This Week's Weekly: The ¥21 Trillion-Plus Economic Stimulus Package is the Fuse for a Weak Yen, Inflation, and a Bubble Explosion

 This Week's Weekly: The ¥21 Trillion-Plus Economic Stimulus Package is the Fuse for a Weak Yen, Inflation, and a Bubble Explosion—The Double Whammy of a 10% Consumption Tax and an Accelerating Inflation Tax Will Only Further Exploit the Common People

 

Monday, November 24, 2025

 

① Will the ¥21 Trillion-Plus Economic Stimulus Package Be Enough to Alleviate Concerns about Living?

 

The Mainichi Shimbun's editorial on Saturday, November 22nd, was quite persuasive, stating, "Simply inflating the budget unchecked will not alleviate the concerns of the people suffering from rising prices." Below, we borrow an excerpt from the editorial to highlight the dangers of Sanaenomics, which proposes a supplementary budget exceeding ¥21 trillion.

 

The Takaichi Sanae administration has decided on its first economic stimulus package since taking office. It emphasizes "active fiscal policy" and totals over ¥21 trillion, more than ¥6 trillion more than last fall's package. This means the administration is planning a massive fiscal stimulus policy amounting to 3.5% of nominal GDP of approximately 600 trillion yen.

 

If we assume that the fiscal policy multiplier coefficient is the usual 1.5, the aggregate demand stimulus effect would be just over 32 trillion yen, 1.5 times the 21 trillion yen. The aggregate demand stimulus effect relative to GDP would be amplified by 5.3%.

 

In contrast, according to the government and the Bank of Japan, the potential growth rate of the Japanese economy is only about 0.6%. Therefore, excessive aggregate demand stimulation by fiscal stimulus could trigger inflation of as much as 4.7%, corresponding to this gap. In fact, as detailed in Section 3, the October national CPI already suggests that inflation could reach 5% in the near future.

 

In this way, far from addressing rising prices, Sanaenomics is playing with fire, adding fuel to the fire of accelerating inflation and potentially turning the Japanese economy into a scorched earth.

 

Specifically, the government's top priority measures to combat rising prices can hardly be described as handouts. In addition to abolishing the temporary gasoline tax, subsidies for winter electricity and gas bills will be significantly increased starting this summer.

 

Low-income earners are the ones hit hardest by rising prices. Support should be prioritized for these groups. However, if support is given generously to high-income earners as well, it is obvious that this could overly stimulate consumption and contribute to price hikes.

 

Furthermore, the distribution of "rice coupons" that allow people to buy rice cheaper cannot be overlooked. While large grants will be provided to a wide range of local governments as financial resources, this reduction in the burden on consumers is only temporary. The fundamental problem of a weakening production base is being covered up, and prices will remain high.

 

Adopting the Komeito Party's proposal to add 20,000 yen to child allowances across the board is also spurring inflation. While the government's minority government likely aims to gain cooperation in passing the budget, it would be irresponsible to swallow it whole without considering financial resources.

 

The effectiveness of large-scale investments in areas deemed essential is also being questioned. The prime minister claims to increase growth potential to realize a "strong economy," raising wages and increasing tax revenue. However, investments are prominently focused on industries that have been left behind in international competition, such as semiconductors and shipbuilding.

 

In the end, large-scale measures will not be covered by tax revenue, and a large amount of additional government bonds will have to be issued. Concerns about a worsening fiscal situation are growing in financial markets, accelerating yen selling.

 

The weak yen has been a major factor in the rise in prices since April 2022. While raising interest rates by the Bank of Japan would lead to a correction, the prime minister has maintained a cautious stance. A further decline in the yen could lead to further price increases.

 

Government bonds are also being sold in the market, and long-term interest rates have risen to their highest level in 17 and a half years. Not only will interest payments on the debt mount, passing the burden on to future generations, but the sudden fall in government bond prices will also raise concerns about the finances of regional banks and other financial institutions holding large amounts of long-term government bonds, as unrealized losses grow.

 

The Prime Minister has emphasized that he will "turn anxiety about the future into hope." However, prioritizing short-term popularity will only leave a lasting legacy of serious problems.

 

② Japan's Debt Denial: Japan's Long-Term Interest Rates are Showing Debt Crisis Signs

In this section, we introduce a very interesting tweet dated November 23rd by Robin J. Brooks (a senior fellow at the Brookings Institution and former FX analyst at Goldman Sachs):

"Japan is in denial. For years, despite its massive government debt, long-term interest rates have been very low, creating the illusion that this was somehow normal. This is not the case. Low interest rates are artificial, brought about by the Bank of Japan's (BOJ) massive purchases of government bonds and the imposition of yield caps. This approach ran into problems after the COVID-19 pandemic. As central banks raised interest rates to contain inflation, long-term government bond yields began to rise globally. The BOJ continued to cap long-term interest rates, but this was due to the weak yen. It spiraled. The yield cap was no longer sustainable.

"What you need to know about Japan's long-term interest rates is that, even after their recent rise, they remain artificially low. After all, as we've noted in this article, the Bank of Japan (BoJ) remains a large buyer of Japanese government bonds on a gross basis. Imagine how high Japanese yields would be if the BoJ truly withdrew from the market. Japan's "shadow" long-term yields—the yields that would equilibrate the market in the absence of BoJ bond purchases—are much higher than we're seeing. "

"The easiest way to see how deeply skewed Japan's long-term yields are is with the graph below. The horizontal axis shows total debt as a percentage of GDP. The vertical axis shows 30-year government bond yields. Eurozone countries are in red, other G10 countries are in blue, and Germany (DE) and Japan (JP) are in black. Germany's debt in 2024 was 65% of GDP, Japan's was 240%. Yet the yields on their 30-year government bonds are the same. This is a sign of major mispricing, showing that Japanese government bond yields are far below where they should be.

