Commentary: Can Japan’s New Premier Fix the Country’s Old Problems
After winning the presidency of the Liberal Democratic Party, Sanae Takaichi is poised to become Japan’s first female prime minister. She has declared her intention to “make Japan a vibrant land of the rising sun once more,” proposing measures such as tax cuts, cash handouts and the abolition of the temporary gasoline tax. Yet compared with the ambitious “three arrows” policy of her former faction leader, Shinzo Abe, she has not presented a new economic strategy capable of inspiring hope.
Japan’s economy has been languishing for 30 years, unable to regain its footing. But as the world’s third-largest economy, the country remains a key player in technology, manufacturing, and quality control. Following the bursting of the 1980s asset bubble, the economy experienced stagnation and recession in the 1990s, in what is often referred to as the “Lost Decade.” The country has since been mired in stagnation, despite repeated attempts by the government and corporations to revive the economy through policy reforms and stimulus measures. The economy remains trapped in a cycle of low growth, low inflation and low interest rates.
In recent years, overlapping challenges including an accelerating demographic decline, intensifying global competition, slow industrial transformation and a sclerotic labor market, have exposed deep-seated structural problems in Japan’s economy.
Japan’s potential growth rate has long been low. According to statistics from Japan’s Cabinet Office, the country’s annual GDP growth has hovered around 1% for the past decade, far below the average for major global economies. In early 2024, Japan briefly fell into a technical recession after two consecutive quarters of negative GDP growth.
This low growth reflects not only a shrinking population and workforce but also the inadequacy of corporate investment and innovation. The global competitiveness of traditional industries has gradually declined, while the development of emerging industries has been relatively slow, leaving the overall economy with limited growth engines.
Since 2022, inflation finally returned to Japan after a long absence and as prices have risen, companies have begun to raise wages. During the 2024 “shunto” spring labor offensive, for example, many large corporations agreed to wage increases of over 3%, a level not seen in decades.
Yet it is questionable whether this “benign inflation” can be sustained. The answers to whether companies will continue to raise wages and whether consumers will be willing to increase spending will determine if inflation translates into real economic momentum. If wage growth fails to keep pace with price hikes, it will squeeze real purchasing power and further dampen domestic demand.
Japan’s public debt is severe, with the total exceeding twice its GDP — the highest level in the world. Although most of this debt is held by domestic investors, mitigating the risk of capital flight, this high-debt structure severely limits the government’s fiscal policy space, making it difficult to implement effective stimulus during a crisis. Furthermore, the aging population requires the government to spend enormous sums annually on social security and medical care, exacerbating fiscal pressure.
Since 2022, the yen has fallen sharply against the U.S. dollar. While this has provided a short-term boost to exporters, it has also driven up import costs, fueling imported inflation. Sharp price increases for necessities like food and energy have directly hit consumers. Meanwhile, the currency’s depreciation has shrunk Japan’s dollar-denominated GDP, causing its relative standing in the global economic system to decline. Striking a balance between currency stability and export stimulus has become a dilemma for the Bank of Japan.
A major factor behind Japan’s economic predicament is its demographic crisis: a low birthrate and an aging population. Japan’s total fertility rate has fallen below 1.3, far short of the 2.1 needed for natural population replacement. This has led directly to a shrinking workforce and declining consumption. Compared with countries like China and India that enjoy a demographic dividend, Japan lacks a young population to drive domestic demand and innovation.
The demographic problem also creates a heavy social welfare burden. With over 28% of its population elderly, Japan directs considerable public resources toward pensions, health care and long-term care. This squeezes the budget for education, child-rearing, and research and development, creating “intergenerational inequality” that disadvantages the young. This structural burden further weakens the foundation for future economic growth.
But Japan’s fundamental economic weaknesses lie in its industrial structure and corporate culture.
First, there is a lack of dynamism in innovation. Japanese corporate culture tends to be conservative, valuing stability and traditional systems over rapid change. The atmosphere for innovation and entrepreneurship is weak in comparison to Silicon Valley or China, and the scale of venture capital is relatively limited.
Second is the problem of industrial hollowing out. To cut costs, many Japanese manufacturers moved their production bases to China and Southeast Asia starting in the early 2000s, leading to broken domestic supply chains and a drain of technical talent. Although a trend of “reshoring” has emerged in recent years, its impact has been limited by labor and cost constraints. Moreover, despite holding huge cash reserves, Japanese companies are reluctant to invest on a large scale. Average corporate R&D spending as a percentage of GDP remains below that of the U.S. and South Korea. This conservative financial strategy may enhance short-term stability, but it sacrifices long-term growth potential.
Japan’s long-standing systems of lifetime employment and seniority-based wages have made companies conservative about staffing adjustments, leading to inefficient talent allocation. It is also difficult for young people to change jobs, resulting in a labor market that lacks dynamism and agility. To manage cost pressures, companies have increasingly hired non-regular workers, such as temporary and part-time staff. These workers receive far lower wages, benefits and job security than their full-time counterparts, which not only suppresses overall wage levels but also erodes consumer confidence and the desire to start families, further inhibiting domestic demand.
Japan implemented zero-interest-rates for some 25 years, alongside quantitative and qualitative easing measures, but these policies had limited success. Instead, they entrenched expectations of low inflation and low interest rates among businesses and consumers, creating “inflation inertia.” The marginal effectiveness of monetary tools has diminished, doing little to boost investment and consumption. “Abenomics” proposed “three arrows” — fiscal stimulus, monetary easing and a growth strategy — but in practice, the third arrow of structural reform has made slow progress. The core problem is that reform involves tackling vested interests and adjusting social structures, making it exceedingly difficult to advance and trapping the economy in stagnation.
