Japan has captured global market attention following the historic election of Sanae Takaichi as the country's first female Prime Minister. Takaichi, who also leads the long-ruling Liberal Democratic Party (LDP), takes charge at a time when the party faces declining voter support. Her rise signifies a strategic move to consolidate power and marks a distinct rightward shift in Japan's political and economic direction, heavily inspired by the policies of her mentor, the late Shinzo Abe.
A New Chapter of Abenomics: Fiscal Firepower and Corporate Reform
At the core of Prime Minister Takaichi's economic agenda is a massive stimulus package worth JPY 21.3 trillion (approximately USD 136 billion). This plan combines significant tax cuts with increased government spending, aiming to spur domestic growth. This approach continues the legacy of 'Abenomics,' the three-arrow strategy launched by Shinzo Abe in 2012 to combat deflation.
The results of those earlier policies are now evident. Japan has successfully escaped the grip of falling prices, with core consumer price inflation (CPI) currently running at about 3%. Crucially, real wage growth has, on average, outpaced inflation, translating to tangible gains in household disposable income.
Another pillar of Abenomics that Takaichi is committed to sustaining is corporate governance reform. These earlier reforms forced Japanese companies to become more accountable to shareholders, boosting profitability and investment returns. This transformation has been key in repositioning Japan as an attractive destination for global capital.
Foreign Policy Hawks and Currency Targets
On the international front, Prime Minister Takaichi has adopted a notably hawkish stance towards China, leading to increased political friction between the two Asian powers. However, analysts suggest the economic fallout from these tensions will likely remain contained, with a diplomatic détente expected in the medium term. Conversely, Takaichi has strengthened ties with the United States, and there is speculation that the current 17% US import tariff on Japanese goods could be reduced during her tenure.
A major focus for investors is the new administration's stance on the Japanese yen. The newly appointed Finance Minister, Katayama, has indicated a comfort level with the yen trading at 120 against the US dollar, a level implying substantial appreciation from its current position. While a weaker yen traditionally benefits exporters and supports equity markets, Japanese authorities are primarily focused on preventing any excessively rapid currency movements.
Market observers note that the USD/JPY rate of 160 is seen as a critical 'line in the sand.' Breaching this level would likely trigger verbal intervention first, followed by direct market action by the Ministry of Finance to strengthen the currency. A key driver of this sensitivity is Japan's status as a net food importer. A plummeting yen directly fuels food inflation, a pressure point highlighted by Japan's large 'food deficit' of JPY 7.7 trillion (USD 49 billion) in 2024. This economic pain for households is a primary reason behind Takaichi's push for gasoline tax cuts and energy bill subsidies.
Is the Yen Undervalued? The Investment Outlook
The critical question for investors is whether the yen is fundamentally cheap. An analysis of the Real Effective Exchange Rate (REER), which measures a currency's value against its trading partners, provides insight. Japan's REER has fallen to levels last witnessed in the early 1970s, indicating the yen is competitively valued.
This valuation, coupled with expectations of very gradual interest rate hikes by the Bank of Japan, supports a forecast of moderate yen appreciation through 2026. For global investors, Japan under Takaichi presents a complex but intriguing picture: a reinvigorated reform agenda, managed geopolitical tensions, and a currency poised for a potential recalibration.
