Japanese Prime Minister Sanae Takaichi answers a question from Yoshihiko Noda, leader of the main opposition Constitutional Democratic Party, regarding his policy speech at the National Assembly House in Tokyo, November 4, 2025. (Photo by Kazuhiro Nogi/AFP) (Photo by Kazuhiro Nogi/AFP via Getty Images)
Kazuhiro Nogi | AFP | Getty Images
Just weeks after taking office, Japan’s Prime Minister Sanae Takaichi faces an early challenge to her “Abenomics” approach to the economy: declining real wages.
Real wages fell for the ninth straight month in September, according to Labor Department figures released Thursday. On an annual basis, it has not increased since 2021, highlighting the strain on household purchasing power.
Yes, nominal wages are rising, but real incomes are being eroded by inflation. Data for September showed that nominal wages rose 1.9% year-on-year, but real wages fell 1.4%.
This comes in the wake of Takaichi’s promise to revive the spirit of “Abenomics,” a policy advocated by the late Shinzo Abe that is centered on the three pillars of ultra-easy monetary policy, aggressive fiscal spending, and structural reform.
Within weeks of taking office, Japan’s first female prime minister reportedly began drawing up a 13.9 trillion yen ($92.2 billion) spending plan to help households cope with rising prices, according to Reuters.
The Nikkei Shimbun reported that the total amount would exceed 10 trillion yen, including subsidies for electricity and gas bills and support for wage increases for small and medium-sized enterprises.
But such spending plans could clash with Japan’s broader fight against inflation.
The headline inflation rate has exceeded the Bank of Japan’s 2% target for 41 consecutive months, reaching 2.9% in September. Household spending rose only 1.8% in the same month, falling short of the 2.5% increase expected by economists.
“Public opinion polls show that inflation is the top concern for Japanese voters,” said Marcel Tieriant, head of Asia Pacific at Capital Economics. “If Mr. Takaichi responds with populist policies like energy subsidies and cash transfers, that will only increase inflationary pressures.”
Japan may also have limited fiscal space to fight inflation. Justin Feng, Asia economist at HSBC, said a large-scale stimulus package financed by government bonds “could undermine Japan’s fiscal credibility.”
The country has the highest debt-to-GDP ratio in the world, reaching almost 250% in 2023, according to International Monetary Fund data.
“If Japan’s inflation rate is not still below 2% in six to nine months, this cabinet’s popularity will plummet, because the Japanese people’s first, second, and third concern is inflation.”
jesper cole
Monex Group Expert Director
Rising inflation could force Mr. Takaichi to water down his expansionary monetary policy stance to keep interest rates low. This is because it could lead to a weaker yen and higher costs for imported goods.
“The latest real wage statistics reflect sustained inflationary pressures in Japan. If the Bank of Japan does not respond proactively in a timely manner, it risks appearing outdated,” Feng said.
Bank of Japan in trouble
The Bank of Japan kept its benchmark interest rate unchanged at 0.5% for the sixth consecutive time at its meeting last month, with Governor Kazuo Ueda reportedly saying the Bank of Japan was “not behind the curve” in combating inflation.
Takaichi was much more moderate than his sharp criticism of the Bank of Japan’s policy tightening campaign last year, but he reportedly told parliament earlier this month that Japan was not achieving sustainable inflation and suggested the central bank should raise interest rates more slowly.
The central bank said it would raise interest rates if it sees a “virtuous cycle” of rising prices and wages.
“Under the new political situation, the hurdles for the Bank of Japan to tighten monetary policy are now higher,” Feng said.
However, this does not necessarily mean that the Bank of Japan will be restrained. “The current process of policy normalization will continue gradually. In our view, the question of future rate hikes is not a matter of if, but when,” Feng added. Capital Economics’ Thieliant expects the Bank of Japan to raise interest rates to 1.5% by 2027.
Analysts told CNBC that curbing inflation is a top priority for the Takacs administration, with some BOJ board members calling for interest rate hikes to counter inflationary pressures.
Japan has a large population of retirees who receive pensions or fixed incomes, and inflation is “very painful” for them, Tomohiko Taniguchi, a special advisor at the Fujitsu Future Research Center, told CNBC’s “Squawk Box Asia” last month.
Jesper Coll, a specialist director at financial services firm Monex Group, also said in October: “If Japan’s inflation rate doesn’t stay below 2% in the next six to nine months, the popularity of this cabinet will plummet, because the Japanese people’s…first, second and third concern is inflation.”
