Meiji Restoration 2.0? Japan looks set to reinvent itself under the bold leadership of Sanae Takaichi

In a sense, the Japanese prime minister has. As the victor of an internal party vote to become prime minister in October, Takaichi lacked a popular mandate and was momentarily enfeebled further when she lost the support of a coalition partner of the Liberal Democratic Party (LDP). Nonetheless, when she was asked in parliament in November what Japan would do if Taiwan was threatened by a blockade by Beijing, she responded by saying Japan would have to intervene.

This turned out to be both politically savvy and a forthright statement of her views. Takaichi began to climb in opinion polls. Beijing’s usual playbook of intemperate language and economic bullying in response played to her advantage as Takaichi refused to soften her statement even as China clamped down on Japanese seafood imports and sought to limit supplies of rare earths to Japan. The 64-year-old in January called for a snap election, well ahead of schedule, and led the LDP to a two-thirds majority, a margin never achieved in Japan’s post-World War II history.

In a matter of months, Takaichi has seized the advantage from Japan’s old guard of male politicians, in a manner not dissimilar to the way Indira Gandhi established control over the Congress Party in 1969. And her star quality with young voters is reminiscent of the cult that surrounded John F. Kennedy and Jackie Kennedy in the early 1960s. Takaichi has a 90% approval rating with those under 30.

Everything she uses, from her unremarkable black handbag to a metallic pink pen, has started to sell out. The manager of the Hamano handbag factory in Nagano sounded somewhat baffled by the huge demand from young women. There is now a nine-month wait for that tote bag.

This is markedly an election victory, as with so many these days, determined in part by popularity fanned by social media. But Takaichi’s challenges are likely to be old-fashioned.

Her government must find a way to keep inflation in check and resist the urge to put pressure on the Bank of Japan (BoJ) to keep interest rates low. Her promise to suspend a consumption tax of 8% on food for a couple of years could also boost consumption across the board. But it would amount to forgoing 6% of Japan’s total tax intake at a time when there is concern about its fiscal position.

On 20 January, the day after Takaichi called for the election saying she was also seeking a mandate for fiscal expansion, the market for long-dated Japanese bonds showed investors were getting concerned. Yields on 30- and 40-year bonds tightened.

Takaichi is also expected to move quickly to militarize Japan. This is long overdue, but it will inevitably add to Japan’s fiscal deficit.

While developed world debt has risen sharply in the past few years, Japan’s is the highest of them all as a percent of GDP. And, as The Economist noted in a recent article, it is no longer true that Japan’s debt story is a domestic drama alone. The market segment that sold off bonds with 10-year to 40-year maturities in January is more than half owned by foreign investors, up from less than a quarter before the covid pandemic.

The BoJ, meanwhile, wants to keep inflation in check by raising interest rates. This puts it and the prime minister potentially on a collision course. In a rare misstep since she took over, Takaichi opined that she thought raising interest rates would be “stupid”. Befitting Japan, this will likely be settled decorously, but, as events last month in its bond market demonstrated, foreign investors will make their opinions count.

Unlike her immediate predecessors whose tenures fell short of the four-year term of the lower house, Takaichi now has a full term ahead of her. This means she will need to carve out a working relationship with Chinese President Xi Jinping. As its first attempt at intimidating Takaichi backfired spectacularly, Beijing will have to devise a different strategy.

Responding to US President Donald Trump’s warm congratulations this week, Takaichi praised the “limitless’’ alliance between the two countries. In another achievement, like Prime Minister Giorigia Meloni in Italy, she appears to have built a stable and cordial relationship with the unpredictable US leader.

Meanwhile, corporate Japan is starting to transform itself in a manner akin to its politics. Major corporations are giving promotions based on ability rather than seniority and offering outsiders large pay hikes to join. Many are adding leverage, says Jesper Koll, a former JPMorgan managing director who has lived in Japan for decades, and banks are forcing zombie companies to close.

The country has been working around its rapidly ageing population by granting more than 1,200 work visas a day for the past couple of years, he says. Women are joining the workforce in larger numbers.

Taken together, this is a 21st century equivalent of the Meiji Restoration. And all the more remarkable because this potential turnaround is led by a leader who plays the drums and totes an iconic handbag.

The author is a former Financial Times foreign correspondent.