Japan's Takaichi Fast Headed For A Liz Truss Moment

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All this has markets buzzing about a possible“Liz Truss moment” in Japan.“The dynamics,” says Jeroen Blokland, founder of the Blokland Smart Multi-Asset Fund,“are starting to look uncomfortably similar to those in the UK in 2022, when then–Finance Minister Kwasi Kwarteng and Prime Minister Liz Truss – who would go on to become the shortest-serving UK prime minister in modern history – announced an unfunded tax cut package.”

The bond market meltdown that followed had lawmakers showing Truss the door after just 49 days in office. Now, Takaichi has the unenviable job of walking a tightrope between skittish voters and bond investors impatient with Tokyo's chronic complacency.

All this is has put Bank of Japan Governor Kazuo Ueda in a tight spot. In December, Ueda's BOJ managed to hike rates to 0.75%, a 30-year high. The BOJ's preference is for continued tightening moves.

Yet, policymakers are cognizant that, with inflation near 3%, GDP flatlining, real wages falling for at least the first 11 months of 2025 and bond yields surging, latitude to hit the monetary brakes now is limited.

The BOJ is in a state of“hawkish discomfort with cautious phrasing on Japan's inflation prospects,” says Naomi Fink, strategist at Amova Asset Management.

“Although the consensus vote reduces policy uncertainty, the bias remains tilted toward hikes, with potential upside inflation and growth surprises leaving the door open to earlier normalization of rates than currently projected,” Fink said.

Sam Jochim, an economist at EFG Asset Management, adds that“even after the latest interest rate increase, the BOJ noted that real interest rates are expected to remain very low and that monetary policy remains accommodative. The decision in December can therefore be likened to the BOJ taking its foot off the accelerator rather than stepping on the brake.”

Part of the issue is that even many of Takaichi's Liberal Democratic Party members realize that 26-plus years of zero interest rates have backfired. In this way, the plunge in the yen over the last decade is now coming back to haunt Tokyo.

The ways in which a weak yen deadened the urgency to level the playing field and increase competitiveness explain why Japan Inc today is watching with alarm as Chinese electric-vehicle maker BYD and artificial-intelligence upstart DeepSeek shake up their respective industries, in the way Japanese firms might have in the 1980s.

The challenge now confronting Ueda's BOJ is that the government is, once again, failing to do its part. Since 1999, when the BOJ first cut rates to zero, one government after another came and went without major economic improvements.

Unless Takaichi takes bold steps to level business playing fields and recalibrate regulatory and tax priorities away from the legacy corporate giants toward startups bent on disrupting Japan Inc, ultralow rates have zero chance of raising Japan's competitive game.

Takaichi is the latest leader to assume the let-the-BOJ-take-the-lead position and to switch Tokyo's fiscal-spending machine back on. Not surprisingly, the bond vigilantes are fed up, having seen this movie too many times before. A weaker yen now will likely just further deaden Japan's animal spirits, while adding to Tokyo's massive debt pile.

Takeshi Yamaguchi, chief Japan economist at Morgan Stanley MUFG, argues that that although Takaichi's announcement that she is considering eliminating the consumption tax on food products“came as a surprise to us and undeniably had a negative impact in terms of policy predictability and stability, it appears that her intention not to widen the fiscal deficit has not been fully conveyed to investors.”

More likely, it's that investors lack trust in the LDP's assurances that the debt isn't about to explode.

It's still early days for Takaichi, who took office on October 21. Yet any of the“Abenomics” reforms she's pledged to implement would be destabilizing and hard to ram through a change-averse parliament, never mind a few of them.

Abe failed to put any of these wins on the scoreboard from 2012 to 2020. If Takaichi is going to do any better, she will have to pick up the pace on reforms. Other than making nice with US President Donald Trump and running afoul of China with comments on Taiwan, it's hard to see what she's been up to.

Who knows, the gamble Takaichi is taking could work. Her hope is to win a clear majority in the lower house of parliament to set her fiscal spending plans in motion. But she still must contend with a minority in the upper house, which won't be easy to sway or navigate.