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Here in the heart of Osaka, in the bustling Umeda district, stand two striking towers of glass and steel. Together, they form the Umeda Sky Building.
Completed in 1993, it's the world's first connected skyscraper. But this was never meant to be just a pair. The original plans called for four towers. Then, the money ran out. Where a third tower was meant to rise, a vegetable garden now stands. A fourth was planned just beyond it, but was never built.
The unfinished vision of the Umeda Sky Building mirrors Japan's own story, born of the economic boom and stalled by the bust. We have to go back to the late 1980s. The economy was booming, equity prices, land prices were soaring. And so the government wanted to burst the bubble. Land and equity prices collapsed, and the economy also collapsed. Since the early 1990s, Japan's economy has stalled. Overall, Japanese economy was quite weak and quite weak domestic demand.
But recently, there have been signs of revival. In February, the Nikkei broke 57,000 for the first time ever. The catalyst? New leadership. The day before, Prime Minister Sanae Takaichi and the ruling Liberal Democratic Party won the general election in a landslide. Is Japan finally headed for an economic turnaround? Or will these signs of life sputter out?
In fall 2024, IT professional Sato Takahide returned to Japan. He'd spent over 8 years studying and working abroad. One of the first things he noticed on his return, how much prices had risen in his absence.
Of course, this is inflation. But in Japan, inflation of any kind has been unusual. You see, for about three decades, prices in Japan barely rose. I think we have to go back to the late 1980s. At that time, Japan was a bubble economy. Uh the economy was booming. Uh equity prices, land prices were soaring, and things were getting a little bit out of control. So, the government felt that it's time to bring them down. And so, they tightened monetary policy, and they restricted real estate lending, and so forth. And these various policies were very successful, in fact, maybe too successful, and they led to a collapse of the bubble, and land and equity prices collapsed, and the economy also collapsed.
Japan's economy and stock market surged through the '80s until December 1989. Then, Japan's massive asset bubble popped. And by 1992, the Nikkei had lost more than 60% of its value. Households and firms pivoted from spending to debt repayment, even with interest rates at near zero. This basically led to this 30-year recession in Japan. And because it was a recession, the people's incomes were stagnant. People didn't have money to spend.
For about 30 years, the country was stuck in a deflationary cycle. This period came to be known as Japan's lost decades. For economists, some level of inflation is a good thing. It can reflect steady demand for goods and services, often a result of rising employment or wages. Deflation, on the other hand, can be a signal of economic stagnation. Because people didn't have money to spend, there was not enough aggregate demand. And if there isn't enough demand, then prices will generally fall.
Throughout the lost decades, roughly spanning 1991 to 2021, Japan's GDP grew by about 1% each year, with some years of negative growth. But in 2022, inflation returned to the world's fourth largest economy, surpassing the Bank of Japan's 2% target. Was this a sign of an economic turnaround? It all depends on what's happening on the other side of the ledger, namely incomes and wages. Even if prices are going up 10% a year, if people's wages are going up 20% a year, then there's nothing to worry about.
There are other signals that Japan might be emerging out of its lost decades. The country saw six consecutive quarters of growth ending in Q2 of 2025. This is the longest consecutive streak of expansion since the COVID-19 pandemic. GDP growth for 2026 is projected to be about 0.5%. The Nikkei also reached an all-time high at the start of 2026 and has continued its record-breaking run.
Mr. Kaichi became Prime Minister in October last year. Around that time, the Japanese economy was still in the process of uh continuing the very moderate economic growth. And real GDP level uh just recovered the pre-COVID-19 pandemic's level. But overall, Japanese economy was quite weak and quite weak domestic demand. So, I can't really say the Japanese economy is booming. Um but it's not really collapsing, either.
There's a reason for this caution. To determine if the inflation figures point to economic revitalization, we must look more closely at the details. In Japan's case, rising prices are not wholly caused by increased consumer demand. 4 years ago in 2022, uh Russia invaded Ukraine. Since Ukraine is a major producer of grain, the war disrupted the production and export of grain from Ukraine. And this led to increase in grain prices throughout the world. And at the same time, foreign countries imposed various sanctions on Russia, one of which was on the export of oil and gas. And this led to uh sharp increase in oil and gas prices around the world. And this also had a ripple effect on other prices and led to, you know, overall uh increase in overall prices.
At the same time, the low interest rate environment, meant to spur borrowing and growth, has led to a depreciation of the yen. And that has led to sharp increase in import prices, and that has had a ripple effect on the economy causing all prices to to increase in Japan. People suffered from high imported prices. Their purchasing power was uh deteriorating.
The current inflationary cycle has hit some Japanese consumers and businesses hard. Yui Sawada used to run a cafe here, selling candy apples, light snacks, and hot meals. Sawada tried to cut costs, using cheaper ingredients, shortening her business hours. In the end, she had no choice but to raise prices.