"Japan has options. The alternative is to let the market set yields without BOJ intervention, which would stabilize the yen but lead to a significant rise in long-term interest rates and a debt crisis. Or to cap yields, which would keep the yen falling. Sanae Takaichi hopes this will differentiate her from her predecessor, but expanding debt-fueled stimulus will only make things worse and demonstrate that the highest levels of government do not understand how precarious Japan's debt situation is. It is easier to remain trapped in the deception than to acknowledge the unpleasant reality.

 

③ October's national CPI growth rate accelerated to +4.9% year-on-year, driven by a sharply weaker yen.

 

The Ministry of Internal Affairs and Communications announced the October national consumer price index (core CPI excluding fresh food) on Friday, November 21st. The year-on-year growth rate expanded for the second consecutive month, reaching the 3% mark for the first time in three months. Core CPI rose 3.0% year-on-year, up from a 2.9% increase in September. This marks the 43rd consecutive month that the CPI has exceeded the Bank of Japan's target of 2%.

 

Food prices excluding fresh food remained strong, rising 7.2%, while rice prices rose 40.2%. Energy prices rose 2.1%. It's unfortunate that, like the Nikkei article and others, the Bloomberg article only focuses on the year-on-year inflation rate, pointing out that factors such as auto insurance premiums (up 6.9%) and hotel rates (up 8.5%) were driving the increase.

 

This is because Western media typically analyzes time series data trends not only in year-on-year comparisons, but also in seasonally adjusted month-on-month comparisons. The former can result in a delay in recognizing changes in economic indicators such as inflation over a six-month period compared to the latter.

 

Looking at month-on-month comparisons, it is noteworthy that the national CPI for October was +0.4% (+4.9% annualized) on an overall, core, and core-core basis, indicating a significant acceleration of inflation.

 

This coincides with the October PPI's +0.4% month-on-month change, and it is clear that behind this is the significant month-on-month decline in the dollar-yen exchange rate. The dollar-yen exchange rate went from around 148 yen at the end of September to around 154 yen at the end of October, a significant monthly depreciation of the yen and appreciation of the dollar of -4.1%.

 

At its October meeting where it decided to maintain the current monetary policy, the Bank of Japan emphasized that there would be disinflation (a decline in the rate of price increase) in the future. However, rice prices rose significantly in October, by 5.3% compared to the previous month (annualized increase of 85.8% compared to the previous month), and recorded a 40.2% increase compared to the same month last year.

 

④ The Significance of Q3 GDP, the First Real Negative Growth in Six Quarters

 

Now, the Cabinet Office released the preliminary GDP figures for the July-September 2025 quarter on Monday, November 17. While this represents the first quarter-on-quarter negative growth in six quarters, it is not a second consecutive quarter of negative growth and does not technically qualify as a recession.

 

Both personal consumption and corporate capital investment maintained positive growth compared to the previous quarter, indicating that the Japanese economy is not entering a structural contraction. Furthermore, there is a possibility that corporate capital investment and other forecasts may be revised upward in the upcoming second revision.

 

In any case, this was a temporary negative growth resulting from a combination of special factors, including a rebound decline in housing investment. Rather, we must not lose sight of the fundamental challenges facing the Japanese economy: the vicious cycle of currency depreciation and inflation.

 

In fact, the GDP deflator rose 0.6% quarter-on-quarter and 2.8% year-on-year, indicating that inflation continues to exceed 2% not only on a CPI basis but also on a value-added basis. This is not a temporary phenomenon, but a sign of structural upward pressure on prices.

 

To overcome the quadruple challenges facing the Japanese economy -- a declining birthrate, long-term stagnant consumption, a depreciating currency, and high prices -- an appropriate monetary and fiscal policy mix centered on the normalization of monetary policy and the abolition of the consumption tax is essential.

 

The current negative GDP growth is only a temporary phenomenon, but this situation should be seen as an opportunity to reaffirm Japan's path to recovery.

 

⑤ A New Cold War Between Japan and China Could Be the Final Blow to the Quadruple-Worse Japanese Economy

 

This morning's Asahi Shimbun editorial, "Japan-China Relations: Putting an End to the Fruitless Conflict," dated Tuesday, November 18th, was persuasive overall. However, it also contains some issues that cannot be overlooked.

 

This is because we must not overlook the fact that one of the causes of the fruitless conflict in Japan-China relations is Japan's own words and actions. The first step toward truly restoring trust is to frankly admit our fault and demonstrate a willingness to exercise self-control.

 

Simply seeking improvement in China's overreactions and hardline stance, which Japan cannot directly control, risks making the situation worse. Diplomacy should involve assessing the other party's actions while calmly adjusting one's own position.

 

In any case, the editorial is noteworthy, especially as it documents the rapidly escalating issues between Japan and China. Below are its key points.

 

Immediately after Prime Minister Takaichi shook hands with Chinese President Xi Jinping in late October and agreed to "build a constructive and stable relationship," Japan-China relations rapidly deteriorated.

 

The trigger was a comment made by Prime Minister Takaichi in a Diet response on November 7. Regarding China's response to a Taiwan emergency, she said, "If it involved the use of military force using battleships, it could pose an existential threat."

 

This comment goes beyond the views of previous administrations, including the Abe administration that enacted the security legislation. Moreover, by mentioning the name "Taiwan," it must be said that it unnecessarily escalated tensions.

 

The Chinese government has firmly maintained its position that "Taiwan is an inalienable part of China," and the Japanese government has pledged to respect this. Previously, Japan has limited its statement to the "importance of peace and stability in the Taiwan Strait," but these recent comments go beyond that.

 

China reacted strongly, summoning its ambassador to China to protest. Furthermore, it is difficult to understand the government's attempts to spread the conflict between governments to the private sector, such as by calling for people to refrain from traveling and studying abroad.

