Nostalgia hinders Takaichi’s vision for Japan

Two themes dominate Japan’s elite thinking at present: a blend of awe and fear about the ambitions of Japan’s powerful prime minister, Sanae Takaichi; and concerns about the US-Japan security alliance.

Takaichi became prime minister last October through winning a party leadership election, then won her Liberal Democratic Party (LDP) a huge majority in general elections for the Lower House of the Diet (parliament) in February this year. This was largely attributed to Takaichi’s novelty as the country’s first female prime minister and one who does not come from a political dynasty, but also to her robust stance in the face of a row with Japan’s biggest security threat, China, over remarks she had made in the Diet about Taiwan. That landslide victory did not make her impregnable – the LDP lacks a majority in the weaker Upper House of the Diet, which it cannot change until elections to that house in 2028 – but it opened up a big opportunity to bring about change.

Like Giorgia Meloni, her Italian equivalent who won power in 2022, Takaichi presents herself as an outsider to the old political elite, as a hard worker – sometimes boasting of taking only three hours of sleep a night – and as a clear and effective communicator. Yet, like Meloni, she is also no radical. Alongside some undoubted innovations, and an impressive urge to keep Japan at the frontier of innovation in technology, lies a great deal of nostalgia. For a leader who is often seen as a pioneer, Takaichi is turning out to be remarkably backward-looking. 

The biggest nostalgia-fest lies in economic policy. Far from representing an expected continuation of or improvement on ‘Abenomics’, the three-arrow quiver of fiscal expansion, monetary expansion and a bit of structural reform deployed by her mentor, the late Shinzo Abe in 2012-20, her ‘Takanomics’ turns out to consist of an old-fashioned mix of industrial and fiscal policy, albeit on a grand scale. 

Back from the days of the pre-1990s is the role of the Ministry for Economy, Trade and Industry (METI) as core planner and co-ordinator of an envisaged Y370 trillion (US$2.25 trillion at today’s exchange rates) in public and private investment over the next 15 years in 17 sectors identified as strategic. Its postwar forerunner MITI – the Ministry for International Trade and Industry – would be proud. Gone, it is said, are short-run fiscal adjustments with regular supplementary budgets.

How this is to be financed is not yet clear. Jesper Koll, a veteran Japan-based economist and investor well connected in Tokyo political circles, writes in his excellent Japan Optimist Substack ‘Avoiding the Takaichi trap’ that:

Of the Y370 trillion, I expect approximately 10% to come from on-balance-sheet national government debt, 60% from private corporations, asset owners and investment managers, and 30% coordinated and syndicated by off-balance-sheet public-policy financing firms like Development Bank of Japan, Japan Investment Corporation etc — basically the established-during-Meiji-but-privatized-by-PM Koizumi-in-the-early 2000s ex-FILP Fiscal Investment & Loan institutional stewards of off-balance-sheet public finance.

How much of that Y222 trillion or so of private investment will really come to pass is unpredictable, but the point of the long-term plan is to try to provide a framework that might convince investors that policies are going to endure. The 17 sectors include sexy areas such as artificial intelligence, quantum computing, semiconductors, fusion energy and defence, but also plenty of more conventional ones such as ‘the content industry’ and ‘information and communications’. Looking at the list, it can feel as if the government felt the need to be inclusive, for fear of stigmatising sectors as non-strategic.

It would be reasonable to have some doubts as to whether a state-led plan such as this will really be able to pick winners and raise Japan’s long-term growth rate beyond the just below one per cent per year that it has been stuck at for the past decade. The burdens of an ageing and shrinking population are not going to go away. But those burdens do require Japan to step up its annual rate of productivity growth if they are to be coped with, the achievement of which will be the real test of this plan. The ambition is impressive, while the method draws very much on techniques that proved successful in the rather different circumstances of the 1960s and 1970s, Japan’s high-growth heyday.

Amid the uncertainties inevitably associated with an ambitious long-term plan, two consequences can be described as pretty much certain, as Koll also writes. One is that this expansionary plan is bound to be inflationary, in a country which has already been grappling in recent years with price inflation that has been exceeding both the central bank’s two per cent target and nominal wage growth. So contrary to comments made by Takaichi during her campaign last year to become her party’s leader that interest rates should be kept low, if her plan is to work it will be imperative that the Bank of Japan raise interest rates sufficiently to keep annual inflation to two per cent or below.

