Takaichi wants to make Japan Inc great again

IN A memorable quip during her campaign for election earlier this year, Japan’s Prime Minister Sanae Takaichi promised that she would smash the button marked “growth”.

Her strategy now pits that instinct against those who fear the country’s finances may be what gets smashed instead.

In a land where leaders tend to last an average of about two years, yet another growth plan can elicit yawns.

But the blueprint Takaichi revealed in June, set to be advanced in July, is something different: It is the inaugural post-deflation outline for expansion, and the first comprehensive industrial policy in decades.

Together with the private sector, the document calls for 370 trillion yen (US$2.3 trillion) of domestic investment through 2040 in an attempt to fortify Japan, economically and geopolitically, against China.

It is nothing less than a call to build an industrial state after decades of relying on monetary policy and the market. But the biggest challenge to making Japan Inc great again is likely to come not from Beijing, but from Tokyo’s own anxiety over spending.

Previous strategies have often been macro-focused and reflationary, assuming industry would come along for the ride once structural issues are solved and red tape slashed.

In the years since the end of Shinzo Abe’s stint at the helm, Japan has lacked a serious long-term programme for growth. More latter-day initiatives promised results, such as wage hikes and regional revitalisation, without outlining how they would happen; projects such as revitalising the chip industry were largely confined to a single sector.

Takaichi is instead focused on 17 areas with 62 priority products and technologies, including fast-growing fields like physical artificial intelligence and longer-term bets such as quantum computing. She sees the three-decade shortfall in domestic investment as the economy’s main problem.

China is left unstated, literally: The strategy refers instead to the dominance of a “certain country” in fields such as solar panels, rare earths and some drug ingredients.

But with a focus on defence, shipbuilding and cybersecurity, there is no mystery.

This is an economic-security response to Beijing’s manufacturing scale, technological ambition and willingness to turn industrial capacity into geopolitical leverage.

Once known for its formidable trade and industry ministry, Japan moved away from top-down industrial policy amid trade tensions with the US in the late 1980s.

And while it never de-industrialised the way some countries did, it suffers from a deficit of investment at home, as companies traumatised by the economic bubble bursting and the Asian financial crisis became overly conservative.

Deflation always made it cheaper to build next year, and firms became adept at cost-cutting instead of investment.

Japan stopped doing industrial policy just as semiconductors became the ultimate beneficiary, and companies drew down debt just as Beijing encouraged its firms to spend all-out in a race to the bottom that prices out competitors.

As a result, Japan was pushed out of multiple sectors it could otherwise have dominated. This package aims to ensure that does not happen again.

A battle for the purse strings

Yet it is the proponents of austerity who could bring this whole thing down.

Among the most controversial elements is a plan for a new fiscal architecture to ensure spending continues into the future.

Finance Minister Satsuki Katayama has referred to these changes as the biggest overhaul to the budgeting system since the end of the war. That investment could be front-loaded from bridge bonds backed by future redemption resources, the strategy says.

The catch is that those resources remain only vaguely sketched, despite rules calling for funding sources to be identified in advance.

Do not expect the guardians of fiscal discipline to go down without a fight. Despite its free-spending reputation, Tokyo’s corridors of power are continually locked in a battle between those who advocate for looser purse strings and those who insist it must scrimp and save to clean up the books.

The latter have an ally in the bond markets, where yields are rising again amid concern over shifting fiscal policy. The talk in the market is of the “Honebuto shock”, named after the annual economic-policy outline due for Cabinet approval later this month.

There are other obstacles. While Japan once had a formidable reputation for picking industrial winners, in recent years it has lost the knack. Will bureaucrats be better than the free market at identifying the right targets, both at the sector and the firm level?

The inclusion of video games in the strategy is a potential warning sign. A business already booming globally hardly needs the same help as shipbuilding, quantum computing or critical minerals.

And unlike South Korea, Japan’s past efforts to bureaucratise soft power have not always covered the state in glory.

Another hurdle is convincing companies to come along for the ride. The plans does not outline how much of the 370 trillion yen is to come from the private sector.

But Japan cannot save its way into increased growth. Given the enormous sums being spent on AI and data centres, across the world the mood has shifted away from free-market-knows-best laissez-faire towards a recognition that government cannot simply stand aside.

Japan has enjoyed years of record tax revenue and its corporates are cash-rich. The problem is one of coordination, not lack of funds.

Takaichi’s biggest obstacle might be staying in office long enough to convince corporate executives, along with bond traders and finance ministry officials, that this is the start of something new. A multi-decade industrial policy, after all, requires a prime minister who lasts longer than a budget cycle. BLOOMBERG