 

In addition, the abusive social media posts by Xue Jian, China's Consul General in Osaka -- "We will have no choice but to cut off that filthy head without a moment's hesitation" -- are completely unacceptable for a diplomat. Although the posts have been deleted, no explanation has been offered and the Chinese Ministry of Foreign Affairs has defended them, which is unacceptable.

 

It is only natural that the Japanese government protested against such provocative behavior. However, what is important here is for our country to maintain calm and restraint and avoid escalating the situation. In light of Xue's past behavior and remarks, there are calls for him to "exit the country," but hasty action could be counterproductive.

 

Japan-China relations can only be stabilized through mutual trust and moderate dialogue. Japan itself must first be deeply aware of the weight of its words and the historical context, and maintain a cautious diplomatic stance.

 

China's responses so far have been limited to (1) a de facto ban on imports of Japanese seafood, (2) calls for people to refrain from travel to Japan, (3) postponements of Japanese film releases and cancellations of events, and (4) the postponement of ministerial meetings at the request of China.

 

However, depending on Japan's future response, we cannot rule out the possibility that China may resort to its trump card, such as restricting or banning rare earth exports to Japan.

 

In any event, any further escalation of the Sino-Japanese cold war could have a fatally negative impact on the Japanese economy.

 

⑥ The Mystery of Japanese Stocks' Much-Hated Ups and Downs Over NVIDIA's Earnings

By the way, the wild fluctuations in the Nikkei Stock Average last week surrounding NVIDIA's earnings results, which could be described as "much-hated ups and downs," are thought to be primarily due to a combination of the following factors.

1. Background to the Rise (Excitement and Relief Over NVIDIA's Strong Earnings)

• NVIDIA's "Super" Strong Earnings

o At the start of the week (November 20th), NVIDIA's quarterly earnings, announced the previous day (November 19th, US time), showed record profits that far exceeded market expectations and provided a bullish earnings outlook.

o NVIDIA is the largest semiconductor (GPU) manufacturer driving the AI ​​boom, and its earnings results were closely watched worldwide as a test of the sustainability of the "AI boom."

• Impact on Semiconductor-Related Stocks in the Japanese Market

• Huge buying activity was concentrated in Japanese semiconductor-related stocks (such as Tokyo Electron, Advantest, and SoftBank Group, which are high-value stocks that contribute significantly to the Nikkei 225 index) where NVIDIA has many customers and suppliers, due to expectations of continued demand for AI.

• As a result, the Nikkei 225 index soared by more than 2,000 yen at one point, recovering to the 50,000 yen range. This likely included buybacks by investors who had reduced their positions due to excessive caution prior to the earnings announcement.

• 2. Background to the Sharp Drop (Lumbersome Reaction in the US Market and Rekindled Overheating)

• Sluggish Growth of NVIDIA Stock in the US Market

• Immediately after the earnings announcement, NVIDIA shares rose sharply in after-hours trading, but once full-scale US market trading began, their shares stagnated and ultimately closed in the red.

Because the market's strong earnings results had already priced in high expectations, the market viewed the news as "all the news has been released," and the "bubble-like overheating of the AI ​​boom" persisted.

 

• Renewed recognition of overheating in the Japanese market and profit-taking

• The decline in NVIDIA shares in the U.S. market eroded the sense of relief that the "AI boom is not over," and in turn rekindled concerns about overheating in Japanese semiconductor-related stocks.

• Because it came immediately after a surge, short-term profit-taking sales dominated, leading to a sharp drop of over 1,000 yen the following day (November 21).

• Other external factors (correction trend)

• The Nikkei average had already entered a correction phase since the beginning of the week due to concerns about prolonged U.S. monetary tightening, falling U.S. stock prices, and concerns over certain political and economic developments. The event occurred amid a weak market sentiment. While NVIDIA's earnings results temporarily offset this trend, subsequent developments accelerated the correction trend once again.

 

This series of movements shows that the "AI boom" is the most important theme in the stock market today, and that the financial results of NVIDIA, its core company, have an extremely large influence on Japan's major tech stocks and, by extension, the Nikkei Stock Average.

• Skyrocket: The enthusiasm was caused by the market's biggest concern (the end of the AI ​​boom) being temporarily alleviated by NVIDIA's extremely strong financial results.

• Sharp drop: The subsequent reaction of the US market led people to conclude that "stock prices are not growing despite good financial results = the sense of overheating is still strong," and short-term investors concentrated their selling efforts to take profits and avoid risk.

 

In short, amid a tug-of-war between "expectations" and "caution over overheating" regarding the huge theme of the AI ​​boom, stocks that contribute significantly to the Nikkei Stock Average reacted strongly to this, resulting in extreme price movements.

 

7. US Employment Growth Exceeds Expectations, Unemployment Rate Rise to 4.4% - Reflecting Labor Market Instability

 

To conclude this week's weekly report, let's take a look at the latest US economic indicators, as the government shutdown has finally been lifted and the publication of US economic indicators has finally begun to partially resume.

 

In the September US employment report, nonfarm payrolls increased by 119,000, beating market expectations. However, August's figure was revised downward to a decrease. The unemployment rate also rose 0.1 percentage point from the previous month to 4.4%, reaching its highest level in nearly four years.

 

By industry, healthcare and leisure/hospitality saw notable employment growth. Meanwhile, manufacturing, transportation/warehousing, and business services saw declines. Private sector employment increased by 97,000, the largest increase in five months and exceeding market expectations.

 

Notably, the labor force participation rate reached 62.4%, the highest level in four months. Women contributed to the increase. The "prime working generation" (ages 25-54) maintained its highest level in a year.