The other is that the cost of capital both for the Japanese government and for the private sector will rise, thanks to the high demand for funds under this plan and to the associated inflation which lenders will need to be compensated for even if it is kept under control. This could improve the allocation of capital and the discipline provided by it, which decades of low interest rates deadened, leaving far too many inefficient and unproductive companies alive. But it will also put more pressure on the government budget as the cost of servicing its huge debt rises.

That prospect has raised some quite serious doubts as to the coherence of Takaichi’s economic policy. At the same time as announcing this ambitious fiscal-industrial plan, she has insisted on cutting the country’s consumption tax, which is currently 10 per cent for most items and eight per cent for food, to just one per cent for food, supposedly temporarily. 

Takaichi may want to do this to reduce headline inflation and court popularity, but if the cut goes ahead it will weaken the country’s fiscal position just at a time when helping households may no longer be necessary. In recent months, incomes have begun to rise more rapidly than inflation for the first time in several years. As the OECD said in its recent economic survey of Japan, domestic demand is now the main driver of growth, for the first time since the country’s financial crash began in 1990.

A second sign of incoherence came from the Minister of Finance, Satsuki Katayama, one of Takaichi’s closest aides, when she recently floated the idea of pressing the Government Pension Investment Fund (GPIF), the world’s largest such pool of retirement savings, to buy more Japanese government bonds. This probably reflects a belief that the institution that has hitherto been the main buyer, the Bank of Japan, intends to reduce its purchases as it tightens and normalises monetary policy. Yet to try to manage the government’s borrowing costs essentially by forcing the GPIF to earn lower returns for its beneficiaries by filling its boots with government bonds would be a seriously retrograde step. 

Despite the big fanfare around her new industrial policy, it feels as if Team Takaichi have not yet got their economic thinking straight. Where straighter thinking can be discerned is in security and defence.

Unlike the Europeans in NATO, Japan knows that it has no viable option other than to stick close to America, unpleasant and bullying though the Trump administration may be. In principle European NATO could cope with Russia, but Japan on its own could not deter China. The US-Japan Security Alliance looks more important to Japan now than at any time since it was launched in 1951, just at a time when America itself is behaving in more erratic and problematic ways than ever before.

This reality is leading Japanese policymakers in two directions simultaneously. One is a further enhancement of the defence strategy followed by Prime Ministers Abe and Kishida, of building Japan’s defence capabilities sufficiently to make the country more valuable to its US ally in acting as a deterrent against Chinese aggression, especially regarding Taiwan. The other is, as for the Europeans, to try to reduce Japan’s long-term dependency on American technology and weapons supplies so that it will have at least some resilience in case of changes of mind or circumstance in Washington.

The effort to be more valuable also contains a new nostalgic element, in the form of a now-open discussion in Tokyo of formally revising the third of Japan’s ‘three non-nuclear principles’. Established in 1967 by then Prime Minister Eisaku Sato, these principles were that Japan would not possess nuclear weapons, produce them or permit them to be brought into Japanese territory. During the Cold War, the third of those principles was often honoured in the breach, with America bringing nuclear-armed vessels into its bases with the knowledge of the Japanese governments of the time – but no public acknowledgement of the fact.

It is possible that some of those advocating a return to Cold War ambiguity – this time publicly rather than covertly – also see it as a useful step towards winning public support for the eventual production and possession of nuclear weapons. But most advocates seem to see it as a way to become more useful to the United States in its efforts to deter Japan’s two nearby nuclear-weapons states, China and North Korea. Though described commonly as ‘nuclear sharing’, this would simply mean permitting America to move nuclear-armed vessels and aircraft through Japan. The only thing that would be shared is geography. It would be very much a throwback to the Cold War.

Meanwhile, Japan’s effort to depend on America for fewer critical technologies and capabilities is gaining strength, albeit still at an early stage. Officials acknowledge that the secure government software and data ‘cloud’ will have to be contracted from an American supplier, for no Japanese firm has the scale to compete with the likes of Amazon in this area. There is, however, a clear desire to avoid relying on an American software operator such as Palantir for crucial cyber-security or other sensitive services. A debate is also under way as to whether it is too late for Japan to develop its own foundational artificial intelligence models in a public programme or whether it might still be prudent to invest in a Japanese foundational model in parallel with working with the American industry leaders. Moreover, with the supply of long-range American Tomahawk missiles that Japan has ordered now in serious doubt, Japan is getting serious about emulating Ukraine by developing and producing its own missiles.

