PM Sanae Takaichi at the party headquarters in Nagatacho, Tokyo, February 8.
Prime Minister Sanae Takaichi is moving to reframe Japan's economic debate around a simple proposition. The country is no longer managing deflation, but learning to live with inflation and with harsher geopolitics that treat supply chains as weapons.
Economist Hidetomi Tanaka says Takaichi is treating the final steps of Japan's long deflation fight as a near-term hurdle, not the main project. "The Abenomics task of escaping deflation is in the final stage," he said, arguing the government intends to "clear" that agenda "within a few months" before shifting to policies suited to an inflationary environment.
What comes next, in Tanaka's analysis, is not a conventional stimulus program. He describes Takaichi's economic strategy as one that "integrates economics and security." The point is to stabilize prices and wages at home. Public money, meanwhile, is being used to build resilience in industries that Tokyo views as critical to national survival, like semiconductors, AI, pharmaceuticals, and rare earths.
Inflation That Interest Rates Can't Fix
Tanaka argues Japan's biggest short-term headache is not abstract fiscal arithmetic but the cost of living, especially inflation that isn't easily tamed by monetary tightening. He expects government moves on fuel, utilities, and logistics to push headline inflation down toward the Bank of Japan's (BOJ) 2% target.
Recent policy steps have already started to lower gasoline prices, Tanaka said. Electricity and gas subsidies running through March should add further relief.
He also expects cheaper fuel for freight starting in April to bring down distribution costs. That, he said, should "push prices down," making a sub-2% inflation rate plausible in the near term.
The harder part is food, where Tanaka sees shortages, not excess demand, as the driver. "Food prices are the issue," he said, pointing to rice shortages and ripple effects on the many products in Japan's food economy that depend on rice, from convenience-store bento to restaurants.
He also cited global disruptions such as weaker harvests abroad affecting coffee and cacao, warmer weather that reduced meat supply, and avian influenza pushing egg prices higher. With food inflation driven by shortages, he argues, rate hikes are a poor tool. "The Bank of Japan can raise rates all it wants — it doesn't mean anything," he said. Even a stronger yen, he added, doesn't solve a rice shortage.
Two Years of Zero Consumption Tax on Food
That diagnosis underpins Takaichi's signature retail promise: a two-year zero rate on the consumption tax for food. Tanaka portrays the pledge as targeted relief rather than old-style pump-priming. "This is clearly a policy for low-income households," he said, emphasizing it's different from "handing out money to make the economy better."
His key statistic is familiar to economists but newly salient to voters. Low-income households, Tanaka said, have a high Engel coefficient — the share of spending devoted to food — so cutting the tax on groceries "would make things considerably easier."
The political logic is straightforward. Utility bills may fall as subsidies filter through, but grocery prices are the everyday pressure point. In Tanaka's framing, a food-tax holiday is designed to be felt immediately, even if it does little to increase the supply of rice or cacao.
A Welfare System That Discourages Work
Tanaka says the food tax cut is meant to buy time for a more ambitious, and far more complex, reform: a refundable tax credit that would reshape Japan's safety net.
Japan's current system, he argues, contains a trap. People on welfare who take even small jobs can lose benefits quickly, creating what he calls "the welfare trap" or "poverty trap." "If you work a little, you fall off welfare," he said, so many people simply don't work.
A refundable tax credit would try to smooth that cliff. Recipients could keep support while working a little, then transition gradually into paying taxes as earnings rise.
Tanaka says it's closer to social security system reform than business-cycle management. He even calls it "similar to a basic income" in structure. Support would be universal in principle, then clawed back through taxation for higher earners.
The hurdle, he notes, is that such a system requires tighter administrative capacity. As he puts it, the state must better track income and assets and rationalize overlapping programs that would conflict with a universal floor.
Competing With China
Tanaka says the foreign-policy logic of Takaichi's economics is built around one competitor: China. Beijing, he argues, is flooding global markets with inexpensive output — rare earths, pharmaceuticals, mid-tier semiconductors, electric vehicles — by producing more than domestic demand can absorb.
In that environment, he said, Japan can't rely on private firms to preserve strategic capacity. "If you leave it to the private sector," he warned, Japan "loses easily to China" and then becomes dependent on a rival for critical inputs.
For Tanaka, the lesson comes from the painful example of Japan's failed attempt to build a domestic solar panel industry. Chinese panels were cheaper, he said, and "production in Japan became impossible," leaving Japan exposed in a core renewable technology.
His proposed remedy is bluntly interventionist. Governments should support minimum viable prices for strategic materials so that supply chains survive even when a competitor tries to undercut them. Tanaka said Japan has discussed with partners the idea of setting an "international minimum price" for rare earths. If China sells below it, the state would subsidize the gap so "the market can be maintained."
A Stockpile for the Supply Chain Age
Then there's his most concrete, and most Japan-specific, proposal: treat rare earths like rice.
"If Minamitorishima's rare earths can really become commercial," he said, the government should buy a portion itself. "It's the same idea as rice," Tanaka said. "The government buys rice and keeps it for emergencies. Rare earths should be stockpiled the same way."
He pointed to the United States as a model. Washington, he said, has been purchasing regularly from domestic production sites. That creates a strategic buffer, rather than relying purely on market price signals.
A Clear Agenda
Whether Takaichi can execute the agenda of food-tax relief now, welfare redesign later, and a state-backed industrial strategy in between, remains an open question. But Tanaka argues that investors are already reacting to something simpler: clarity. "Look at how quickly stocks have moved," Tanaka said. "It reflects how clearly the Takaichi government has signaled its policy direction."
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Author: Daniel Manning