 

Average hourly earnings increased 0.2% from the previous month (compared to market expectations of a 0.3%), the slowest growth since June. Compared to the same month last year, they were up 3.8% (compared to 3.7%).

 

In the end, the September employment statistics may be seen as providing some reassurance that the US labor market was not in a state of collapse before the government shutdown.

 

By the way, the US Bureau of Labor Statistics announced on the 19th that it will not release October employment statistics. The October employment data will be incorporated into the November data, scheduled for release on December 16th.

 

Since the next FOMC meeting is on December 9th and 10th, this September's employment statistics will be the last to be released before the FOMC meeting. The release of the October CPI has also been canceled, with the November data scheduled for release on the 18th, after the December FOMC meeting.

 

Finally, as I pointed out at the beginning, it is truly unfortunate that Sanaenomics and Ueda's Bank of Japan appear to be heading in the exact opposite direction from the traditional path of economics, almost as if they are "crazy."

If things continue like this, I worry about what will happen to Japan as we approach the New Year holidays. A crash, dissolution of the Diet, or a general election is not out of the question.

In any case, let's overcome this greatest challenge since the war.

I believe that crisis is also a great opportunity.

 

Ｔomo Nakamaru, Former World Bank Economist

Japan’s ¥21 Trillion Stimulus: A Costly Detour from Real Reform

 

Japan’s ¥21 Trillion Stimulus: A Costly Detour from Real Reform

 

Japan’s government has unveiled a ¥21.3 trillion economic package aimed at easing the burden of persistent inflation. Yet despite its scale, the measures are unlikely to deliver meaningful relief to households. The problem lies not in the size of the spending, but in its design — temporary subsidies and one‑off handouts that fail to address the structural drivers of rising prices.

 

The centerpiece is a cash payment of ¥20,000 per child under 18. With no income limits, wealthy families benefit alongside the poor, while single adults and low‑income households without children are excluded. Local governments will receive ¥2 trillion to issue rice coupons or electronic vouchers, but these are quickly exhausted, leaving families once again exposed to inflated food prices. Energy subsidies, scheduled for January to March, will shave about ¥7,000 off household bills — a modest, short‑lived reprieve.

 

Such measures are palliative at best. The root cause of Japan’s inflation is the chronic yen weakness that began under Abenomics, which raised import costs across the board. Unless the yen is stabilized, fiscal giveaways will only postpone the pain.

 

Markets are already signaling alarm. Long‑term interest rates recently surged to 1.8 percent, a 17‑year high, as investors questioned the sustainability of ballooning deficits. Rising yields erode confidence in government bonds, risk further yen depreciation, and threaten to trap Japan in a vicious cycle: fiscal stimulus intended to curb inflation ends up fueling it.

 

The supplementary budget alone adds ¥17.7 trillion in spending, surpassing last year’s package under Prime Minister Shigeru Ishiba. More deficit bonds will inflate debt‑servicing costs, squeezing future budgets and undermining fiscal credibility.

 

What citizens demand is not another round of coupons or subsidies, but genuine relief from household pain. That requires monetary, not fiscal, adjustment. The Bank of Japan must resume rate hikes, gradually lifting policy rates to a level positive in real terms above the 2 percent inflation target. To offset the risks of higher rates and a stronger yen, a permanent cut in the consumption tax to 5 percent — ultimately moving toward abolition — would provide households with lasting support while restoring confidence in Japan’s economic management.

 

The Tokyo Shimbun deserves credit for being the lone major newspaper to highlight the need for BOJ rate hikes. While most commentary remains fixated on fiscal expansion, the editorial rightly identifies monetary policy as the decisive lever.

 

Japan’s leaders face a stark choice. They can continue down the path of ever‑larger stimulus packages, eroding fiscal trust and perpetuating yen weakness. Or they can confront the structural problem head‑on: stabilize the currency, restore monetary discipline, and deliver durable relief to households. The latter course is harder, but it is the only one that promises lasting stability.

Tomo Nakamaru

November 2025 Monthly: Abenomics expert Koichi Hamada, Professor Emeritus at Yale University, also warns that the Bank of Japan's monetary tightening is the priority.

 

November 2025 Monthly: Abenomics expert Koichi Hamada, Professor Emeritus at Yale University, also warns that the Bank of Japan's monetary tightening is the priority.

 

Thursday, November 13, 2025

 

① The Bank of Japan's monetary tightening is the priority for addressing rising prices.

 

Correcting the weak yen is essential to restoring the lives of people suffering from rising prices, and the Bank of Japan's monetary policy holds the key to this. Japan's policy interest rate is currently 0.5% per year. The interest rate gap with the United States is more than 3% and is the main cause of the yen's depreciation.

 

Coincidentally, last night on the New York market, the dollar briefly surpassed the 155 yen level. This is the first time the yen has weakened and the dollar has strengthened since February of this year. To overcome the situation where wage increases are unable to keep up with rising import prices for energy, food, and other items, the Bank of Japan needs to gradually raise interest rates.

 

However, since the inauguration of the Sanae Takaichi administration, the future of monetary policy has become uncertain. This is because there is a strong view that the Prime Minister hopes to support the economy and wish to continue ultra-low interest rates.

 

Despite the inflation rate exceeding the government and Bank of Japan's targets, his remarks that "it's too early to be complacent that deflation is over" were interpreted as a warning against raising interest rates.

 

At the Bank of Japan's Monetary Policy Meeting in October, the Bank of Japan decided not to raise interest rates further. Governor Ueda stated that he would "like to confirm further" the impact of the Trump administration's high tariff policy and companies' stance on wage increases ahead of the spring labor offensive. He also stated that "if we are satisfied with the economic data, we will adjust interest rates regardless of the political situation."

 

This is seen as a sign of intent to continue the interest rate hike course, but a lack of communication with the government could cause confusion in the market.

