When the new prime minister of Japan, Sanae Takaichi, assumed her duties, she pledged that her priority would be the improvement of the Japanese economy.
However, her statements on Taiwan, which preceded her appointment, and any possible new mishandling, could have significant costs not only for Japan, but also for the Asia - Pacific region, and even on a global scale.
Analyst Dr. Dan Steinbock, in his article in Modern Diplomacy, notes that on 21 October Takaichi, president of the ruling Liberal Democratic Party (LDP), was elected as the 104th prime minister of the country, the first woman to hold the highest office.
Just one month later, in her first speech in Parliament, Takaichi, 64 years old, stated that Japan may become militarily involved in a conflict between China and Taiwan.
These positions triggered a diplomatic crisis, with Japan–China relations collapsing to their lowest point in recent years.
For Steinbock, this crisis did not come suddenly.
Takaichi needs a geopolitical clash in order to shift attention away from Japan’s deep, long-standing and structural economic problems.
Political shift to the hard right
Instead of maintaining cooperation with the centrist Komeito party, Takaichi formed a coalition government with the center-right Nippon Ishin party.
After 26 years, the LDP–Komeito coalition came to an end, leading the LDP to a clear strategic and ideological shift to the right.
Initially, the popularity of Takaichi’s government was at particularly high approval levels, from 65% to 85%, marking one of the best starts for a Japanese government in the last two decades, especially among younger and middle-aged voters.
Citizens give overwhelming priority to issues of inflation (84%), economic support (64%), social benefits and security (53%) and national security (47%).
Everyday issues far outweigh military matters.
Only 17% of Japanese approved the appointment of Hagiuda Koichi to the position of executive deputy cabinet secretary.
In the past he had been at the center of a “black funds” scandal, while after the assassination of Shinzo Abe, the LDP’s ties with the controversial Unification Church were re-examined.
Hagiuda maintained close links with the organization, which sparked negative reactions.
At the same time, both Takaichi and Hagiuda participate in the nationalist and far-right non-governmental organization Nippon Kaigi.
The organization promotes the revision of Japan’s post-war history, the re-deification of the role of the emperor, the downgrading of gender equality, official visits to Yasukuni Shrine, and also denies historical crimes such as the forced prostitution of the “comfort women” in World War II.
Nippon Kaigi has a strong presence in the Japanese parliament and six Japanese prime ministers have been members.
Takaichi’s ultimate goal is the full normalization of Nippon Kaigi and the deepening of military cooperation with the United States.
Sell-off in Japanese bonds
After all this, the tremors are strong, especially in Japan’s government bonds, amid increasing speculation about an early interest rate hike by the Bank of Japan.
The yield on the 10-year government bond rose to as high as 1,875%, the highest level since 17 June 2008.
At the same time, the yen strengthened to 155,37-37 per dollar, from 156,28-31 at the same time on Friday.
In a speech, BOJ governor Kazuo Ueda stressed that the central bank will make an “appropriate decision” on whether to raise interest rates at its 18–19 December policy meeting.
In a subsequent press conference, he warned that delaying a rate hike could fuel inflation and cause confusion in the market.
Structural economic illness
Recently, the Japanese government approved a support package of 135 billion dollars to tackle high prices and boost growth, with strategic investments in semiconductors and artificial intelligence.
Takaichi had been pushing for a “responsible fiscal policy,” but it is not clear how she will balance fiscal prudence with new spending.
Japan has the largest public debt in the world, approaching 10 trillion dollars, more than double the size of its economy.
The reason the economy has not collapsed so far, despite the enormous public debt, is that most of it is held by domestic investors and interest rates have remained low. Although the debt-to-GDP ratio has fallen from the first phase of the pandemic to today, Takaichi’s new fiscal moves may reverse the trend.
Economic stagnation, population decline and demographic aging, combined with chronic stimulus packages and increased social benefits, have further increased debt pressure.
For Steinbock, the new fiscal expansion carries serious risks, rising interest rates and a weakening yen, resulting in a new wave of inflation, loss of investor confidence, or even capital flight, with broader economic side effects.
The persistent contradiction of the LDP
The first signs point to increased anxiety in Japan’s markets.
Yields on 10-year JGBs have recently risen to 1,835%, a level not seen since 2008.
The yen temporarily weakened to 157,90 per dollar, while bets on a rate hike by the BOJ show hesitancy despite inflation at 3%.
If the credibility of monetary and fiscal policy is eroded, the weakening yen may trigger a new wave of rising prices, reducing the effectiveness of support packages.
This would force Takaichi’s government to push for more stimulus, putting medium and long term pressure on economic and financial stability. This is the major contradiction that Abe had managed to control, but Takaichi is starting from a much more fragile base, with clear signs of weakness in the currency.
Takaichi’s ultra-conservative profile
Takaichi, coming from a middle-class family with two working parents, grew up in a particularly conservative environment. She studied at university and worked in the United States as a Congress fellow for Democratic representative Pat Schroeder.
Returning to Japan, she built a career at TV Asahi and entered politics in the early 1990s. Although initially elected with a liberal starting point, after the elections she moved to the LDP.
The support of Shinzo Abe put her in the position of political successor as early as 2010.
Her right-wing identity was symbolically linked to visits to Yasukuni Shrine, while in 2011 she was even photographed with the leader of a small Japanese neo-Nazi party, Kazunari Yamada.
After three failed bids, the fourth made her the first woman prime minister of Japan, at a time when the US–Japan alliance is considered by Takaichi to be a pillar that can enter a “golden age,” as she herself stated at the American naval base in Yokosuka.
Three possible scenarios
Today Takaichi faces three possible developments.
In the first scenario, she will seek careful de-escalation of tensions through dialogue.
Japan remains deeply dependent on Chinese tourism, seafood exports and raw materials such as rare earths, while China is its largest trading partner, accounting for more than 20% of Japan’s trade flows in 2024.
De-escalation would be supported by the United States for reasons of regional stability, but it is not Takaichi’s ideological goal, rather an economic necessity driven by public opinion.
In the second scenario, prolonged instability will be sustained with waves of minor tensions and confrontational rhetoric without a complete rupture.
This would allow China to maintain economic pressure, Takaichi’s government to normalize increased military spending and alignment with Washington, while markets would punish the country with persistent uncertainty and pressure on GDP.
The third scenario, full escalation, would mean further rupture of diplomatic relations and reinforcement of military posture, with possible naval operations in disputed waters.
Takaichi would commit even more deeply to the Taiwan issue, crossing China’s red line. Although the Trump administration tends to regionalize conflicts, full escalation would drastically hit Japan’s growth, reduce the effectiveness of the economic package, undermine business and investor confidence and increase the risk of capital flight.
Decisive weeks for markets and diplomacy
China’s decision to bring the issue to the UN forces Takaichi’s government into a defensive diplomatic position.
The coming weeks will be critical, as new mistakes could accelerate geopolitical and economic erosion.
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