Japan was once the model of technological leadership in Asia. Today, however, countries like China and South Korea are catching up fast. In fields such as semiconductors, electric vehicles (EVs), display panels, and artificial intelligence, Japanese companies are steadily losing their dominant position as their market share is carved up. The U.S.-China trade war and geopolitical tensions are reorganizing global supply chains that could allow Japan to reclaim its role in key components, but its companies have often been slow to react. Meanwhile, American and European firms are accelerating their investments in digital transformation and the green economy, widening the competitive gap with Japan. In strategic sectors like chips, EVs and renewable energy, Japan’s past advantages are being eroded. This competitive pressure forces Japan not only to address its internal structural issues but also to redefine its role and value in the global economy.
Amid a global wave of industrial change, hopes for Japan’s economic revival rest largely on the breakout potential of its strategic industries. The year 2025 has become a do-or-die period for Japanese brands in critical areas like electrification. Squeezed by Chinese, South Korean, American and European companies, Japan has chosen to anchor its strategy on solid-state batteries, attempting to rebuild its competitive edge in the new-energy race. But a mismatch between the pace of its technological implementation and market demand makes this battle highly uncertain. In smart technology, a traditional weak spot, Japanese firms are adopting a flexible strategy of “leveraging the domestic ecosystem” to catch up, with demand for high-end smart features providing a foothold to penetrate the youth market. But this technical advantage has yet to translate into market dominance, and multiple real-world challenges have become more acute in 2025.
For the new prime minister, the key industrial policy question will be how to synchronize technological breakthroughs with market deployment. This requires not only continuing R&D subsidies for core technologies like solid-state batteries but also encouraging collaborative innovation between companies, universities and research institutions to shorten the technology transfer cycle. It will also be necessary to guide companies in streamlining their brand portfolios to avoid internal price wars and find a balance between luxury and mass-market strategies. But against a backdrop of fiscal austerity, how to allocate resources to support industrial transition will be a test of policymaking precision.
Japan’s deep-seated economic problems cannot be solved by any single policy. The structural contradictions in its demography, labor market, and public finances are intertwined. Any reform requires confronting the trade-off between short-term pain and long-term value, placing immense demands on the new prime minister’s political courage and governing wisdom.
Takaichi has emphasized “fiscal restructuring,” but this will require a precise combination of subtraction and addition. On subtraction, cutting inefficient spending is a must. For addition, more public funds must be invested in areas with medium- and long-term returns. More critical still is tax reform. Although Japan’s effective corporate income tax rate has been lowered to 29.7%, the tax burden on small and midsize enterprises remains heavy. Rates could be further differentiated, and companies whose R&D spending exceeds 5% of revenue could be granted additional tax credits, using tax levers to spur investment in innovation.
Amid geopolitical tensions and supply-chain reorganization, Japan’s economic recovery cannot be limited to internal reforms. It must find a new, indispensable value proposition in the global economic chain. The old advantage of relying on a “technology monopoly” is gone. The new prime minister must push Japan to transform from a “product exporter” to an “ecosystem integrator.”
In emerging races like the green transition and the digital economy, Japan needs to build an “open and cooperative ecosystem.” Facing America and Europe’s lead in digital technology and China’s advantage in market scale, a solo breakout will be difficult for Japan. It must therefore promote regional economic cooperation to expand its market space. Since the Regional Comprehensive Economic Partnership took effect, Japan’s exports to the Association of Southeast Asian Nations (ASEAN) have grown by 12%, but that is still slower than China’s export growth to the bloc. The new prime minister needs to push for a “deepening” of the agreement. In the ASEAN region, Japan could establish industrial parks with local companies based on a “Japanese technology plus local manufacturing” model, focusing on sectors like auto parts and electronics. In Northeast Asia, it could cooperate with China and South Korea in green energy and the digital economy. For example, by jointly setting EV charging standards to reduce regional trade costs.
Japan’s 2024 wage hikes shows that corporate profitability remains sound, its reserves of technology like solid-state batteries offer hope for an industrial breakout, and supply-chain reorganization creates an opportunity to reinvent its role. But whether this potential can be realized depends on the new prime minister’s ability to break free from the constraints of short-sighted politics and embed long-term policies on demographics, industry, and finance into a legal framework to reduce the impact of personnel changes on reform. It is also essential to balance the adjustment of interests with social stability. Since reform will inevitably affect vested interests, it is crucial to build a social consensus.
Decades of stagnation have left Japanese society with a pervasive “reform fatigue.” A 2024 poll showed that only 41% of the public believes reform can improve the economy. Takaichi will need to communicate her policies clearly to help people see the long-term gains that lie beyond short-term pain. Japan achieved its economic takeoff in the 1960s through the Income Doubling Plan. The key was that the government seized the opportunities of a technological revolution and the global division of labor while pushing through systemic reforms. Today, a new window of technological opportunity and supply-chain restructuring has opened. If the new prime minister sticks to short-term stimulus while avoiding deep reform, her vision of a “rising sun” will likely prove to be empty rhetoric. Japan’s economic future depends on the depth and determination of its reforms.
Chen Guoxiang is a Taiwanese journalist.
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