Japanese Prime Minister Sanae Takaichi, who was re-elected in a House of Councillors vote on February 18, faces significant challenges in delivering on her campaign promises, according to a recent report from the International Monetary Fund (IMF). The report, issued just before her election victory, highlights concerns over her proposed policies, including fiscal stimulus and consumption tax cuts, warning they may strain Japan's finances and contradict long-term fiscal health goals.
During the campaign leading up to the 2026 general election, Takaichi pledged to temporarily eliminate the consumption tax on food for two years, positioning it as a key measure to address cost-of-living issues. On February 9, she reaffirmed her commitment, stating she would push for discussions through a "national conference" with the aim of reaching a preliminary conclusion by summer.
However, the IMF expressed clear opposition to such tax cuts in its February 17 report, cautioning that broad, untargeted reductions would shrink fiscal flexibility and heighten financial risks. Rahul Anand, head of the IMF’s Japan mission, explained that while short-term economic support might be achieved, temporary tax cuts could exacerbate fiscal deficits and undermine Japan’s longer-term consolidation objectives.
Takaichi’s stance on the pledge appears to have shifted since the election. Initially firm in her campaign rhetoric, she later softened her language, emphasizing the need to "accelerate discussions" within the national conference and moving the timeline from immediate implementation to a phased approach.
A proponent of what she terms "responsible proactive fiscal policy," Takaichi advocates increased investment in artificial intelligence, semiconductors, and cybersecurity to spur growth, boost tax revenue, and ultimately achieve fiscal health. Following her election victory, she indicated plans to incorporate these priorities into the budget process starting with the 2027 fiscal year.
The IMF, however, advised against further near-term fiscal easing, noting that while Japan retains some fiscal space, maintaining restraint is essential to preserving buffers against future economic shocks. The report projected that Japan’s fiscal deficit would widen over the long term, with public debt rising and interest payments doubling by 2031 compared to 2025 levels.
This IMF guidance stands in stark contrast to Takaichi’s expansionary fiscal agenda. The report warned that high debt levels combined with deteriorating fiscal conditions could leave Japan’s economy vulnerable to external shocks—a concern raised as her new administration prepares its budget plans.
Takaichi’s stance on monetary policy is also under scrutiny. Market observers are watching whether she will oppose further interest rate hikes by the Bank of Japan (BOJ), as the central bank continues its policy normalization efforts. The IMF stressed the importance of BOJ independence and credibility in stabilizing inflation expectations, recommending a gradual exit from monetary easing with policy rates reaching neutral levels by 2027. The fund anticipates two rate hikes this year and another in 2027.
Balancing growth and inflation control presents a key challenge for Takaichi. Although she has not explicitly opposed rate hikes, her fiscal strategy relies on accommodative monetary conditions, testing the coherence of her economic program.
Beyond fiscal and monetary issues, Takaichi’s government has faced criticism over its promotion of rare-earth exploration near Minami-Torishima Island. An announcement of successful mud sampling, strategically timed during the heated election period on February 2, was highlighted in her stump speeches as a major achievement, with claims that the rare-earth resources would suffice for generations. However, project insiders urged caution, noting that the effort remains in a technical verification phase, with analysis of rare-earth content still pending and commercialization hurdles—including costs estimated at 20 times those of Chinese rare-earth concentrates—remaining substantial. One senior official remarked that the government’s promotional approach was problematic and overstated the project’s near-term prospects.
As Prime Minister Takaichi begins her new term, her transition from campaign promises to policy implementation is proving difficult. Whether the issue is tax cuts, fiscal expansion, or resource development, her ambitious proposals are meeting growing skepticism from international institutions, economic realities, and practical constraints.