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