Japan’s New Prime Minister Faces Economic Challenges Ahead

Japan is entering a pivotal period in its economic policy under the leadership of Sanae Takaichi, the country’s first female Prime Minister. Takaichi is committed to revitalizing Japan’s economic growth with a strategy she describes as a “responsible proactive fiscal policy.” This approach aims to balance targeted spending in critical sectors while maintaining fiscal sustainability and managing Japan’s substantial public debt.

Despite these ambitions, the challenges facing Japan’s economy are considerable. According to Qatar National Bank (QNB), Japan’s economic performance has fallen short in recent years, with annual real GDP growth hovering around 0.8% from 2022 to 2024. Although there was a slight recovery in 2025, with growth projected at 1.1%—exceeding the pre-COVID average of 0.9%—the outlook for subsequent years appears increasingly bleak.

Challenges to Consumption and Growth

The stagnation of consumer spending poses a significant obstacle to economic recovery. Consumption constitutes approximately 60% of Japan’s economy, making it a critical driver of overall performance. While there was an uptick in consumer activity this year, it remains stagnant compared to earlier periods.

Weak consumer spending can be attributed to the diminishing purchasing power of households, exacerbated by high inflation rates. Following a brief period of wage growth at the end of last year, real earnings have contracted consistently throughout 2023. This trend is expected to persist, leading to further declines in consumer spending.

Additionally, the Bank of Japan has been normalizing its monetary policy, raising the benchmark interest rate from -0.1% to 0.5%. This shift increases borrowing costs for households and limits the government’s ability to implement fiscal measures due to higher debt servicing costs. Given the importance of consumption to Japan’s economy, these developments are likely to hinder growth prospects significantly.

External Factors and Trade Dynamics

The outlook for Japan’s export-driven economy also remains precarious. Following a turbulent first half of the year marked by uncertainties in U.S. trade policy, a new trade agreement was established in July between Japan and the United States. This agreement imposes a baseline 15% tariff on nearly all Japanese imports entering the U.S., a drastic increase from the previous average tariff of 1.5%. With the U.S. accounting for around 20% of Japan’s export market, these new tariffs represent a significant barrier to foreign sales.

Moreover, an anticipated slowdown in global trade, coupled with ongoing geopolitical tensions, further complicates Japan’s economic landscape. Exports contribute approximately 20% to Japan’s GDP and are essential for industrial production. As these external pressures mount, they present substantial headwinds for Japan’s economic performance.

In response to these challenges, Prime Minister Takaichi has announced a sizable stimulus package worth JPN 21.3 trillion, marking her first major economic initiative. This plan signals a commitment to reversing the current economic slowdown. Nevertheless, analysts remain skeptical about the potential impact of this package, suggesting it may not be sufficient to catalyze a significant change in growth trends.

Looking ahead, projections indicate that Japan’s economic growth may decelerate to 0.6% per year from 2026 to 2027, down from the 1.1% expected for this year. As Japan navigates these turbulent economic waters, the effectiveness of Takaichi’s policies will be critical in determining the country’s economic trajectory.