Quick Bites | The Emergence of Rejuvenated Japan

Japanese Prime Minister Sanae Takaichi’s landslide election victory on the weekend gives her an unprecedented shot at shaking Japan out of its long economic funk and taking on a bigger security role deterring Chinese ambitions in Asia. The Nikkei 225 sharemarket index responded accordingly, rising 5% on Monday, and up a stellar 47% year on year.

Source: Financial Times

Japan carries the heaviest debt burden among high-income countries, at more than 200 percent of the country’s GDP. A weak currency and investor concerns have driven up costs of living and inflation rates. However, the election victory gives Takaichi a strong mandate to revitalize the economy on her terms—without needing to negotiate with other parties or from parliament’s opposition-controlled upper house. (The LDP’s two-thirds supermajority in the lower house gives it the ability to override vetoes by the upper house.)

“We must pull Japan out of excessively tight fiscal policy and a lack of investment,” Takaichi said on Monday. Following the election, the prime minister repeated her pledge to suspend a sales tax on food for at least two years to help ease household living costs, though she ruled out issuing fresh debt to achieve this.

PM Takaichi’s agenda includes new investment in strategic industries, temporary tax relief for consumers and fatter defense budgets.

For Australia and for the US, Takaichi’s triumph ensures Japan is led by a prime minister who is in broad agreement with American goals, especially President Trump’s imperative of getting allies to spend more on regional security, and who is seen as a key strategic partner in Canberra.

“We will confirm the unshakable unity between Japan and the US, while advancing broad Japan-US cooperation in diplomacy, economics, and security,” Takaichi said at a news conference on Monday.

Her message to fellow lawmakers is, “This is Japan’s last roll of the dice. We are going to have to go big on economic growth, on economic security. We’ve just got to do it.”

But even though she now leads a parliamentary majority larger than any other in Japanese history, Takaichi still faces challenges.

Investors have been nervous about the prospect of more government borrowing to finance her spending plans. That could lead to higher interest rates and a weaker currency in future, as reflected in rapidly rising bond yields. The yield on the 10-year bond was up 0.06% at 2.29%, heading back towards January’s peak, which was the highest level since 1999. The yen was broadly steady at ¥156.60 against the dollar.

Source: Trading Economics

But generally financial markets broadly welcomed the prospect of long-term, stable leadership in Japan.

One big challenge is Beijing. Japan has suffered a barrage of economic reprisals from China after Takaichi said Japan might get pulled into any conflict over Taiwan. It isn’t clear if those tensions will ebb or keep growing.

Takaichi will need to deliver for voters who, having handed her such a big win, will have lofty expectations for her government. In the Japanese parliament’s lower-house, Takaichi’s coalition won 354 of the 465 seats up for grabs. The gains included a more than two-thirds majority for her Liberal Democratic Party, its best-ever result.

That margin of victory gives Takaichi’s administration overwhelming control over Japan’s legislature. The LDP and its smaller coalition partner can now overrule parliament’s upper house if the two chambers clash on legislation.

One legislative goal now within reach is dismantling restrictions on exports by Japan’s defense industry. Current rules limit exports to non-lethal uses, such as rescue missions, transportation and minesweeping. Ditching those restrictions would drive investment and innovation in the sector by allowing Japanese firms to find new markets and customers, which would help Japan play a much bigger role in regional security by arming neighbours such as Australia and the Philippines.

The Trading Relationship with Australia is Big and Growing.

Source: Observatory of Economic Complexity (OEC)

Japan is one of Australia’s top three trading partners, with two-way goods and services trade valued at A$108 billion in 2024, acting as a critical market for Australian resources and agricultural exports. Japan is Australia’s third-largest export market (approx. A$75 billion), driven by energy, coal, and food, while Australian imports from Japan amounted to A$32.4 billion.

Key Aspects of Australia-Japan Trade (2024-2025):

Total Two-Way Trade: Valued at A$108 billion in 2024.

• Major Exports to Japan: Coal, iron ore, liquefied natural gas (LNG), and agricultural products (e.g. beef).
• Major Imports from Japan: passenger vehicles, refined petroleum, and machinery.
• Trade Balance: Consistently in Australia’s favour, with a significant surplus.
• Key Agreement: the Japan-Australia Economic Partnership Agreement (JAEPA) covers over 95% of trade value, eliminating or reducing tariffs on most goods.
• Investment: Japan is a major investor in Australian energy, infrastructure, and resources, including critical minerals and decarbonization projects.
• Sector Highlights: Queensland alone exports $11 billion in coal to Japan, making it a critical regional partner.
• The relationship is robust, with strong cooperation in energy transition and food security. Japan is the fourth largest economy in the world, just behind Germany.(The US: $28t, China: $18t, Germany: $4.5t, Japan: $4.2t, India: $3.8t.)

The major trade links between Japan and Australia are:

• Energy resources – Australia is Japan’s largest supplier of liquefied natural gas (LNG) and a major coal exporter to Japan, providing critical energy for Japanese industry and power generation.
• Iron ore – Australia supplies most of Japan’s iron ore imports, which are essential for Japan’s steel industry and manufacturing sector.
• Food and agriculture – Australia exports beef, wheat, seafood, and other agricultural products to Japan, which relies heavily on food imports.
• Automobiles and machinery – Japan exports cars, industrial machinery, and manufacturing equipment to Australia, making it one of Australia’s top sources for vehicles and advanced technology.
• Investment and services – There are substantial two-way investment flows, with Japanese companies investing in Australian mining, real estate, and infrastructure projects, while Australian firms invest in Japanese markets, particularly in financial services.

Consensus GDP growth forecasts for Japan and Aus

Based on the latest forecasts, here are the consensus GDP growth forecasts for 2026: Japan to grow ~ 0.8-1.0% and Australia ~ 2.1-2.4%. Australia is expected to grow roughly 2-3 times faster than Japan in 2026, driven by stronger household consumption and domestic demand, while Japan faces more modest growth. This chart shows GDP growth indexed to 100 starting in 2000 for both countries:

Source: Claude

Starting from the same point in 2000, Australia’s economy has grown nearly 93% cumulatively, while Japan’s has grown only about 23%. This reflects Japan’s “lost decades” including the 2008-2009 GFC, the 2011 tsunami and Fukushima nuclear disaster, and the COVID pandemic in 2020. Australia, by contrast, maintained relatively consistent growth throughout most of the period, benefiting from the commodities boom, strong ties with China, and avoiding recession during the GFC.

But this is looking at the past. Japan faces many challenges, the staggering debt burden and an ageing population not the least of them, but it has shown an ability to transform itself. Are we about to enter a new age of growth in Japan? We should all be hoping so, for the benefits to Australia could be enormous.