Why Japan’s Sanae Takaichi Should Stick to Her Pro-Growth Guns
Republicans may lose both houses of Congress.
Why Japan’s Sanae Takaichi Should Stick to Her Pro-Growth Guns
August 10, 2026
By: Christian Whiton
Apparently, there is some distance between the US and Japanese governments. Such was the implication of a recent Nikkei Asia headline: “Takaichi’s tax cut plan exposes fault line with US over fiscal policy.”
Except it doesn’t. There is no disagreement at the senior levels of the Trump administration and Japanese Prime Minister Sanae Takaichi, who is pursuing a uniquely Japanese attempt to accelerate the Japanese economy through real growth. In fact, there is tight collaboration and agreement between the two governments.
The immediate matter at hand was a coordinated action on July 31 by the Treasury Department and the Japanese Ministry of Finance to halt the accelerating decline of the yen against the US dollar. That drop risked widening the US-Japan trade deficit and Japanese inflation, which has flared in part due to high oil prices.
Since the Iran War began on February 28, the yen’s exchange rate has fallen to a 40-year low of 164 per dollar before Washington and Tokyo intervened.
The public is rightly wary of politicians blaming market “speculators” for moves they dislike. However, in this instance, the yen became less a verdict on Japan’s economic prospects than a reflection of herd behavior. A falling yen spurred more yen selling, which in turn spurred even more selling. Washington and Tokyo’s coordinated intervention to buy yen broke the cycle and stabilized the currency, enjoyably burning traders who had been betting against Japan in the process.
But the real story is an allergy among establishment voices on both sides of the Pacific to pro-growth policies intended to help consumers and the supply side of the economy (aka the private sector). The pursuit of such policies puts Takaichi and President Donald Trump in a similar boat that is all too rare across advanced economies.
In effect, Takaichi is fulfilling the legacy of her mentor, Shinzo Abe, the transformative Japanese prime minister whose second premiership ran from 2012 to 2020 and who was assassinated after leaving office. Abe’s economic reforms were grouped into three “arrows”—monetary easing, fiscal stimulus, and structural reform. The first two, which Abe successfully implemented, were short-term efforts to spur Japan’s economy out of a long-term coma. But structural reform, which was intended to include liberalization of Japan’s stodgy economy and business culture, remained elusive.
Takaichi’s program finally goes well beyond fiscal and monetary stimulus. Her government created Japan’s largest-ever tax incentive for capital investment. A new corporate governance code pressures companies to shift capital from cash to investment, research, and labor.
Separately, her growth strategy uses tax incentives, public financing, procurement, and regulatory changes to encourage public and private investment in favored sectors, especially tech, with cumulative investment projected to exceed $2.3 trillion by the end of the decade. Her government abolished longstanding gasoline and diesel tax surcharges and raised the income-tax threshold to about $11,000, reducing the tax penalty on additional work, including for housewives.
This amounts to a broad private-sector-led growth strategy that combines governance reform, tax relief, investment in favored sectors, and supply-side measures. It is complicated and not on the scale of the pro-market reforms pursued by President Ronald Reagan and British Prime Minister Margaret Thatcher in the 1980s, which modernized their economies but sharply increased short-term unemployment.
Such a painful strategy would not fly in Japan, even with the unprecedented political mandate Takaichi won in February. But Takaichi’s reforms represent a real watershed for Japan and the realization of Abe’s missing third arrow. US Senator Bill Hagerty (R-TN), who was Trump’s first-term ambassador to Japan, remarked earlier this year: “Takaichi is actually a protege of Abe, and she’s carried the ball even further.”
More controversially, Takaichi’s government is cutting the consumption tax on food from 8 percent to 1 percent for two years. Economic scolds in the business media have criticized these moves, citing Japan’s large national debt, which exceeds 200 percent of GDP.
That debt is worrisome, but it is held mostly by Japanese corporations and individuals unlikely to invest elsewhere, denominated in yen and therefore not subject to a currency-induced crisis like the debt of poorer nations, and has a healthy average maturity of nine years and an average interest rate of just 1 percent. The tax cut is in response to food inflation that frustrates Japanese voters no less than it frustrates Americans—and that can be attributed significantly to the effects of the Iran War on oil prices. Like most tax cuts, its net effect is to move money from the unproductive public sector to the productive private sector.