 

Takaichi has pledged to continue Abenomics and has demonstrated a stance of promoting active fiscal policy and monetary easing. Rising prices are intended to be addressed through fiscal policy measures such as gasoline tax cuts.

 

However, the economic environment has changed dramatically since the Abe administration. At that time, the economy was sluggish due to a strong yen and deflation, and monetary easing was necessary.

 

The inflation rate has now exceeded 2% for three and a half years, and interest rates that are too low compared to the real economy are causing adverse effects such as an excessively weak yen.

 

Hamada Koichi, professor emeritus at Yale University and a leading figure in Abenomics, also sounded the alarm, saying, "The Bank of Japan must first tighten monetary policy to curb inflation." For example, he said, "The Bank of Japan has forgotten its true mission of preventing inflation, fearing the side effects of interest rate hikes on stock prices and other factors. I hope the Prime Minister will also work to eradicate the inflation that is plaguing the public."

 

Professor Hamada continued, "Professor Kiyotaki Nobuhiro of Princeton University shares the same opinion. He wonders why monetary policy was not discussed during the LDP presidential election, and the only issue that was brought up was the reduction of gasoline taxes. He is absolutely right that "provision of subsidies or gasoline tax cuts (in times of inflation) is counterproductive and will only exacerbate inflation" (Keiyu, the October 2013 issue of the University of Tokyo Keiyu Association magazine).

 

In any case, price stability and sustainable economic growth cannot be expected with monetary policy that ignores changes in the economic environment.

 

② A Warning Against "Irresponsible Active Fiscal Policy"—The Dangers of Sanaenomics

The government's single-year target of achieving a primary balance surplus is not the critical issue. The real problem lies in the repeated, deeply flawed policy choices being made in response to the current Japanese economy, which is suffering from a "quadruple whammy" of declining birthrates, prolonged consumption stagnation, a depreciating currency, and rising prices.

 

In the current macroeconomic environment, inflation and the inflation gap are widening, with aggregate demand exceeding aggregate supply.

 

Under these supply constraints, "Sanaenomics," which re-launches the first and second arrows of Abenomics (monetary easing and fiscal spending expansion), is nothing more than a "double-down" tactic, a strategy that has already failed to achieve price stability and sustainable economic growth. This is extremely dangerous.

 

Even with regard to the third arrow, a traditional government-led growth strategy unrelated to the free creative destruction of the private sector could easily lead to the misuse of vested interests and likely end up being nothing more than a pipe dream.

 

Sanaenomics, which can be seen as a throwback to the original reflationary wing of Abenomics, which allowed the currency to fall and prices to rise, will not only further exacerbate the yen's depreciation, inflation, and bubble economy through fiscal expansion and monetary easing under supply constraints, but will also lead to a sharp rise in interest rates, threatening to plunge the Japanese economy into its greatest postwar crisis.

 

At a House of Representatives Budget Committee meeting on November 7, Prime Minister Takaichi withdrew the single-year target of achieving a primary balance sheet surplus for the national and local governments. This is nothing less than "irresponsible active fiscal policy." The government must recognize Japan's worst fiscal situation among major countries as its greatest weakness and chart a path to fiscal consolidation.

 

The primary balance sheet is an indicator of the soundness of the current administration's fiscal management, excluding past debt repayments and interest payments. It measures whether tax revenues and social insurance premiums can cover policy expenses such as social security, public works, education, and defense, and indicates a minimum level of fiscal discipline.

 

This primary balance target has been continually postponed since the Obuchi Cabinet in 1998 set a target of balancing the budget by fiscal 2008. The Abe Cabinet also postponed the target of achieving a surplus by five years in 2018, and is now aiming for a surplus by fiscal 2025.

 

However, the actual fiscal situation is even more severe. Due to rising interest rates, government bond expenses in fiscal 2026 are certain to exceed 32 trillion yen, approaching the 34.8 trillion yen requested by the Ministry of Health, Labour and Welfare. Ignoring the fiscal deterioration will rob policy flexibility and have direct implications for people's lives.

 

In any case, given the selection of members for the Council on Economic and Fiscal Policy and the Japan Growth Strategy Council, it is clear that the Prime Minister is clearly committed to returning to Abenomics. Fiscal expansion under supply constraints will encourage inflation, a weaker yen, and higher interest rates.

 

The Prime Minister has stated that he will review the primary balance "every few years," but details are unclear. The argument that there is no problem as long as nominal GDP growth exceeds long-term interest rates is also risky.

 

If confidence in government bonds declines, it is easy for interest rates and growth rates to reverse course. Ultimately, growth that relies on inflation could end up only passing the burden on to the people.

 

 

3. "Abolishing the Consumption Tax" Is the Strongest Growth Strategy - The Government's Growth Strategy is a Politics of Interest Without Creative Destruction

 

It's too hollow for the new Takaichi administration to simply use the banner of the "Japan Growth Strategy Headquarters." Furthermore, the Ishin Party's "12 Arrows" and the Takaichi administration's "17 Growth Strategy Areas" are both listic and over-the-top, like Christmas trees.

 

They lack focus and will likely be criticized as distracting tactics. Amid the ongoing vicious cycle of a weak yen, inflation, and a bubble, a government-led, handout-style growth strategy scheduled for next summer will not address the current challenges.

 

A fundamental shift in thinking is necessary to overcome the "quadruple whammy" of a declining birthrate, long-term stagnation in consumption, a depreciating currency, and rising prices.

 

Eliminating the Consumption Tax Is the Greatest Growth Strategy

 

I believe that the most powerful growth strategy would be to first permanently lower the consumption tax rate to 5%, then gradually lower it to 3%, and ultimately "eliminate the consumption tax."

 

This is because even a permanent reduction in the consumption tax rate to 5% would enable sustainable GDP growth of 3% annually, or approximately 18 trillion yen (= 600 trillion yen nominal GDP x 60% personal consumption x 5% consumption tax cut).

