Takaichi's Nostalgic Economic Plan Sparks Inflation Fears

Japan's Prime Minister Sanae Takaichi is known for her forward-thinking approach to governance, but according to some critics, she is also surprisingly nostalgic. This nostalgia is evident in her economic policy, which has been dubbed 'Takanomics.' The plan aims to raise Japan's game by investing Y370 trillion (approximately $2.25 trillion) over the next 15 years in 17 strategic sectors.

The Ministry for Economy, Trade and Industry (METI) will play a central role in planning and coordinating this investment. This is a step back to the past, reminiscent of Japan's high-growth heyday in the 1960s and 1970s.

Economist Jesper Koll notes that only 10% of the investment is expected to come from on-balance-sheet national government debt, with 60% coming from private corporations. The remaining 30% will be coordinated by off-balance-sheet public-policy financing firms.

The plan has raised concerns about inflation and the cost of capital for both the government and private sector. To mitigate these risks, the Bank of Japan may need to raise interest rates. This could improve the allocation of capital but also put more pressure on the government budget as the cost of servicing its debt rises.

Takaichi has also announced plans to cut the country's consumption tax from 10% to 1% for food, supposedly temporarily. However, this move may weaken the country's fiscal position at a time when households' incomes are rising more rapidly than inflation.