Accounting for inflation, real wages in Japan fell for the fourth year in a row last year. Consequently, unions pushed for higher pay. So, in October last year, Japan implemented a major minimum wage increase. From 1,055 yen to between 1,118 and 1,120 yen, this bump of roughly 6% was the largest on record. But for business owners like Sawada, this was another headache.
Earlier this year, unable to keep up with operating costs, Sawada turned her business into a pop-up. Going mobile cut her rent. As Watakide, the cost of living he found on his return forced him to manage his expectations.
One important ingredient in any economic revival is sentiment. When people and businesses feel optimistic, they're more likely to spend and invest. In Japan, however, confidence remains subdued. A government survey found that financial insecurity is the top concern among citizens with over six in 10 people worried about their economic stability and future prospects.
But are we starting to see the light at the end of the tunnel? Initially, when IT professional Sato Takahide returned to Japan, he had dreams of striking out on his own. But his parents had different ideas.
Japan has one of the world's lowest unemployment rates. For every 100 people, only two or three are unemployed. But this demand for labor is not reflected in their wages. Usually, there's this inverse relationship between unemployment and wages. If there's a labor shortage and unemployment is low, wages will tend to increase. But in the case of Japan, we have a very strange situation in which you have very low unemployment, but also low wages. It's very somewhat counterintuitive.
Like with inflation, Japan's employment picture is unusual. Among Japan's more than 58 million company employees, nearly four in 10 are irregularly employed, meaning they're not permanent full-time staff. Instead, they're freelancers or on short-term contracts. In Japan, traditionally, workers have permanent tenure. They cannot be fired until they reach retirement age. So, permanent workers are fixed cost to the company. But temporary workers, you know, they have 1-year contracts usually, so it's easier to release them when the the need arises.
After three fruitless months trying to build his business, Takahide reluctantly began job hunting at his parents' urging. But landing a full-time role proved elusive.
Since 1990, average real wages in Japan have remained almost flat. In contrast, real wages in the US are now about 1.5 times higher than they were three decades ago. Today, the average Japanese income is lower than in most advanced Western economies and slightly below that of neighboring South Korea. In part, the suppression of wages is a reflection of business outlook. Yeah, during the last two or three decades, you know, the economy has been relatively stagnant. So, companies have very often had to scale down. So, they're they feel a greater need to reduce their fixed costs, reduce their their labor costs. I think that's what led to this increase in the share of temporary or low-wage workers.
This has been Takahide's experience. Currently, he works odd jobs in the IT industry. The problem is that people's incomes have been stagnant. They just don't have money to spend even though companies have been, you know, making lots of profits. They've been retaining most of that money inside the firm and not paying it out as wages. So, workers have been as have been hurt by this. If wages do not keep up with inflation, then people are more likely to tighten their belts.
Here in Sakuranomiya Park, the cherry blossoms are in full bloom. Nearby, 46-year-old Kentaro Kuga runs a patisserie. His store once catered to locals. But 2 years ago, rising costs forced him to increase prices of his menu items by 10%. Today, his business relies mainly on tourists.
But, there are signs of change. Last year brought the strongest nominal wage increase in decades. Exports have also picked up with growth recorded for seven consecutive months as of April. Some attribute these bright spots to new leadership. Prime Minister Sanae Takaichi and her ruling Liberal Democratic Party secured a landslide victory in the February general election. They captured 316 seats in the 465 seat House of Representatives. The election revealed the strong support Takaichi enjoys among young people. A Yomiuri survey found that four in 10 of Takaichi's youth supporters backed her as they were expecting results from her policies.
What are the new administration's policies and can they unlock Japan's economic revival? October 21st, 2025. A historic day for Japan. Sanae Takaichi became the country's first female Prime Minister. Her rise to power followed the resignation of her predecessor, Shigeru Ishiba. Upon taking office, she placed the economy high on her agenda. One of her first moves, a stimulus package to promote growth and ease the cost of living. Part of it gave relief to households, including a 7,000 yen subsidy for electricity and gas, and a one-off cash support of 20,000 yen per child.
From last year's supplementary budget, she abolished some part of a gasoline tax, and then also she provided some a temporary subsidy for electricity. And this year, she started uh some tax credit for the personal income tax. So, people's tax payment will be less, right? So, during election campaign in January, she said she will introduce 0% food-related consumption tax. So, right now, we pay 8% for the food. So, she said she will increase the disposable income.
In November, the Takaichi administration also moved to abolish Japan's provisional gas tax. Introduced in 1974, it added about 25 yen per liter to fuel prices at the pump. The move was supposed to curb inflation. 38-year-old food truck operator Keisuke Yasuda welcomed the measure.