 

This is a far more direct and immediate solution than supply-side reforms or subsidy policies. Moreover, it is completely free of the possibility of vested interest-related corruption.

 

"Sanaenomics" is a rehash of Abenomics

 

The Takaichi administration's "17 areas" are nothing more than a rehash of the "third arrow" of Abenomics, and in reality, they could become a breeding ground for vested interest politics, just as they have been until now. A "friends-first" policy that includes party tickets risks tipping toward rent-seeking state capitalism.

 

Nobel Prize Theory Reveals a "True Growth Strategy"

 

The Agion-Howitt model, which won the 2025 Nobel Prize in Economics, suggests that Japan's traditional "growth strategy" may be unrelated to, and even harmful to, technological innovation.

 

At the heart of this theory is "creative destruction"—the process by which new technologies drive out old ones. To make this possible, the following elements are essential:

· Promotion of competition

· Entry and exit of companies (metabolism)

· Reward for risk-taking

·

However, Japanese policies, under the guise of maintaining employment and protecting local communities, intentionally halt this process of "destruction" by prolonging the life of zombie companies.

 

Furthermore, excessive industrial cooperation and government-led restructuring hinder healthy competition and remove incentives for innovation.

 

Shifting to an "Investor + Insurer" Model

Azion et al. list the following roles that the state should play:

1. Investor: Sow the seeds of creativity through investments in R&D and education.

2. Insurer: Provide retraining and income security for those displaced by disruption, supporting a society that is not afraid of challenge.

 

For Japan to truly grow, it must move away from the mindset of "protecting existing stability" and shift toward a system design that allows society as a whole to bear the "pain of disruption." This is a strong suggestion from the Nobel Prize theory.

 

Establishment of the Growth Strategy Headquarters and Concerns

 

The Takaichi Cabinet established the Japan Growth Strategy Headquarters on November 4 and held its first meeting. Seventeen fields, including AI, semiconductors, and shipbuilding, contain dual-use technologies that could be converted for military use. While this is understandable to a certain extent given the geopolitical risks, careful discussion is required while maintaining accountability to the public.

 

Furthermore, growth strategies should move away from stimulating demand through fiscal and monetary policy and shift toward supply-side reform. While the Prime Minister's references to "dramatically strengthening supply capacity" and "multi-year budget measures" are commendable, an institutional framework to complement the single-year budget system is essential.

 

It's Too Late to "Select and Focus"

 

The 17 areas include a mix of legacy projects and are hardly priorities. Many overlap with China's "Made in Japan 2025" initiative, so we should aim to "preempt" rather than follow. Fundamental research at science and engineering universities and support for corporate R&D will be the seeds of future growth.

 

Changing Fiscal Indicators and the Dangers of Inflation Dependence

 

There are also concerns about the move to change the measure of fiscal soundness from the primary balance to a ratio of nominal GDP. Inflation-driven increases in nominal GDP could backfire in the form of increased burdens on low-income earners.

 

As such, the current "growth strategy" harbors structural problems and falls far short of truly sustainable growth.

 

The key to paving the way to the future is to embrace creative destruction and design systems that support its pain across society.

 

④ Gasoline tax cuts are a drop in the bucket—examining the true nature of inflation taxes and monetary policy.

 

The November 8th (Sat) Mainichi Shimbun editorial, "Abolishing the temporary gasoline tax rate: leaving the problem behind is irresponsible," has some merit. However, its assessment as a measure to combat rising prices must be considered insufficient. The policy effect of abolishing the temporary tax rate would be no more than 1-2 trillion yen.

 

This is a drop in the bucket compared to the 11 trillion yen annual "inflation tax." This inflation tax can be calculated simply by multiplying personal consumption, which accounts for approximately 60% of Japan's 600 trillion yen nominal GDP, by the current 3% inflation rate. In other words, the government is robbing the public of approximately 11 trillion yen annually through inflation-related consumption activities.

 

What is a truly effective measure to combat rising prices?

 

The only option is to permanently lower the consumption tax rate to 5%. This will result in a consumption tax cut of 600 trillion yen x 60% x 5% = 18 trillion yen, far exceeding the burden of the inflation tax.

 

Furthermore, rising gasoline prices are not a problem of crude oil prices. In dollar terms, crude oil prices have been on a medium-term downward trend since 2022. Japan is the only G7 country where gasoline prices are particularly soaring.

 

The cause of this is monetary policy that allows the yen to weaken. The government and the Bank of Japan have continued to tolerate the yen's depreciation without setting a policy interest rate that exceeds the inflation rate.

 

Abenomics' low interest rate and yen-weakening policy has finally exceeded the 2% inflation target since April 2022, creating a vicious cycle of yen depreciation, inflation, and asset bubbles that is becoming uncontrollable.

 

And now, "Sanaenomics" has emerged, further accelerating the misguided Abenomics doubling down tactics. This is the height of irresponsibility and nothing short of runaway economic policy.

 

Finally, we must point out the environmental issues associated with abolishing the provisional gasoline tax rate. The government has offered no explanation for this measure, which contradicts global warming countermeasures.

 

According to estimates by the National Institute for Environmental Studies, abolishing the provisional tax rate will increase CO₂ emissions by 6.1 million tons in 2030. This hasty tax cut, which ignores the loss of road construction funding, the setback in the spread of EVs, and the inconsistency with decarbonization policies, is nothing less than "irresponsible ignoring the problems."

 

In reality, a review of the gasoline tax should be discussed within the context of a comprehensive redesign of the energy tax system, including the introduction of carbon pricing. The cost of addressing aging roads should also be borne fairly by all vehicle users who benefit from its benefits.

