Japan’s New PM Takaichi Faces Economic Challenges Ahead

Japan is entering a pivotal phase of economic policy under the leadership of Prime Minister Sanae Takaichi, the first woman to hold the position. With a commitment to revitalize the nation’s economy, Takaichi has introduced what she terms a “responsible proactive fiscal policy.” This approach seeks to balance strategic spending with fiscal sustainability while managing Japan’s substantial public debt.

Despite these ambitions, Japan faces significant structural challenges and an uncertain global economic landscape, as outlined in the latest economic commentary from QNB. The country’s economic performance has been lackluster in recent years, with annual real GDP growth averaging around 0.8% between 2022 and 2024.

Economic Recovery and Challenges

In 2025, forecasts suggest a modest recovery with growth projected at 1.1%, surpassing the pre-COVID average of 0.9%. This improvement has been supported by rising real incomes, increased consumption, fiscal stimulus, and a depreciating currency that bolstered exports. However, the positive momentum appears to be fading, as adverse economic dynamics threaten to undermine progress in the coming years.

One major challenge is stagnating consumption, which constitutes approximately 60% of Japan’s economy. Despite some recovery this year, overall consumption has plateaued. The purchasing power of households has been eroded by persistent inflation, leading to a contraction in real wages. This trend has been compounded by the Bank of Japan’s ongoing monetary policy normalization, which has raised the benchmark interest rate from -0.1% to 0.5%. The resulting increase in borrowing costs has further restrained consumer spending, crucial for economic growth.

Global Trade Dynamics Impacting Growth

External factors are also weighing heavily on Japan’s economy. The anticipated slowdown in global trade, combined with heightened trade-policy uncertainty, poses additional challenges. Following months of instability surrounding U.S. trade policy, Japan and the United States reached a trade agreement in July 2024. This agreement established a baseline 15% tariff on nearly all Japanese imports to the U.S., significantly higher than the previous average tariff of 1.5%.

With Japan relying on the U.S. as its second-largest export market—accounting for about 20% of its foreign sales—the new tariffs represent a considerable barrier to trade. Furthermore, the expected downturn in global demand, exacerbated by geopolitical tensions, adds to the bleak outlook for Japanese exports, which constitute 20% of the country’s GDP and are vital for industrial production.

In response to these challenges, Prime Minister Takaichi unveiled a stimulus package worth JPN21.3 trillion, marking her first major economic initiative and signaling her policy direction. Despite this ambitious plan, analysts remain skeptical about its potential to initiate a significant change in growth trends.

Looking ahead, projections indicate that Japan’s economic growth may decelerate to 0.6% annually between 2026 and 2027, down from the anticipated growth of 1.1% for 2025. The combination of internal and external pressures suggests that the new government will face an uphill battle in revitalizing the economy amidst these formidable headwinds.