In all, the stimulus package amounted to over 20 trillion yen, approximately 130 billion US dollars. These moves are meant to create what Takaichi calls a high-pressure economy. High-pressure economy, my understanding is basically to more fiscal expansionary policy to increase the aggregate demand. So, not only for the consumers' disposal income, but like to spend more money for research and development and support more corporate sector's capital spending so that company increase their earning capacity.
There's another part to Takaichi's economic plan. Boosting state-led investments in 17 strategic sectors, from AI and semiconductors to shipbuilding and food technology. In a written reply to Insight, the government says these sectors were chosen for their potential to address global challenges, drive economic growth domestically and internationally, and strengthen Japan's standing through innovation.
Here at this asphalt plant in central Japan, a backhoe is working, but there's no operator in the vehicle. It's being controlled from elsewhere. Oram is also working to retrofit the robotics on existing machinery. Company chief, Yuri Nomura, sees many uses for her company's technology. I think she put a bit more emphasis on defense industry. Uh for example, she recently she talked about exporting military equipment. She want to foster the defense defense industry. Also like semiconductor and related, so AI, etc.
In the first 2 months of this year, Japan received just over 7 billion US dollars in foreign direct investments. After Takaichi-san became Prime Minister, then stock prices started to go up and go up and go up. Amazing, right? About 50,000. So, that is a sort of we call Takaichi put. So, which means foreign investors expectation that Takaichi-san will do a lot of things to strengthen Japanese economies. Japan attracted TSMC, and the TSMC in Kumamoto is going to produce advanced chips. Also, like Rapidas in Hokkaido, they also produce advanced chips.
Will Takaichi's measures work as advertised? Takaichi's strategy will pump more liquidity in the market. More money circulating the economy, more downward pressure on the yen. On one hand, a weak yen makes Japanese goods and services cheaper, driving exports. On the other, it risks domestic inflation, which can curtail demand. Reports from this year indicate that household spending has declined.
It's Golden Week in Japan, a major holiday season, and a period of domestic travel and celebration. Yet, in one survey, 1/3 of respondents say they intend to stay home. On average, respondents say they're budgeting to spend less during the holidays than in previous years. There was a slight blip in consumption in November, just after she took office, but after that, consumption has been quite stagnant and unstable. So, at the moment, there isn't any strong indication that her policies have been enormously successful, but I think it's a little bit too early to tell. You know, we have to give her a chance for her policies to be implemented and to have an effect on the economy. But Takaichi san want to replicate Abenomics. So, she want to maintain accommodating monetary policy, expansionary fiscal policy, and try to strengthen Japanese economy. So, she's actually promising many things, including support for the general public.
But Japan's new Prime Minister may have a key advantage. The LDP's strong showing at the February lower house election gave the party a super majority. Although her approval rating has eased from its peak, it still ranges between 53 and 70% in recent polls. This makes the Prime Minister comparatively more popular than recent incumbents. She now has a dominant majority in the lower house, so I think she can get policies passed uh quite easily, and um maybe she may be successful in implementing many of the policies that uh she's uh trying to implement.
When she was elected as a first female Prime Minister, it gave a lot of hope, especially young female people. But I think what matter, credibility of the leadership, impact of this female leadership uh will be uh put into test in the second half of this year. So, we have to see how she will uh you know, come up with this detailed policy, how clearly she will communicate with people.
But Takaichi's plans and any hope of Japan's economic revival are now running up against some very real challenges. On December 31st, 2025, Japan lifted its 50-year provisional tax on gasoline. Drivers rejoiced. Then, just over 8 weeks later, Tensions in the Middle East continue to escalate. US President Donald Trump now saying Iranian Supreme Leader Ayatollah Ali Khamenei has been killed in joint air strikes with Israel.
Just as Japan is seeing signs of economic revival, it's already facing both external and internal pressures. The ongoing conflict in the Middle East is especially challenging. Japan gets about 90% of its oil shipments via the Strait of Hormuz. By March, the country's fuel prices hit record highs. For food truck operator Yasuda, the relief from the abolished tax was short-lived. Japan's government was forced to reinstate subsidies to cap gasoline prices at around 170 yen per liter. This will lead to the higher food price again. So, this will be a very tough for government administration because public already, you know, suffering for this cost-push inflation for 4 years. This time, not only just a food pri- higher prices, but there are some shortage in fuel, right? I think uh maybe people starts to call for more more support for the general public.
Other external challenges include Japan's relations with China and the US. With China, those ties are at a low point. Last November, Prime Minister Takaichi implied that a Chinese attack on Taiwan could trigger Tokyo's military involvement. Her words sparked a strong rebuke from Beijing. China has been uh implementing various retaliatory measures against Japan uh strongly encouraging Chinese people not to go to Japan for tourist purposes, reducing the export of dual-use products to to Japan, and so on. And China is Japan's top trading partner, and uh you really Japan's economy would collapse if, you know, no relations with China. I think it's very important for Japan to repair relations with China.