 

Both the ruling and opposition parties have a responsibility to present a comprehensive tax system that looks to the future, rather than simply pursuing short-term popularity.

 

⑤ A Warning About Sanaenomics Reversing History

With the inauguration of Prime Minister Sanae Takaichi, the cabinet's approval rating reached a high of 74%, and the Nikkei Stock Average reached the 50,000 yen mark for the first time in history.

 

Coupled with the symbolism of her being the first female prime minister, a sense of excitement for "change" seems to be spreading among voters and the market. However, expectations often turn into illusions. Forgetting the lessons of the past and "doubling down" will eventually lead to failure. This is clear when we look back at the trajectory of Abenomics.

 

Lessons from Abenomics: The Turning Point Between Success and Fall

 

Abenomics emerged in early 2013 amid a stagnant situation characterized by a strong yen and a deflationary recession. Through bold monetary easing and flexible fiscal stimulus, inflation of approximately 2% and economic recovery were achieved in the first year, fulfilling the scenario outlined in my book, "The Great Turnaround of the Japanese Economy!" (Tokuma Shoten).

 

However, as the book warns, the 8% consumption tax hike in 2014 marked a turning point, and Abenomics fell into a vicious cycle of a weak yen and long-term consumption stagnation. The declining birthrate has not been halted, and the original goals of price stability and sustainable growth have not been achieved.

 

Macroeconomic policy is always "conditional."

 

The optimal fiscal and monetary policy solutions vary greatly depending on whether we are experiencing inflation or deflation, an inflation gap, or a deflation gap.

 

The Perils of Sanaenomics: Doubling Down on the Failed Abenomics

 

Japan in 2025 will be in a situation completely opposite to that at the start of Abenomics. It faces a "quadruple whammy" of inflation and an inflation gap, a declining birthrate, long-term consumption stagnation, a weak currency, and high prices.

 

In this environment, replicating the first arrow (monetary easing) and second arrow (fiscal expansion) of Abenomics would lack economic rationality.

 

Despite this, Sanaenomics appears to be an attempt to "double down" on Abenomics.

 

This is a historically risky gamble, further strengthening an already failed strategy.

 

Sanaenomics aims to "put cannons over butter."

 

Furthermore, if we compare it to the prewar policy of "enriching the country and strengthening the military," Sanaenomics is a policy of choosing "cannons over butter."

 

Increasing defense spending will waste economic resources and further strain people's lives in the form of an inflation tax.

 

As a result, we may be approaching the worst-case scenario of a "powerful country, poor people."

 

Behind the Stock Market Rise: The Gap Between Expectations and Reality

 

Since the Takaichi administration took office, stock prices have soared, and corporate management is increasingly focusing on capital costs and ROE (return on equity).

 

The price-earnings ratio (PER) has reached approximately 19x, the highest level since the Abenomics era. However, sustained stock price growth requires substantial corporate reform and improved profitability.

 

The stock market boom during the Abenomics era, fueled by improved business performance due to a weak yen, ran out of steam after three years. Without innovation and structural reform, expectations will soon turn to disappointment.

 

Don't Reverse History

 

As symbolized by Prime Minister Takaichi's English skills, Sanaenomics reveals the three major flaws common to Japanese leadership: unfounded overconfidence, arrogant ignorance, and bottomless irresponsibility.

 

If things continue as they are, this administration will likely end up being as short-lived as the "Truss Shock" caused by the Truss administration in the UK.

 

To avoid disappointing people's expectations for change, realistic and sustainable policies that look to the future are needed, rather than reversing history.

 

Expectations can only be supported by actual results. Now is the time for true change, not illusion.

 

⑥ The monetary illusion of the "high market trade" caused by distorted monetary policy

Despite inflation exceeding 2% for 43 consecutive months since April 2022, the Bank of Japan (BOJ) has continued to brazenly claim that "underlying inflation has not reached 2%." The very person responsible for this distortion of perception is BOJ Governor Ueda.

 

Furthermore, Japan's real GDP has recorded positive growth for five consecutive quarters, and the GDP gap is estimated to be +0.3% for the April-June period of this year. The Cabinet Office has clearly stated that we are in a state of inflation gap, where total demand exceeds total supply.

 

Despite this, the BOJ continues to assert the exact opposite, claiming a "deflationary gap of -0.3%." This discrepancy in perception suggests that BOJ Governor Ueda is effectively supporting the "high-pressure economy" policy that is aligned with "Sanaenomics."

 

In other words, the BOJ is pandering to "fiscal dominance," which prioritizes short-term economic stimulation and election strategies through interest rate suppression over the true mission of monetary policy: price and currency stability.

 

A policy interest rate that exceeds the inflation rate is a prerequisite for price stability (the Taylor principle). Among the G7 countries, only the Japanese government and the BOJ have turned their backs on this principle.

 

Raising the current policy interest rate from 0.5% to 0.75% would be a drop in the bucket compared to the current inflation rate of 3%.

 

In theory, price stability cannot be achieved unless the policy interest rate is gradually raised to above 3% over a period of around two years. As long as the BOJ maintains a 2% inflation target, it must aim for a medium- to long-term policy interest rate level above 2%.

 

Without a clear neutral interest rate and transparent, rules-based monetary policy, it is only a matter of time before the "high market trade" shifts from expectations to disappointment.

 

Meanwhile, the Tokyo stock market has been booming since the inauguration of the Takaichi administration. The Nikkei average continued its upward trend after hitting the 50,000 yen mark for the first time on October 27, soaring to 52,411.34 on the 31st. This marked a record monthly increase of over 7,400 yen.

 

International investors are pinning their hopes on Prime Minister Takaichi's economic growth policy, which advocates a "responsible and proactive fiscal policy." The Tokyo market, which had long been perceived as undervalued, is being bought up, hence the nickname "Takaichi Trade."

