Japan has sent a strong and clear message at the ballot box. Voters gave Sanae Takaichi a strong mandate to clear the path for a major change in tax policy. The result signals support from the public on economic relief at a time of rising prices and fragile growth.
Takaichi’s victory in the leadership vote creates more room for her in the ruling coalition, and gives her impetus for action. The campaign focused on economic pressure, to households and businesses. Inflation has moderated from its recent peak but the wage rate has been finding it difficult to catch up.
Too many families still are squeezed. Takaichi had promised tax cuts to give an economic boost and rebuild confidence. Voters responded.
The proposed tax cuts are made in the areas of income and corporate taxes. Supporters say lower taxes will result in more money in the pockets of consumers and also spur firms to invest. Takaichi has presented the movement as a means for revitalising domestic demand and enhancing Japan’s competitiveness.
She has also signaled support for targeted relief for small and medium-sized enterprises which are the backbone of the economy.
Japan’s economy is at a very fragile stage. Growth has been uneven. Exports are buffeted by weakening global demand. The cheap yen has helped exporters and increased the cost of imports. Energy and food prices are still sensitive to global shocks. Against this background, tax policy is becoming an important tool of economic management.
Critics are concerned that tax cuts will put pressure on public finances. Japan has one of the highest public debt stocks of all advanced economies. Any drop in tax income raises the question of how the government will fund social security and defense spending. Japan’s aging population is an additional stress on the budget. Some analysts say that it should be structural reforms and productivity gains, rather than short-term fiscal stimulus.
Takaichi has tried to overcome such concerns. She has stressed fiscal discipline and has promised to use tax relief in tandem with attempts to spend less. Details are still being discussed and much will hinge on negotiations in the ruling coalition. Still, the election result gives her political capital for pressing her agenda forward.
Beyond the economics of the situation, domestically, the vote is also significant of geopolitical significance. Japan is facing growing security problems in East Asia. In recent years, defense spending has been increasing. Balancing tax cuts and security commitments will put the Government’s fiscal strategy under pressure. International investors will be closely monitoring to see policy stability.
Financial markets reacted cautiously but without major reactions. Investors seem to find a peaceful rest after many months of political uncertainty. The yen remained stable while equity markets made small gains. Analysts say what the measures of the tax will do in reality will be dependent on the scale and time frame of these measures.
Many voters did not so much make an ideological decision as they did a practical one. Daily costs are much more important than abstract debates over fiscal matters. Takaichi had a message that was direct. Lower taxes. Stronger growth. Greater resilience. Such clarity may have helped her get such a decisive mandate.
The coming months will show what promises are made in those youth. Any draft legislation is expected soon. Debate will follow. Japan is now faced with the financial choice between financial discipline and economic rejuvenation. With a strong mandate in his hand, Takaichi has the authority to do so. The challenge will be bringing relief but also maintaining appropriate long-term stability.