[Kangkook Lee's column] Will the bet on 'Takaichinomics' pay off?

Dr. Kangkook Lee is Professor of College of Economics at Ritsumeikan University in Japan and Affiliated Research Fellow at CUKPE

Five days before South Korea's Lee Jae-myung administration announced three major mega-projects centered on semiconductor companies on the 29th of last month, Japan's Takaichi administration also unveiled a large-scale investment plan. It publicly declared that the public and private sectors would jointly invest 370 trillion yen in strategic industries, such as artificial intelligence (AI) and semiconductors, by 2040. The Japanese government had already selected 17 strategic industries and 61 key items to be fostered through government-private cooperation on March 10. The list is extensive and detailed, notably encompassing a wide range of industrial sectors, unlike South Korea's approach. Furthermore, the Japanese government appears to be more proactive regarding public investment compared to South Korea. The Takaichi administration announced plans to carry out public investments through annual fiscal spending of over approximately 10 trillion yen to support the 370 trillion yen investment plan.

Rapidus is a prime example illustrating this plan. This semiconductor foundry was established in 2022 through a joint investment by the Japanese government and eight major private companies, including Toyota and Sony. True to its name, Rapidus rapidly built a factory in Hokkaido, launched 2-nanometer prototypes based on technical support from IBM, and aims for mass production next year. To date, the Japanese government has provided the company with approximately 2.6 trillion yen in funding, including equity investments and subsidies . However, concerns are being raised regarding the success of mass production and securing customers. Much like Rapidus, the future of the Japanese economy faces significant uncertainty. Will Prime Minister Sanae Takaichi's ambitious fiscal expansion and growth strategy be the solution for the revival of the Japanese economy, or is it a dangerous gamble?

■ Takaichinomics, a Single Bullet

The core of 'Takaichinomics' is to emphasize economic security and promote corporate investment and growth through industrial policies based on active fiscal expansion. Takaichi's economics is an economic strategy that inherits the spirit of Abenomics, which aimed to revive the Japanese economy, while being differentiated from former Prime Minister Kishida's 'New Capitalism'.

Reflecting on the limitations of Abenomics in improving the lives of the people, the previous Kishida administration prioritized wage increases and inclusive reforms. However, current Prime Minister Takaichi has set economic growth as his top priority and places investment promotion at the center of his policy. He established the Japan Growth Strategy Headquarters within the Cabinet and personally leads the Japan Growth Strategy Council. Meanwhile, while Takaichinomics inherits the broad framework of Abenomics, it is differentiated by placing much greater emphasis on fiscal expansion—the "second arrow" that Abe failed to fully implement. Whereas Abenomics aimed to fire three arrows—monetary easing, fiscal policy, and structural reform—Takaichinomics effectively possesses a single bullet: "fiscal spending and public investment" for industrial policy. Immediately after taking office in November 2025, Prime Minister Takaichi announced an economic stimulus package worth approximately 21 trillion yen. Takaichi defined this as "responsible active fiscal policy" and expressed his determination to significantly expand the government's role in supporting economic growth.

In particular, Prime Minister Takaichi has adopted economic security as a core policy objective against the backdrop of a global economy intensifying post-war geopolitical conflicts and supply chain instability, seeking to promote investment through close cooperation between the government and the private sector. This policy direction directly reflects the changes in the global economy, where the era of neoliberal globalization is fading and active state intervention and industrial policies are making a comeback. This is also significant given that during the Abenomics period, private investment failed to grow as much as expected despite substantial increases in corporate profits. Recently, through the revision of the Corporate Governance Code aimed at improving corporate governance, the Japanese government is striving to redirect accumulated corporate profits toward capital investment and research and development spending, rather than emphasizing only shareholder interests.

From a macroeconomic perspective, the theoretical basis of Takaichinomics is the concept of a "high-pressure economy," which refers to a state where actual Gross Domestic Product (GDP) exceeds potential GDP. This concept was proposed by Janet Yellen, who served as Treasury Secretary during the Biden administration. Recent macroeconomic studies report that demand-side shocks, such as the global financial crisis, generate hysteresis effects—stimulating a decline in corporate investment in new technologies or an increase in long-term unemployment—thereby slowing productivity growth and negatively impacting economic growth rates. In other words, demand-side shocks can also affect the supply side. Yellen argued that to reverse these hysteresis effects, if the government maximizes aggregate demand through aggressive fiscal expansion, aggregate supply will follow suit.

In Japan, Aida, Chief Economist at Crédit Agricole CIB Tokyo and economic advisor to Prime Minister Takaichi, is actively advocating this logic. The argument is that if the government increases aggregate demand through fiscal expansion, corporate investment will be stimulated, the labor market will tighten, and productivity and potential growth rates will rise simultaneously. From this perspective, if economic growth can improve public finances, the government does not need to be overly concerned about fiscal deficits and national debt. The Japanese government also forecasts that if its growth strategy is successful, the potential growth rate will exceed 1.5% in the late 2030s, and the government debt ratio will stabilize.