 

However, this stock price rise is driven by expectations and is undeniably disconnected from the real economy. While investment in growth sectors like AI and easing US-China friction are behind this, we must be cautious about market overheating. If the impact of Trump's tariffs or a resurgence of US-China economic stagnation were to occur, Japanese companies' exports would be hit hard, potentially causing a reversal of the stock market rally.

 

What the Takaichi administration needs is a shift to a sustainable growth trajectory. To overcome the current situation in which wage increases are unable to keep up with rising food prices, measures to combat rising prices and improving the investment environment in growth sectors are urgently needed.

 

Rather than simply handing out budgets, a medium- to long-term growth strategy that carefully examines effectiveness and funding sources is essential. The distance between the Bank of Japan and Prime Minister Takaichi regarding monetary policy also bears close attention. While the Bank of Japan is exploring the possibility of further interest rate hikes, Prime Minister Takaichi remains cautious.

 

However, if interest rate hikes become more distant, there is a risk that the yen will continue to weaken, accelerating inflation through rising import prices. While the Bank of Japan decided not to consider further interest rate hikes at its recent meeting, its responsibility lies in calmly assessing the actual state of the economy, not politics, and working to stabilize prices. We must not forget this principle in the conduct of monetary policy going forward.

 

⑦ What Lies Beyond "Unfounded Enthusiasm"

The November 2nd (Sunday) Tokyo Shimbun editorial, "Thinking at the Beginning of the Week: What Lies Beyond 'Unfounded Enthusiasm'," is a very persuasive, calm warning against the current stock market surge. I, too, believe that the current surge in Japanese stocks is nothing but unfounded enthusiasm.

 

The main reason for this is the fact that the real policy interest rate is significantly negative (nominal 0.5% - inflation rate of approximately 3% = -2.5%).

 

Theoretical stock prices are calculated by discounting future dividends and profits by interest rates, but under negative real interest rates, stock prices could theoretically diverge infinitely. This is the fundamental background to the stock market surge in the fall of 2025.

 

In addition, the vicious cycle of a weak yen and inflation is worsening. Despite inflation exceeding the 2% price stability target for 43 consecutive months, the Bank of Japan is reluctant to further raise interest rates.

 

Meanwhile, the government has shifted responsibility for monetary policy away from the Bank of Japan and is moving forward with "Sanaenomics," which aims to stimulate aggregate demand by using both fiscal and monetary policy to drive a high-pressure economy. This is nothing more than dangerous economic management that refuses to acknowledge the failure of Abenomics and instead seeks to double down on it, further increasing its stakes.

 

On the other hand, at the FOMC meeting in late October, expectations for a U.S. interest rate cut receded, and concerns about a weaker dollar are fading. This could once again intensify pressure for a weaker yen due to factors both in Japan and the U.S.

 

Furthermore, negative real interest rates tend to lower storage costs and push up prices for commodities such as rice, which have low supply elasticity. A resurgence of the Reiwa-era rice riots is by no means unfounded.

 

Under these circumstances, the Bank of Japan appears to have abandoned its role as a guardian of prices and the currency and reduced itself to a government watchdog.

 

The Japanese people are suffering the triple whammy of a weak yen, inflation, and a bubble economy, and the double whammy of a high consumption tax and an inflation tax is putting even more strain on their lives.

 

If things continue as they are, our country could once again be engulfed in the flames of inflation and reduced to ashes.

 

Stock prices finally topped 52,000 yen at the end of October, far surpassing the bubble-era peak of 38,915 yen at the end of 1989. This is an astonishing increase of approximately sevenfold in 16 years from 7,054 yen after the Lehman Shock, but wages have remained roughly flat, diverging from people's actual living standards.

 

Japan's Engel coefficient is the highest among the G7 countries, and statistics indicate that economic hardship is spreading. We should recall the British disease and the pound crisis of the past. The Thatcher administration rebuilt the economy through deregulation and the introduction of foreign capital, but this may have come at a cost to people's lives.

 

Incidentally, Takaichi Sanae's positioning of former British Prime Minister Thatcher (1979-1990) as the "ideal politician" can be understood as superficial conservatism or an admiration for a "strong leader." However, when we look at the substance of their policy philosophies, the two are almost polar opposites.

 

Thatcherism, a standard-bearer of neoliberalism alongside Reagan, thoroughly promoted "small government," "deregulation," "privatization," and "balanced budgets." She eliminated state intervention as much as possible and emphasized competition and efficiency based on market principles.

 

Sanaenomics inherits the Abe administration's state capitalist framework, and appears to be the epitome of "big government," with its bold monetary easing, active fiscal policy, industrial intervention under the guise of a growth strategy, and the preservation of vested interests and nepotism. Her advocacy for the integration of fiscal and monetary affairs is the direction Thatcher was most wary of.

 

Ignoring such ideological differences and insisting on "following Thatcher's example" is political rhetoric that lacks respect for history and ideals, and it is no exaggeration to say it is a bad joke.

 

Similarly, in Japan, the policy of weakening the yen since Abenomics has led to rising stock prices, but the benefits have been unevenly distributed among the wealthy and large corporations.

 

Now is the time to create an environment that attracts sustainable investment rather than speculation. By distributing profits fairly and raising the bottom line of national income and consumption, we must create a virtuous cycle of funds.

 

Rather than getting too excited or upset about stock prices, the first step to Japan's revival is to normalize interest rates and combine this with abolishing the consumption tax to offset the risk of a strong yen causing a recession -- and I want to share that conviction now.

 

Otherwise, we cannot help but fear that Sanaenomics, which displays arrogant ignorance by ignoring and downplaying even the basics of economics, especially (open) macroeconomics, could sooner or later trigger a recurrence of the Truss Shock that occurred in the UK in 2022.

 

Tomo Nakamaru, Former World Bank Economist