Takaichi's Growth Promise Faces Japan's Track Record of Overspending

Japanese Prime Minister Sanae Takaichi has painted a rosy picture: expansive government spending to jumpstart growth, all without raising taxes. But Japan's recent track record suggests that without laser-focused targeting, this could become another expensive exercise in disappointment.

The Promise That Sounds Too Good

In her February 20th policy speech to parliament, Takaichi pledged to press Japan's "growth switch" through proactive fiscal policy. The government would spend big to boost the economy while keeping citizens' tax burden unchanged.

It's a politically attractive proposition. Who wouldn't want more government benefits without higher taxes? But the devil, as always, lies in the details—and those details remain frustratingly vague.

Takaichi spoke of "severely lacking domestic investment" and the need for "multiyear budgeting frameworks," but offered little specificity about which sectors would receive funding, how much, or what measurable outcomes she expects.

When Big Spending Met Small Results

Japan has been down this road before, and the scenery wasn't pretty. During the COVID-19 pandemic alone, the government unleashed tens of trillions of yen in stimulus packages. The result? Economic growth still hovers around 1%, and real wages remain stagnant.

The money flowed, but much of it seemed to evaporate before reaching ordinary consumers and small businesses. Construction companies and large corporations captured the lion's share of benefits, while the broader economy saw limited impact.

This pattern isn't new. Japan's post-bubble era is littered with infrastructure projects and corporate subsidies that failed to generate sustainable growth. The country built plenty of bridges to nowhere while its productivity growth remained anemic.

Market Skepticism Tells a Story

Investors seem to be reading between the lines. While large-cap stocks have rallied on Takaichi's promises, smaller companies have actually declined. This suggests markets expect another round of big-business-friendly policies rather than broad-based economic stimulus.

Bond markets are equally telling. Government bond yields have ticked higher, reflecting concerns about debt sustainability as Japan's debt-to-GDP ratio already exceeds 250%—the highest among developed nations.

The Global Context

Takaichi's timing is particularly challenging. With the U.S. and Europe grappling with their own fiscal constraints, Japan's go-it-alone approach to stimulus could draw international scrutiny. Trade partners may view aggressive fiscal expansion as an attempt to gain competitive advantage through currency devaluation.

For multinational corporations operating in Japan, this creates uncertainty. Will Takaichi's policies favor domestic companies over foreign competitors? Will the spending focus on traditional industries or emerging technologies like AI and green energy?

The Targeting Problem

The fundamental issue isn't whether Japan should spend more—it's about spending smarter. Previous stimulus efforts failed because they prioritized political constituencies over economic efficiency. Money flowed to sectors with strong lobbying power rather than those with the highest growth potential.

Small and medium enterprises, which employ the majority of Japanese workers, have historically received a smaller share of government support despite being crucial for broad-based growth. Similarly, consumer-focused policies that could boost domestic demand have taken a backseat to producer subsidies.