Editor's note: Cai Liang, a special commentator on current affairs for CGTN, is senior research fellow of Center for Asia-Pacific Studies, Shanghai Institutes for International Studies (SIIS). Zhou Shengsheng is research fellow of Institute for Foreign Policy Studies and Center for Northeast Asian Studies, SIIS. The article reflects the authors' opinions and not necessarily the views of CGTN.

To emulate Abenomics, Japan's new Prime Minister Sanae Takaichi immediately unveiled a fiscal policy centered on "consumption-stimulating tax cuts, industrial subsidies, and defense expansion." The goal is to reignite growth through higher public spending and make public debt more sustainable.

Reactions have been sharply divided. Yet a close examination of the three core questions – where does the money come from, where will it go and whether it retains its value – reveal that Sanaenomics (also called Takaichi-nomics) is actually a high-stakes gamble.

Where does the money come from?

A key feature of Sanaenomics is its expansionary fiscal approach, which inevitably raises the first question: Where does the money come from? There are primary two options: raising taxes or issuing more government bonds.

Raising taxes, however, is politically sensitive. Takaichi seeks support from low- and middle-income households by reducing their burden. But eliminating the provisional gasoline tax surcharge and exempting high school tuition alone would slash close to two trillion yen (over $12.65 billion) in revenue, while projected gains from adjusted tax measures are estimated at only around 1.2 trillion yen. Hidden tax increases seem inevitable.

The more expedient option is issuing additional government bonds. However, Japan's total debt already stands at a staggering 1,333.6 trillion yen, with a debt-to-GDP ratio near 240 percent, the highest among advanced economies. Debt servicing (principal and interest payments) accounts for nearly a quarter of Japan's annual fiscal expenditure, leaving little room for further borrowing. Thus, the most perilous aspect of Sanaenomics is the conflict between the bold fiscal expansion she advocates and the government's lack of credible revenue to pay for it.

Where will the money go?

Fiscal risks are not only about size. They also depend on allocation. Structurally, Sanaenomics has significantly strengthened state-directed investment, with economic security and defense-related spending given top priority.

Shortly after assuming office, Takaichi emphasized that Japan must take the initiative to fundamentally strengthen defense capabilities. She raised defense spending in fiscal 2025 (April 2025 – March 2026) to two percent of GDP via a supplementary budget, a target that had originally been set for Japan's 2027 budget. Some government officials even clamored that Japan should possess nuclear weapons.

To secure funding, Takaichi announced plans to introduce a defense tax equivalent to one percent of personal income tax to take effect in 2027. The relevant statements and measures underscore the central role of defense spending in Sanaenomics.

Against the backdrop of an aging population and a strained social security system, the continuous expansion of defense expenditure is inevitably crowding out social welfare spending. The accelerating concentration of fiscal resources on military and security sectors will marginalize key areas that are critical to social stability and long-term growth expectations, including education, social security, employment support and income redistribution.

Lack of improvements in people's livelihoods and mounting distributional pressures will only fuel public anxiety and a sense of relative deprivation, which will not enhance the sense of security but spread security-related anxiety across society. Such sense of unease is then framed as a "security demand" in political discourse, which in turn is used to justify further increases in defense investment.

Thus, an irreversible vicious cycle will take hold: Military expansion squeezes social welfare spending, social anxiety amplifies the security narrative, and that narrative in turn fuels further military buildup.

Will the money retain its value?

If fiscal policy dictates how much to spend and where, monetary policy determines whether such spending enjoys market trust. On December 19, 2025, the Bank of Japan (BOJ) raised its policy interest rate by 25 basis points to 0.75 percent, the highest level in three decades. The move reflected growing market concerns over inflation and fiscal sustainability, subjecting Sanaenomics to unprecedented pressure.

On one hand, persistent inflation and rising living costs have forced the BOJ to phase out its ultra-loose monetary policy. By the end of 2025, Japan's core consumer price index (CPI) exceeded the BOJ's 2 percent target for 44 consecutive months. A survey conducted by Sumitomo Life Insurance Company found that over half of Japanese households surveyed reported an increase in living costs, with average monthly expenses up by approximately 9,600 yen. On the other hand, nominal wage growth has been too weak to keep pace with inflation, resulting in a three-year consecutive decline in real wages.

As inflation steadily erodes household disposable income, the BOJ faces a deepening policy dilemma in exiting its loose monetary stance. As the BOJ normalizes interest rates and long-term bond yields go up, interest payments are expected to keep growing in the coming years. There are signs that debt-servicing costs will increase at a faster pace than in the past, placing significant strain on Japan's fiscal flexibility. Japan's Ministry of Finance estimates that government interest payments will climb to 16.1 trillion yen in fiscal 2028, up from 10.5 trillion yen in the fiscal year ending March 30, 2026, a more than 50 percent increase over just a few years. If bond yields overshoot, debt-servicing costs will surge even further.

In short, Japan faces a deepening fiscal dilemma. Maintaining expansionary fiscal measures to support economic growth will erode debt sustainability, while shifting to fiscal austerity will put economic growth and social stability at risk.

Sanaenomics may enjoy political support and boost market sentiment in the short term, but the risks are compounding rapidly. The combination of unstable tax revenues, a security-centric expenditure structure, and shrinking monetary policy space will leave the Japanese economy hanging on a highly delicate balance. The real focus is not whether the stock market hits new highs. Instead, it is that without structural reform, a clear fiscal exit strategy, and a sober dividing line between security needs and economic reality, Sanaenomics risks turning into a costly and dangerous gamble.

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