Where self-reliance is definitely intended, but still remains far away, is in intelligence, or specifically in building a Japanese external intelligence bureau along the lines of Britain’s Secret Intelligence Service or MI6. Since 1945, Japanese intelligence collection has essentially been domestic and has been handled by the National Police Agency, albeit overseen by a small unit in the Cabinet Office similar to, but much less powerful than, America’s Director of National Intelligence. A framework law was passed in May to place the new intelligence set-up under a National Intelligence Council, but much of the structure remains vague. 

The critical point may well be to avoid nostalgia, in the form of bureaucratic inertia, by keeping the new external bureau as separate from the National Police Agency as the Central Intelligence Agency has been from the FBI since the CIA was founded in 1947. Placing it under the supervision of the Minister for Foreign Affairs rather than the Ministry of Internal Affairs would be a promising sign. The most difficult task will be recruiting and training, from almost a standing start,  the probably 2,000 officers such an external bureau will need if it is to be effective. The foreign ministry’s existing intelligence-analysis section numbers about 100 people, none of whom are running agents overseas.

It all amounts to quite an impressive agenda for change, in a country often associated – sometimes unfairly, sometimes not – with resisting change. Prime Minister Takaichi wants to wake Japan up, or at risk of mixing metaphors, to raise Japan’s game. Yet lest anyone think that she is a radical reformer she has also been using up political capital on the most nostalgic, or backward-looking, reform of all: an amendment to the Imperial Household Law of 1947 to bring in more potential heirs for the emperor.

You might have thought that Japan’s first female prime minister would jump at the chance of solving the imperial family’s succession problem in the obvious way: by permitting females to become heirs. The current Emperor Naruhito and Empress Masako have just one child, a daughter, Princess Aiko. At present the heir and thus Crown Prince is Naruhito’s younger brother, Fumihito, who himself has one son and two daughters. With Emperor Naruhito’s 90-year-old uncle that makes just three eligible candidates for the succession. Fortunately Emperor Naruhito is a mere 66-years old.

An opinion poll in July by the Nikkei newspaper with TV Tokyo found that 84 per cent of the public are in favour of allowing female emperors. Yet despite the clear public support for modernising the imperial system, Takaichi and the conservative party members allied with her have insisted that Japan must stick with tradition and have only male emperors. The law that Takaichi pushed through the Diet during July will allow the supply of potential heirs to be increased by allowing the imperial family to adopt males from 11 branch families that were excluded from the imperial system in 1947. It is not yet clear on what basis any selection for adoption would be made.

This is as hard to understand as to justify. Under Japan’s postwar constitution, the emperor became a purely symbolic figure barred from any political role. As the role has become less important in practical terms, it ought surely to be both acceptable and convenient to allow the symbolic emperor to reflect both sexes rather than just one. 

For conservatives to argue that the male tradition must be preserved in perpetuity is to stretch a point beyond credulity. The male-only tradition was first enshrined in law only as recently as 1889. Moreover, in the long history of the imperial line there have in fact been eight empresses. Conservatives argue that these were mere regents awaiting an eligible male to reach adulthood, but that is debatable. Not surprisingly, conspiracy theories as to why they are so insistent on this are rife: one is the notion that conservatives think that adopted males may in future be easier to manipulate as a nationalist tool compared with core family members, and especially females.

Whatever the explanation, the conservative rigidity being shown and even promoted by a female prime minister who purports to be an unstuffy radical – chiefly by touting her youthful past as a heavy metal drummer – looks ridiculous and shameful but could also be important in two ways, one in the short term and the other far into the future.

The immediate importance is that whatever one thinks of the change to the Imperial Household Law, it has clearly been pushed through without public consultation or proper explanation. This is contributing to a rather rapid slide in Takaichi’s approval rating. Economic factors may well be the main reason, but her high-handedness over the imperial succession and disregard for public opinion is likely to be another.

In the longer term, this decision over the Imperial Household Law risks storing up trouble for when there is another imperial succession. If Princess Aiko remains popular, there could be serious disgruntlement at the ascent to the throne of Fumihito, who is only six years younger than Naruhito. For conservatives to risk losing public support for what is the most conservative institution in the country looks to be a decision that is as short-sighted as it is strange.