Japan, once called an “economic miracle,” is now struggling with chronic economic stagnation. If decisive action is not taken, it will have irreparable consequences for the global economy and poses security risks. Japan’s newly appointed Prime Minister Sanae Takaichi has a chance to pull the country out of stagnation. But her economic policies are still questionable. Will she become Japan’s Margaret Thatcher? Analysis by Forbes US Editor-in-Chief Steve Forbes
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Can Japan's new prime minister – and the first woman to hold the position – Sanae Takaichi save the country from a deep economic crisis that will also hurt the US and the rest of the free world?
Takaichi, who has just taken office, is a big fan of Margaret Thatcher. In her 11 years as Prime Minister of Great Britain, from 1979 to 1990, the “Iron Lady” transformed her country, dubbed the “sick man of Europe,” from an economically weak state plagued by inflation and high taxes into an economic leader.
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Thatcher sharply cut taxes, broke the destructive power of Britain's unions, curbed inflation, and pursued a strong foreign policy that helped win the Cold War against the Soviet Union.
National debt, taxes and a weak yen
In the same vein, Takaichi advocates a significant increase in defense spending to counter China's growing aggressiveness, which seeks to strengthen Japan's military and economic ties with the United States.
Unfortunately, Takaichi's economic policy, which is largely a continuation of the current course of her predecessors, will not be able to lead the country out of a dangerous economic abyss.
For many years, the Japanese government has spent budget funds on a large scale and raised taxes.
Japan's public debt is proportionally almost twice that of the United States. From 1999 to 2024, the Bank of Japan pursued a destructive policy of zero interest rates. Financial institutions, under intense pressure from the government, accumulated government bonds whose market value is significantly lower than their book value.
Japan is tax-heavy. Total payroll taxes are over 32%, compared to 15.3% in the US.
Worse, Japan has no income limit. In the United States, the limit for Social Security taxes is $176,100. Corporate tax rates in Japan can be as high as 35%, depending on the size of the company. The maximum rate for individuals is 45%.
Japan's national currency, the yen, remains weak, and Takaichi is pushing for another economic stimulus package of the kind Japan is famous for.
Nothing to do with “Thatcherism”
Thatcher-style tax breaks? Forget it. The tax changes are minor, and an additional corporate tax is planned for 2026.
Instead, Takaichi should take a Thatcher-style, hard-line approach to the economy.
Unfortunately, for reasons unknown, Japan's powerful Finance Ministry hates to cut taxes. On the contrary, since the 1990s, the department has been pushing for unpopular tax increases.
Japan has been in a state of economic disorientation for over 30 years, and the new prime minister must clearly understand the reasons for this stagnation.
After that, she will have to use her considerable political skills to push through Thatcher-style reforms in the country, starting with a significant reduction in tax rates.
Japan’s long stagnation stands in stark contrast to its spectacular economic boom after World War II, from the late 1940s to the 1980s. During that time, Japan systematically cut taxes, tightly controlled government spending, and kept the yen stable. The result was a stunning economic growth. By the late 1980s, American and European media were describing Japan as a “rampaging economic giant.”
Then Japan went off course, abandoning the economic model that had enabled its pre-war economic breakthrough, leading to the current financial and monetary chaos.
Global risks
If the situation does not change, Japan's decline will have global consequences.
A devaluation of the yen would hit other major world currencies, which are already in a precarious state. Debt markets would be in turmoil, and governments would be tempted to have central banks buy up junk bonds that otherwise could not be sold. This is a direct path to another round of inflation.
The geopolitical consequences of such a crisis would be political manna for Russia, China, North Korea, and Iran, not to mention other negative players on the world stage.
Prime Minister Takaichi's success will be the success of the entire free world.
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