“Sanaenomics”: A Truss or a Meloni moment?

Takaichi’s Japan leans toward Meloni-style fiscal discipline, avoiding Truss-like shocks, with balanced stimulus and strong domestic financial resilience.

Japan is preparing for a leadership transition with a newly elected prime minister, who is also the new leader of Japan’s Liberal Democratic Party (LDP). Market narratives around the new leader, Sanae Takaichi—often dubbed a “mini Abe”, have centered on expectations of aggressive fiscal stimulus and resistance to monetary tightening. However, these assumptions overlook the structural and political constraints she faces, as well as the evolving macroeconomic landscape in Japan.

Takaichi’s economic vision, rooted in Abe-era expansionism, faces constraints shaped by post-pandemic realities. While her early rhetoric hinted at a revival of Abenomics-style stimulus, Japan’s current environment implies a more sanguine picture. The country faces a persistent policy trilemma: it cannot simultaneously uphold an independent monetary policy, maintain political stability, and deliver credible fiscal stimulus—one of these will probably have to give.

Unlike Abe’s tenure, which operated under deflationary pressure and a strong mandate for stimulus, Takaichi contends with a fragmented National Diet and an inflationary backdrop. Japan today is not the deflation-bound economy that it was in the early 2010s. Headline inflation has exceeded 2% for three consecutive years, albeit US-style core inflation (excluding food and energy) is around 1.5%. These dynamics call for a more measured approach—favoring modest, responsible fiscal support over aggressive spending.

Fiscal policy: From ambition to discipline

Liz Truss’s tenure as the UK Prime Minister in December 2023 was marked by a bold, unfunded fiscal stimulus that triggered a sharp sell-off in gilts and a plunge in sterling. Ultimately, the Bank of England was forced to intervene, undermining market confidence. Giorgia Meloni entered office with a similarly populist and fiscally expansionary rhetoric but has since then toned down her approach, opting for more pragmatic budget management to reassure markets and her European Union partners. Meloni’s restraint has helped to stabilize Italian bond spreads and maintain investor trust, positioning her as a more disciplined conservative compared to Truss.

In Takaichi’s case, hopes for large-scale fiscal expansion are constrained by political realities. The LDP’s long-standing coalition with Komeito ended after 25 years, and its new alignment with the Japan Innovation Party still leaves it just shy of a majority in both chambers of the Diet. This makes it difficult to pass sweeping spending packages. Takaichi has also pivoted toward “responsible fiscal spending”: appointing fiscal conservatives like Taro Aso and Shunichi Suzuki to key roles has signaled a commitment toward market-friendly discipline.

A balancing act between stimulus and discipline

Takaichi’s leadership is expected to be a net positive for household consumption, as her policies may strike a balance between fiscal restraint and targeted stimulus. A supplementary budget could be introduced during an extraordinary Diet session in the near term—to reinforce domestic resilience—but we believe it will not alarm bond market participants.

We recently upgraded Japan’s growth outlook on firm domestic fundamentals, which include a sustained recovery among households. Even though momentum has seemed to stall in Q3, we expect GDP growth to be positively supported by household consumption and capital expenditures.

Following Takaichi’s victory, 10-year Japanese government bond (JGB) yields climbed to a 17-year high of 1.69%, while the 30-year yield hit an all-time high of 3.345%. As we wrote recently, this is an exaggerated reaction to fears of fiscal profligacy. At 236% in 2024, Japan’s overall debt-to-GDP ratio is among the highest in the world, but it rose only by 12% from 2020 in response to the pandemic. The International Monetary Fund has projected that Japan’s government debt as a share of its GDP will fall by 14% by 2030, supporting our expectation of fiscal prudence (Figure 1).

Furthermore, a supplementary budget is in development for this fiscal year, which may keep markets on edge. However, historic data indicate that Japan’s track record of supplementary stimuluses have been rather responsible (Figure 2).

Combined with positive real growth following post-COVID recovery, the country’s net debt-to-GDP ratio has declined to around 140% and continues to be on a downward trajectory. Crucially, over 90% of Japan’s debt is held domestically, significantly reducing exposure to external financing risks. Japan also continues to remain the world’s largest net creditor, with approximately $3.7 trillion in external assets.

These structural strengths help to insulate Japan from the kind of bond market volatility experienced by countries reliant on foreign capital, such as the United Kingdom during Liz Truss’s brief and turbulent premiership.