Yasuhiro Yamazaki owns the premier seafood wholesaler, Yamaharu. At one point, Yamaharu's exports to China were valued in the billions of yen. Nearly half of the company's business. But this fell in 2023 when China banned Japanese seafood imports over the discharge of wastewater from the Fukushima Daiichi nuclear plant. This reversed last June when China reopened its market to Japanese seafood. Now, restrictions have been reimposed by China following the diplomatic row. Yamazaki had planned to join a Japanese food fair in Hong Kong, but talks have stalled.
As for America, Takaichi has committed to investing 550 billion US dollars stateside, part of a broader economic agreement with Washington. Such large outbound investments could reduce the resources available for domestic investment. They may also put downward pressure on the yen as Japanese investors need to sell yen to buy dollars to fund these plans. The question is when the Japanese economy economy is not really strong and a lot of Japanese company not really so lucrative I mean excluding impact of exchange rate not many companies are so profitable. If they invest a lot on US, the question is are they have a capacity to invest a lot in Japan.
Domestically, Takaichi's economic agenda is facing obstacles. She wants to keep the interest rates low to stimulate borrowing and investing. However, the Bank of Japan is under pressure to raise rates to counter inflation. In December 2025, it hiked rates to 0.75%, the highest in three decades. At its latest meeting, the Central Bank held rates steady at 0.75%, though three board members pushed for a further increase. If we raise interest rate, then like you know, floating rate based mortgage rates will go up. And like a floating rate based auto auto loan will go up, right? So suddenly some people suffer. From consumers' point of view and then small medium enterprises, maybe they don't want to have a rate right? But I think most important reason why they kept raising interest rate what is to try to stop further depreciation of yen because already 160 is too much.
Then, there's also the question of how the government will fund its spending. In April, Japan's upper house approved a record 122.3 trillion yen budget, the largest in the country's history. The budget reflects Prime Minister Takaichi's expansionary fiscal policy aimed at supporting economic growth. To fund this, the government plans to issue almost a 30 trillion yen in government bonds. It looks like if she want to achieve everything, she may end up issuing more Japanese government bond. Then, what will be the implication on the 10-year yield on time yield yen depreciation? So, there are uncertainties here.
Currently, Japan is one of the world's most indebted countries with government liabilities around 240% of its GDP, the highest among advanced economies. And for the government to be, you know, engaging in this out of control spending, I think it's not a very good idea. I think the government's hands are tied. The way to bring the finances under control is reducing spending or increasing taxes, but either way you're going to choke off the economy. Instead, officials are planning tax relief measures for households and businesses. The Prime Minister also proposed a 2-year suspension of the 8% consumption tax. So, to fund the expansionary budget, the government may resort to spending cuts in other areas. There are proposals to curb healthcare spending, for example. For example, they cut some of the subsidy provided to the large company. It was an incentive to promote wage hike. They got of stopping this subsidy, but it's so tiny and so already they are using it for other purposes for other spending.
The government is looking to boost labor participation among citizens through upskilling and encouraging retirees, women, and people with disabilities to rejoin the workforce. At the same time, it's tightening immigration. For example, the business manager visa granted to foreign entrepreneurs and executives now requires a minimum capital investment of 30 million yen, up from 5 million previously. Prime Minister Takaichi, I think her views reflect the views of many Japanese. You know, many Japanese do have these nationalistic feelings, but on the other hand, these views can can actually hurt the economy. For example, she seems to be uh intent on uh you know, reducing the number of foreign workers coming into Japan. And given that Japan has a very severe labor shortage, you know, this could uh reduction in foreign workers coming in can have a adverse impact on the on the economy.
For three decades, Japan has struggled with economic stagnation. There have been periods of growth, including a two-year stretch beginning in 2016 under Prime Minister Shinzo Abe. But these recoveries have typically faded. Now, there are signs of a renewed rebound. Rising prices, wages, and exports. The question is whether these point to sustained long-term growth or are merely temporary gains driven by leadership change.
So, I think it's a question of whether her this optimism is sort of just a very short-term thing or whether it can be sustained. And that will of course depend on how successful her policies are. If the policies are not as uh successful as they had hoped, then they're they might return to their earlier pessimism. So, we just have to see. At this moment right now, uh people are really waiting how uh Prime Minister Takaichi uh will come up with a detailed strategy about her campaign promises uh with a clear financial resources. We really have to see uh you know how credible uh policy she's going to implement. So, all depend on that, right? So, it's not clear at this moment yet.