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Sanae Takaichi is not your typical Japanese prime minister. But her ambition for Japan is serious. She feels that it should be shoulder to shoulder with other major economies. She's proposing a radically different plan. Central to which is 370 trillion yen of investments by 2040, across chips and AI, to defense, food tech, manga and more besides. And she's attempting her plan against a daunting backdrop. Debt-to-GDP in Japan is already the highest across the G10. Demographic challenges, aging population, the number of children being so low.
China's top diplomat has suggested relations with Japan are at a low point. People are still feeling the pain from higher living cost. Inflation could be the make-or-break issue. When Takaichi took over the long-ruling Liberal Democratic Party, she turned personal popularity into an election landslide. Now, she has the room to pursue a plan that could revive the world's fourth-largest economy, or leave it with catastrophic bills and the same old problems.
To really grasp what Sanae Takaichi's trying to do, it helps to understand the woman herself. And so, welcome to Nara. This is the old capital of Japan. With its ancient temples, and deer operating a snack-based economy. And of course, it's the birthplace of Japan's prime minister. She's very much an ordinary person. She particularly liked heavy metal drumming. She definitely had a sort of rebellious side when she was younger.
She is from a very normal mid-income family. And she's kind of unlike other Japanese politicians who've reached the peak of the system in that she's not part of a family of politicians. When Takaichi ran her successful bid for the LDP leadership, the LDP was not in good shape after some humiliating defeats in recent elections. One of the things that Takaichi could do for the party is to tap into a kind of right-wing sentiment, particularly on issues related to immigration. and take away some of the energy from the upstart right-wing parties.
She was hugely popular when she came in. You can get all kinds of merch. You can get like, these keyrings, little handkerchief here, and even. cookies. The approval ratings haven't dropped off dramatically, but there's been a slow and steady decline. That being said, she's still very popular compared to her predecessors. All of whom were men, and depicted on this remarkably absorbent Takaichi tea towel. Takaichi is the first female prime minister in Japan, and this was a huge moment in Japanese politics.
The global average for female politicians in politics across the world is about 30%. But in Japan, it's currently 14%. The milestone is historic but her politics are socially conservative. Takaichi opposes legalizing same-sex marriage and allowing married couples to retain separate legal surnames, positions considered helpful in attracting conservative voters to the LDP. Popularity, though, only buys a leader so much time in the face of an electorate with huge concerns. And in Japan. People are really worried about the cost of living. And here's why. In 1986, one dollar bought about 160 yen.
By 2011, it bought just 76. By July 2026, it bought more than 160 again, leaving the yen near its weakest level in four decades. This makes imports to Japan expensive, fuelling inflation for households and businesses reliant on imported food and energy, i.e. basically all of them. Japan was hugely reliant on oil from the Middle East. They were very vulnerable to rising oil prices. The US-Israel war with Iran pushed up the cost of everything, from oil to materials. And it had some unexpected downsides, too.
This is actually a potato chips bag I just grabbed at the convenience store downstairs. It's now looking silver. Whereas they used to look like this. Unstable supplies of ink meant Japanese shoppers had to use their imaginations for a while. Now, cost-of-living crises are hardly unique, but Japan adds a bespoke layer to its own. Japan is just not used to inflation. The country spent the best part of three decades with flat prices, weak wage growth and ultra-low borrowing costs. But recently, inflation returned. And for the first time in a generation, it stuck around.
That's part of the reason why they're really struggling with the cost of living at the moment. The weakness of the yen has meant that there's been more foreign tourists, which has created some social problems. Essentially, too many people in too little space, and sporadic poor behavior that goes viral on social media. The country's deeper demographic issue though is that deaths outnumber births, while the centenarian population has crossed six figures. Longevity is of course good news but funding it with a shrinking workforce is the difficult bit. Japan currently needs more foreign workers, yet Takaichi has tightened immigration rules and promised tougher enforcement. And that's not all she promised.
When she was first elected, she immediately went viral for her first speech. According to a Bloomberg calculation, Takaichi has met with ministry officials much less than her predecessors. This is kind of a bit of a contrast with previous prime ministers who have really valued going out for dinner and talking to other lawmakers. She does far fewer media interviews. She uses social media as her main platform when she's got something to say. So, after a year of work-work-work-work-work, what has she done?
Takaichi has subsidized gasoline and energy prices over the summer. She's also worked to diversify Japan's oil supply. She pledged to cut the consumption tax on food and soft drinks for two years from 8% to 1%. But this plan, which is set to start in April of 2027, also has markets concerned about mounting government debt. Something we'll come back to shortly. One of the biggest policies is a plan to grow Japan's economy with a 370 trillion yen investment, public and private, over 14 years.
She has laid out 17 crucial sectors, including artificial intelligence, defense, energy, and semiconductors, as well as food tech or content creation, such as manga or anime. A stronger Japan could mean sturdier supply chains and a more capable economic and security partner in Asia. She's also looking to overhaul the defense guideline, And she's here as prime minister at a time when the challenges are growing from China, from North Korea, from Russia. When Takaichi said that a war over Taiwan would be an existential threat for Japan, China's reaction was very strong. And a big deal,
given China's a neighbor and Japan's biggest trading partner. They engaged in this big diplomatic campaign to try and isolate her, to force her to change what she'd said. And Takaichi has responded to that by saying no. Previous prime ministers are more circumspect and have not wanted to do that. Which brings us to her broader stance on defense. Japan has had defense spending of around 1% of GDP for decades. That changed in 2022 under previous Prime Minister Kishida.
We're now at around 2% of GDP in defense spending. She wants to go beyond that. Madam Prime Minister. That pleased this chap, who's long pressed America's allies to spend more on their own defense. Takaichi has clearly worked very hard to have a good relationship with President Trump. There's been some criticism of her domestically that perhaps she's been a little bit too keen to impress him. He has concerns about Japan's currency being undervalued. And as the yen sank further, Japan and the US Treasury directly intervened in the currency market to boost it.
A coordinated intervention for the first time in about 15 years. US Treasury Secretary Scott Bessent saying that there won't be a hesitation to intervene again. Japan holds more than a trillion dollars of US government debt, and Japanese investors are one of the world's biggest pools of capital. So moves in the yen ripple far beyond Tokyo. Now, that 370-trillion-yen investment plan is not one giant government check. It's a target for public and private investment.
The question is where that public money will come from. The government probably needs to issue extra bonds and bond issuance will likely create more pressures. That's because Japan's government debt is more than twice the size of its economy. Not a number anyone is rushing to immortalize on a novelty tea towel. The UK, France, the US and Germany are climbing, but to nowhere near the same levels. Debt-to-GDP ratio, which is now the government's key measures for fiscal health, is actually lowering recently. That's quite natural because Japan spent pretty much during the pandemic period so it's kind of a normalization phase at the moment.
Still, servicing that debt swallows up about a fifth of Japan's annual budget. That's why the market is worrying a little bit whether this project will be successful or not. If the entire project is not successful, that will create a huge burden on Japan's public finance. The main challenges for Takaichi now are really making sure her economic program is successful. Can she get markets on board?
How to revive the economy when you have a declining population? Can she manage her increasingly difficult relationship with China? Xi Jinping has cut her off, so she's just waiting for an opportunity to reengage. Takaichi doesn't have a solid base of support within the ruling party, which means that her power is based on the popularity of the broader public. People are reacting quite positively to her economic policies, more hopeful than compared to a few years ago. And so, she has the mandate to try - to work, work, work at making it, well, work.
Whether her stronger Japan will also be a richer and safer one, is the part still to be proved in year two, and beyond.