Investment implications

The Bank of Japan: Contrary to market fears, Takaichi is unlikely to hinder the Bank of Japan’s (BOJ) rate hike trajectory. Instead, she appears to favor a cautious, data-dependent approach. Her preference is for the BOJ to move slowly, especially given Japan’s unique inflation dynamics—food prices in Japan had risen sharply due to a rice crisis.

This could mean that the BOJ might remain behind the curve for an extended period of time. Nonetheless, we see a good chance of a hike around the turn of the year. The pace of hiking is likely to stall subsequently though as the policy rate will approach a psychological barrier of 1.0%.

Japanese yen: USD/JPY has climbed and is hovering closer to 155. Near-term stabilization is plausible if the BOJ leans more hawkish, but structurally the yen’s path remains more Fed than domestic driven. Gradual US easing cycle and a rebuild in FX hedge ratios for international investors from historically low levels should, over time, pull USD/JPY lower. We sketch fair value near 135 by end 2026, while acknowledging that trading is likely to remain anchored closer to 150 in the near term. Bottom line, JPY screens materially cheap on standard PPP/BEER lenses, supporting a medium term mean reversion case.

Japanese government bonds: The JGB curve remains steep, reflecting fiscal dominance expectations. The 30-year yield has risen above 3.25%, and the 5-year-30-year spread (at about 200 bp) is the steepest among Japan’s G4 peers. While near-term dynamics are neutral to bearish driven by foreign money flows and domestic sidelining under BOJ’s quantitative tightening (QT), Japan’s 90% self-funded structure is a stabilizer. Valuations have corrected to fair value among G7 developed Market peers.

Domestic banks, sitting on roughly $3 trillion in cash at BOJ’s current account, are expected to re-enter above 1.8%–2.0%, anchoring the topside of 10-year JGBs. While 2025 could remain a steepening story, there is potential for a flattening in 2026 as the BOJ hikes closer to the terminal rate and Japan’s Ministry of Finance continues to tweak issuance composition to address technical supply-demand imbalances. Notably, JGBs also present an attractive opportunity for long-term foreign investors, offering a compelling yield premium when hedged back into their respective home currencies.

Unlike the UK’s “Truss moment,” Japan’s institutional structure and domestic investor base provide a buffer against fiscal shocks. Pension funds and banks are structurally long and have room to add into any excessive JGBs weakness, and the absence of derivative exposure reduces the risk of forced selling during volatility.

Japanese equities (Nikkei and TOPIX): Takaichi’s reflationary stance is expected to support Japanese equities, particularly in sectors tied to domestic demand and fiscal stimulus. While some of the initial optimism may already be priced in, Japan’s fundamental stability, ongoing corporate governance reforms, and improved earnings power continue to underpin a constructive medium-term outlook. Importantly, Japan’s self-funded nature—household financial assets nearly double the national debt—adds resilience to its financial system and investor confidence.

Sector-wise, financials and construction are well-positioned to benefit from macro tailwinds, including reflationary policy and domestic stimulus. Consumer staples, on the other hand, continue to face margin pressure due to limited pricing power. Semiconductors stand to gain if US-China tensions were to ease, supporting Japan’s strategic chip buildout—highlighted by developments such as Taiwan Semiconductor Manufacturing Company’s expansion in Kumamoto. Additionally, the BOJ’s equity unwind under QT is expected to be a gradual, long-drawn process, limiting near-term market disruption.

Meloni-style pragmatism in the offing?

Sanae Takaichi’s leadership may carry the ideological legacy of Abenomics, but Takaichi’s Japan, like Meloni’s Italy, faces structural constraints: limited legislative control and macroeconomic leeway given political fragmentation and inflationary pressures. Japan’s unique debt structure also points to a more pragmatic policy path, so Takaichi’s actual policies might end up being more measured. As a start, much like Giorgia Meloni in Italy, Takaichi has dialed back her campaign-era fiscal ambitions in favor of responsible spending and appointed officials that favor fiscal discipline for institutional reassurance.

Markets expecting a return to aggressive stimulus or monetary easing may need to recalibrate. Instead of a Truss-style disruption, Takaichi’s tenure could mark a new phase of cautious reform—one that balances legacy with discipline and aims to preserve Japan’s hard-won macroeconomic credibility in a post-deflation world.