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On Tuesday, the Takaichi cabinet approved the government’s Basic Policy on Economic and Fiscal Management and Reform and growth strategy, setting the stage for the biggest test for Prime Minister Takaichi Sanae as she seeks to reorient Japan’s budget in favor of strategic investments in the face of mounting fiscal constraints and conflicting and potentially irreconcilable demands.
Back in February, after Prime Minister Takaichi Sanae led the Liberal Democratic Party (LDP) to an election victory in which it won its largest-ever majority in the House of Representatives, I wrote an essay on why it was important to take Takaichi at her word when she talked about “responsible fiscal expansion.”
…it is imperative to take Takaichi seriously when she says that she wants her government to increase government spending on her policy priorities. To argue that she will pivot to fiscal orthodoxy after the general election would require explaining why she would break with ideas she has advocated for years; why she would break with her closest political allies (and her late mentor), who share these ideas; and why she would reverse course even when the public is broadly tolerant of this approach. Of course, it also means explaining why she would carry out a fiscal u-turn after campaigning on fiscal expansion led the LDP to its largest-ever electoral victory. Perhaps she will yield in the face of financial market pressure or, less likely, critical stances taken by two of the key architects of Abenomics, economist Hamada Kōichi and former BOJ governor Kuroda Haruhiko.8 Absent a major shock, her press conference Wednesday suggests that she is gearing up for a campaign to curb MOF’s power and structurally alter her government’s ability to spend on its priorities. No one should be surprised if she presses ahead with this approach even at the risk of an adverse market reaction.
On Tuesday, 21 July, the Takaichi government took a major step towards realizing the prime minister’s ambitions when it approved the government’s first Basic Policy on Economic and Fiscal Management and Reform – the honebuto, which provides guidelines for the next fiscal year’s budget – and a new growth strategy aimed at realizing a “strong and prosperous Japan.” The documents, including related fact sheets and a regional growth strategy, are available here.
These documents are notable mostly for how little they have varied from what the prime minister herself has expressed as her wishes not just since becoming prime minister but in the years leading up to her successful leadership bid in 2025. The honebuto and the growth strategy – the former is essentially a framework for implementing the program outlined in the latter – are effectively a personal manifesto for Takaichi’s vision, arguing that Japan’s “excessive austerity” (thanks to the Ministry of Finance’s [MOF] power) has resulted in under-investment in critical sectors that has left Japan at risk of falling behind in a fiercely competitive global economy and literally vulnerable to new national security threats in its immediate regional environment. The honebuto explicitly says that Japan is in an industrial policy arms race and the current ways of doing fiscal policy have prevented Japan from competing. “There is a trend of other advanced industrial countries pursuing industrial policy that uses long-term and large-scale fiscal outlays through public-private coordination to address problems that cannot be resolved by simply entrusting it to the market,” it notes.
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