■ Questions Raised for Takaichinomics

However, two important questions arise regarding Takaichinomics. The first is whether Japan has sufficient fiscal capacity to sustain such ambitious fiscal expansion. According to the International Monetary Fund (IMF), Japan's government debt is already projected to reach approximately 207% of GDP by 2025. This figure was even higher prior to the IMF's statistical revision for 2026.

Of course, the Japanese government also has grounds for confidence. Since 2023, inflation has risen rapidly, leading to an increase in Japan's nominal GDP and tax revenues, and consequently, the fiscal deficit relative to GDP has significantly narrowed. The IMF stated that Japan's fiscal deficit is projected to be approximately 1.1% of GDP in 2025, a level lower than that of other developed nations. Furthermore, the Japanese government argues that although its total debt ratio is very high, its net debt—total debt minus assets—is at a manageable level because the government holds massive financial assets. By 2025, the Japanese government's net debt is estimated to be approximately 136% of GDP, a figure that compares to 97% for the United States and 109% for France.

Nevertheless, concerns remain significant. This is because additional fiscal spending could lead to an expansion of the fiscal deficit and a weakening of investor confidence. In fact, long-term government bond yields have risen rapidly since the announcement of the economic stimulus package in November 2025, increasing the government's interest burden. Of course, if fiscal expansion can drive economic growth as strong as expected, the fiscal situation could improve, but that is still merely an assumption.

The value of the yen continues to fall. The yen dropped from approximately 110 yen per dollar in 2021 to about 162 yen by the end of June 2026, raising concerns that this could further stimulate import prices and inflation. Of particular concern is that while the yen's weakness since 2022 was primarily driven by the interest rate differential between Japan and the U.S., the yen continues to weaken even though the gap between the two countries has narrowed since Prime Minister Takaichi took office in 2025. With the Japanese economy's growth and resilience being weak and the Bank of Japan's interest rate hikes being slow, while the U.S. is likely to raise rates, forecasts are being raised that the yen could fall to the 165 yen range in the future.

A more fundamental question is whether Takaichinomics can resolve the structural problems accumulated in the Japanese economy. Japan has experienced stagnant real wages for over 30 years since the 1990s. This led to a slowdown in the growth of private consumption, which accounts for the largest portion of GDP, becoming a significant factor in the long-term recession. While government fiscal expansion can boost aggregate demand, critics point out that successive governments have exhibited a form of fiscal addiction by relying excessively on economic stimulus through repeated supplementary budgets. Indeed, looking at changes from 2018 to the present , government spending and prices have risen, but wages and private consumption have remained sluggish. Ultimately, what the Japanese economy needs most is sustained wage growth. This is because if household income does not increase steadily, it will be difficult for private consumption to revive, and long-term economic recovery will inevitably be limited. Indeed, economic growth has been sluggish in recent years, real wages have failed to keep pace with inflation, and private consumption has continued to show a sluggish trend until recently. The Japanese economy contracted by 0.2% in 2024 and recovered to 1.1% growth in 2025, but this year's growth rate is projected to be only 0.6%.

■ The Japanese Economy Between Expectations and Concerns

Fortunately, recent economic indicators are sending hopeful signals to the Takaichi administration. Japan's annualized economic growth rate for the first quarter of 2026 recorded 1.8%, thanks to a significant increase in exports. Net exports contributed 1.2 percentage points and private consumption contributed 0.7 percentage points to the growth. It is also reassuring that inflation has been declining this year. The consumer price index (CPI) growth rate in May fell to 1.5%, and real wages rose 1.7% year-on-year, continuing an upward trend for six consecutive months, contrary to the previous year. However, it remains uncertain whether this trend will continue. Contrary to the government's expectations, the possibility cannot be ruled out that fiscal expansion could further stimulate inflation amidst slowing economic growth, ultimately leading to pressure for stagflation. It also remains to be seen whether companies will actually increase investment in a reality marked by significant global economic uncertainty, including Trump's protectionist policies.

During his summit with President Trump last March, Prime Minister Takaichi chanted former Prime Minister Shinzo Abe’s famous slogan, “Japan is back.” Indeed, after a long period of deflation, inflation has finally settled in the Japanese economy, stock prices have hit all-time highs, and wage increases through the spring wage struggle have exceeded 5% for three consecutive years, reaching their highest level since 1991. However, as seen earlier, there is still a long way to go before the Japanese economy fully revives. While leaders always speak of hope, it is difficult to predict whether Takaichinomics’ bold bet will succeed. Expectations and concerns coexist regarding the future of Takaichinomics, which aims to rebuild Japan into a strong and prosperous nation.

(This article was originally published as a column in Hankyoreh in Korean and translated into English with the help of Google Translate. The views expressed in this article are those of the author(s) and do not necessarily represent the official stance of the center.)