That concept is inimical to many establishment voices, especially those that love big government. But it is a genuine, democratic response to a real problem for voters.
Why does this matter for the United States? A strong, growing Japan is good for American economic and military security. Japan is America’s most crucial ally in the Pacific and has doubled defense spending in recent years. It and the Philippines are the only countries certain to fight alongside the United States if, God forbid, there should ever be a general war with China. Japan is one of America’s most important export markets. Like Abe, Takaichi is Trump’s best foreign leader friend of consequence and will likely be so for his successor.
Further rebutting the claims of naysayers and those who argue there is distance between Tokyo and Washington, Treasury Secretary Scott Bessent has been unusually explicit in his support, saying Japan’s economy “continues to perform well under Prime Minister Takaichi” and praising the “strong policies” she is pursuing to improve the country’s economic fundamentals.
Investors, who unlike pundits have actual money on the line, agree. The Nikkei 225 is up roughly 33 percent this year, and the broader TOPIX is up about 13 percent. Americans who support private-sector growth on both sides of the Pacific and recognize that a strong Japan is good for America should hope Takaichi sticks to her guns.
Original URL in the National Interest: https://nationalinterest.org/feature/why-japans-sanae-takaichi-should-stick-to-her-pro-growth-guns
In Other News
Who will control Congress after midterm elections? Republican insiders generally believe the Senate is safe but Democrats will probably gain control of the House. The opposition party almost always wins significant seats in midterm elections and the current House margin is thin.
However, some Republicans are more optimistic. They point out bright spots including a strong fundraising advantage, favorable gerrymandering of House districts, the Democrats’ nomination of radicals, and a would-be Democrat Speaker of the House, Hakeem Jeffries, who is unlikely to be mistaken for one of the top scientists in the space program. Republicans just may hold the House, goes the prayer.
Yet another twist is that Republican control of the Senate and Democrat control of the House would not be so bad. After all, Republicans cannot control everything forever and having Dem nutjobs reveal their nuttiness by running the House would be helpful to Republicans in the far more important 2028 elections.
While it’s ancient history, I heard that same argument in the Bush administration in 2006. It didn’t quite work out: instead of a small House majority overseen by crazy Nancy Pelosi that was checked by a Republican Senate, all setting up for a Republican sweep in 2008, Republicans lost both houses of Congress in 2006 and matters would only get worse.
Unfortunately such an outcome is not beyond the realm of possibility in 2026. Prediction markets currently project highly likely Democrat pickup of the House but more of a tossup in the Senate. But the race-by-race picture is worse. The markets have Republicans failing to unseat Democrat Jon Ossoff in ought-to-be Republican Georgia (leaving a 53-47 Republican margin absent other changes), certain loss of a Republican seat in North Carolina (52-48), likely loss of the last Republican seat in New England in Maine (51-49), a slight Democrat edge to pick up a seat in Ohio (50-50, JD Vance tilts power to Republicans but only barely; committees are evenly divided), and even a narrow probability that Democrats pick off a Republican in Alaska with its confusing ranked-choice voting rules (49-51, hello Majority Leader Chuck Schumer). That path is thankfully narrow and fraught for Dems, but not impossible.
But matters may be worse for Republicans than polls and prediction markets imply. Dan Schnur, a former aide to a California Republican governor (yes, they had them), USC professor and political analyst, hypothesized in 2014 that “In politics, a smaller group of citizens with an intense commitment to a cause will almost always prevail over a larger group who lack that same fervor.” He then proved his theory by running for California Secretary of State that year as an independent and coming in fourth place.
The Democrats seem to have energy. They are convinced democracy itself is at stake and they must act. Many Republicans also believe the fate of the Republic is at risk but they have a bodyguard in the White House for at least two more years. Trump’s vacillation over the Iran War, related food and energy price inflation, and sideshow weirdness like Trump’s involvement with Reflecting Poolgate also decrease Republican energy. Republican senators’ love for the unconstitutional filibuster and inability to pass wildly popular election-integrity requirements also have many activists asking “why?”
Much can happen between now and when voting begins in October, but the red lights at the end of the runway are coming up awfully fast.
