. Japan's large population of retirees and those on fixed incomes makes inflation particularly painful for them, as highlighted by Tomohiko Taniguchi, special advisor at the Fujitsu Future Studies Center.
As Takaichi navigates these economic challenges, the success of her 'Abenomics' agenda will depend on her ability to balance stimulus measures with inflation control, all while maintaining the support of the Japanese people, for whom inflation is a paramount concern.
