The latest monthly insight from Naoki Kamiyama, Chief Strategist at Amova Asset Management, titled “Assessing the positives of Sanaenomics as well as its sticking points.”
“Sanaenomics” is a term that describes Japan’s new economic policy framework under Prime Minister Sanae Takaichi. Sanaenomics is designed to balance growth goals with so-called “responsible proactive fiscal policy”, focusing on sectors such as AI, semiconductors, defence and energy, while offering consumer relief through tax cuts and subsidies. We assess the differences between this approach and Abenomics, which Takaichi draws inspiration from, and study its likely short- and long-term impact on the economy and markets.
How “responsible proactive fiscal policy” could affect Japan’s growth and fiscal health
After a rocky start, which included a dramatic shift in the political landscape when her ruling Liberal Democratic Party (LDP)’s junior coalition partner Komeito announced that it would be dissolving the partnership in October, Takaichi has begun her tenure as prime minister backed by historically high public approval ratings. The strong public support rests on hopes that Sanaenomics will address inflationary impacts on consumers.
Before we assess how “responsible proactive fiscal policy” can aid consumers facing rising prices, it needs to be understood that Sanaenomics will not be a repeat of Abenomics, which was introduced more than a decade ago. Unlike during the Abenomics era, Japan is no longer in a state that requires aggressive fiscal expansion. Higher tax revenues allow for a more balanced approach: they enable her administration to pursue temporary fiscal expansion without undermining long-term fiscal discipline. Her policy mix aims to support both innovation-driven growth and consumers through measures like tax cuts and education subsidies. Japan can be said to be in a favourable phase, as it is able to stimulate demand and growth without eroding fiscal credibility. This means that the rise in long-term rates and the weakening of the yen based on fears of government fiscal indiscipline could be short-lived.
Impact of strategic investments and higher defence spending
A key pillar in Sanaenomics is targeted spending on strategic sectors like AI, semiconductors, energy and defence in a bid to strengthen economic security. These policies are intended to strengthen Japan’s resilience against geopolitical and supply chain risks. The plan to increase spending on defence is part of the government’s goal to raise expenditure towards 2% of Japan’s GDP and target advanced technologies.
AI, semiconductors and energy could provide a foundation for long-term growth and resilience, especially given the recent rise in geopolitical risks. It is worth noting that returns on investment in semiconductors may not be even, as production is driven by security concerns and not based on pure efficiency. For example, factories that could deliver more cost-effective production in China or Taiwan may end up moving to Japan for security reasons.
Compared to AI, semiconductors and energy, the defence sector may have a more limited macroeconomic impact in the foreseeable future as it does not have the same multiplier effect as other sectors geared towards civilian use. Defence contractors have seen gains in their share prices after Takaichi took office. However, Japan’s defence sector is not large, it currently lacks a far-reaching growth narrative and it may not deliver significant long-term growth.
Maintaining both growth and distribution: a potential sticking point
While Sanaenomics is centred on growth, it also focuses on wealth distribution through subsidies and tax incentives aimed at the working and middle classes. A potential sticking point is the administration’s emphasis on helping small and medium-sized enterprises (SMEs) to achieve wage hikes and capital investments. Wage growth is primarily driven by sales expansion and labour shortages, not government intervention. The government can smooth out adjustments but cannot fundamentally push wages higher. Moreover, excessive support of weak SMEs risks resulting in overcapacity and inefficiency, which could ultimately hurt corporate competitiveness. In order to achieve long-term growth, the administration may want to focus more on innovation and avoid excessive use of subsidies and policies that distort market dynamics.
What about monetary policy?
It appears that the market currently expects the Bank of Japan (BOJ) to take a more cautious approach towards hiking interest rates under Takaichi, who has been known to favour monetary easing. However, the BOJ may not feel as much pressure to hold off from hiking rates as the market expects. This is because the Takaichi administration knows the importance of curbing inflation, and in order to do so, it cannot let the yen weaken indefinitely. The administration could therefore tacitly allow the BOJ to raise rates and limit the yen’s depreciation. The market will have to recalibrate its expectations if the BOJ actually hikes rates in the coming months, and that is worth watching as it is likely to lead to short-term volatility.
Japan stocks rally on hopes for proactive economic stimulus
The Japanese equity market ended October higher with the TOPIX (w/dividends) up 6.20% on-month and the Nikkei 225 (w/dividends) rising 16.65%. A number of positive factors supported Japanese stocks, including rising US stock prices thanks to an outlook for additional rate cuts by the US Federal Reserve and strong earnings results from major US semiconductor companies related to generative AI, as well as the US-China summit potentially leading to a comprehensive agreement to ease trade tensions. At the same time, in Japan the formation of a coalition government between the LDP and the Japan Innovation Party raised hopes for proactive economic stimulus policies, providing further tailwinds for equities.
Of the 33 Tokyo Stock Exchange sectors, 22 sectors rose, with Nonferrous Metals, Electric Appliances, and Information & Communication posting the strongest gains. In contrast, 11 sectors declined, including Insurance, Services, and Pulp & Paper.
