The Takaichi Fallout: How can the Takaichi Administration achieve "responsibility"?

Editor's note: Tang Jie is a researcher at the Chinese Academy of International Trade and Economic Cooperation under China's Ministry of Commerce. The article reflects the author's opinions and not necessarily the views of CGTN.

The 221st extraordinary session of the National Diet convened on February 18 following Japan's House of Representatives election. Prime Minister and Liberal Democratic Party President Sanae Takaichi is expected to be elected as Japan's 105th Prime Minister during the prime ministerial designation vote at the House of Representatives plenary session in the afternoon.

The transition from Sanae Takaichi's "proactive fiscal policy" to a "responsible proactive fiscal policy" reflects a classic political-economic pivot and attempt to balance aggressive stimulus with market credibility. It also reveals the immense pressure policymakers face—the need to stimulate a sluggish economy through expansionary measures while simultaneously addressing deep market skepticism about the government's debt repayment capacity. However, "responsibility" in fiscal policy isn't a branding exercise—it is a mathematical and structural reality. The label of "responsible" cannot be established simply by self-promotion; its credibility depends entirely on a credible path to fiscal consolidation and substantive structural reforms. To be truly "responsible," a policy must address the tension between immediate relief and long-term solvency.

Policy essence: A "new package" for expansionary fiscal policy

Sanae Takaichi's core strategy remained unchanged: expanding the deficit + curbing interest rate hikes + tax cuts. This continued Japan's long-standing tradition of fiscal dominance, attempting to stimulate demand through government spending while maintaining a low-interest-rate environment and reducing government debt repayment costs through central bank yield curve control (YCC).

The Responsible Modification: The addition of "responsible" was intended to address the market's most pointed criticism—Where will the money come from? This indicates that policymakers recognized that unrestrained expansion is no longer acceptable to the market and that some form of constraint must be demonstrated. However, there is an inherent conflict between policy objectives. On the one hand, there is a need to actively expand spending; on the other hand, there is a need to "responsibly" consolidate public finances. In the context of weak economic growth, expanding spending usually means postponing consolidation, and vice versa.

Market concerns: Lack of a credible "exit strategy"

The market is not buying into this because the current policy framework lacks a credible path for fiscal consolidation.

Japan's government debt-to-GDP ratio has exceeded 260%, the highest in the world. Any additional fiscal stimulus will further increase debt levels. Sanae Takaichi did not clarify the specific sources for filling the gap, leading to market concerns that the debt might be absorbed through inflation, financial repression, or implicit defaults.

A credible "responsible" policy must generally include a medium-term fiscal plan with clear deficit reduction targets and timelines, and also specific revenue-boosting measures— not only relying on natural revenue growth from economic growth, but also concrete tax increases or spending cuts. Reforms must be linked to structural reforms (such as labor market reforms and productivity improvements) to demonstrate that the economy can generate sufficient tax revenue in the future to cover debt.

The dilemma of consumption tax reform: A clash between political and economic realities

Consumption tax is one of the Japanese government's most stable sources of revenue. From a fiscal consolidation perspective, raising the consumption tax is the most direct way to fill the funding gap. However, the foundation of Japan's economic recovery is fragile, and private consumption has been weak for a long time. Raising the consumption tax at this time would directly hit consumption and may cause the recovery to fail.

No Reform- The fiscal deficit and debt problem worsen, market confidence is damaged, and long-term interest rates face upward pressure.

Reform- The short-term economy may fall into recession, with high political costs (such as the economic stagnation after Abe raised the consumption tax in 2014).

The consumption tax may be Japan's most stable revenue source, but it is also a growth killer in a deflationary mindset. Raising it stabilizes the debt but crushes consumer spending; lowering it stimulates the economy but creates a massive hole in the social security budget. A "responsible" approach would shift the focus from the tax rate to the tax base. This involves structural reforms that increase the number of high-wage taxpayers (labor market reform) rather than simply squeezing the existing pool of consumers.

For Takaichi's policy, or any proactive fiscal stance, to earn the "responsible" label, it must move beyond deficit spending and implement the critical pillars—clearly defined boundaries between the Ministry of Finance and the BoJ. For example, establishing a Debt-to-GDP anchor rather than just a yearly PB target. Deregulation in high-growth sectors, such as digital and green tech, and addressing the ageing population. It would demonstrate that the stimulus is an investment in future productivity, not just a temporary consumption boost. 

In summary, Sanae Takaichi's "responsible and proactive fiscal policy" remains more of a rhetorical balancing act than a substantive policy shift. Market scepticism stems from concerns about Japan's deep-seated structural problem: insufficient growth potential to support its debt level. Unless the Japanese government can present a credible fiscal consolidation plan with concrete reform details, "responsibility" will remain merely on paper and will fail to win the market's genuine trust. Ultimately, the effectiveness of a "responsible proactive fiscal policy" is measured by the multiplier effect. If the spending goes toward unproductive subsidies or "zombie industries", the "proactive" part fails, and the "responsible" part becomes impossible.