Hold onto your hats, because Japan’s economic landscape is about to get a whole lot more interesting. Sanae Takaichi, the newly crowned leader of Japan’s ruling Liberal Democratic Party (LDP), is poised to become the country’s first female prime minister, and her victory could significantly shake up the Bank of Japan’s (BOJ) plans for interest rate hikes. But here’s where it gets controversial: while Takaichi’s win might delay rate hikes, it’s unlikely to derail them entirely—though the timing and approach could spark heated debates among economists and policymakers alike.
On October 4, 2025, Takaichi declared a 'new era' for Japan after securing her party’s leadership, a move that puts her on the fast track to the premiership. Her conservative stance and advocacy for expansionist economic policies have already raised eyebrows, particularly regarding her views on monetary policy. Takaichi is a staunch supporter of 'Abenomics,' the aggressive blend of government spending and monetary stimulus championed by her mentor, former Prime Minister Shinzo Abe. This approach aimed to combat deflation and ease the strain of a strong yen on Japan’s export-driven economy. But times have changed, and so has the economic playbook.
And this is the part most people miss: Takaichi’s ascent could complicate the BOJ’s efforts to normalize monetary policy. Analysts predict her leadership will reduce the likelihood of an October rate hike, as she favors demand-driven inflation over premature tightening. In her own words, the goal is to achieve a virtuous cycle where wage increases drive up demand, leading to moderate price rises that benefit businesses. However, delaying rate hikes too long could trigger an unwelcome yen depreciation, exacerbating inflation through higher import costs.
The BOJ, which ended decades of massive stimulus last year and raised its policy rate to 0.5% in January, now faces a delicate balancing act. Before Takaichi’s victory, markets were pricing in a 60% chance of an October rate hike, fueled by persistent inflation and a hawkish tilt within the central bank. But Governor Kazuo Ueda’s recent caution about global uncertainties—coupled with Takaichi’s dovish leanings—has thrown those expectations into question. 'Takaichi’s win will likely push the BOJ into a wait-and-see mode,' noted Mari Iwashita of Nomura Securities, suggesting a pause in October.
Yet, not everyone agrees. Some analysts argue that inflation, not deflation, is now Japan’s primary economic challenge, a reality that cost the LDP dearly in the July elections. Former BOJ official Nobuyasu Atago highlighted the need for the central bank to build trust and communication with Takaichi’s administration, a process that could take time. Meanwhile, diplomatic pressures—particularly from the U.S., which has criticized the yen’s weakness—could further complicate Takaichi’s monetary policy stance.
Here’s the million-dollar question: Will Takaichi’s reflationist agenda force the BOJ to abandon its gradual tightening plans? Or will she strike a pragmatic balance, avoiding a full-blown clash with the central bank? Former BOJ board member Takahide Kiuchi believes she’ll tread carefully, unless a significant downturn in the U.S. economy forces her hand. But as Tomohisa Ishikawa of the Japan Research Institute pointed out, 'Things have changed since Takaichi worked with Abe.' The economic challenges of today are vastly different from those of the past, and her ability to adapt will be closely watched.
As Parliament prepares to vote her in as premier on October 15, one thing is clear: Takaichi’s leadership marks a pivotal moment for Japan’s economy. Whether her policies will stabilize or destabilize the yen, inflation, and growth remains to be seen. What’s your take? Do you think Takaichi’s approach will benefit Japan in the long run, or is she playing with fire? Let’s hear your thoughts in the comments!
