Sanae Takaichi, the new prime minister, has a mandate and a strategy to strengthen Japan's economy

Markets praised the election of new prime minister Sanae Takaichi yesterday, but Merryn Somerset Webb says Japan's economy and stock market still have a ways to go

Japan's new prime minister, Sanae Takaichi, is not well liked by the Chinese. Bloomberg reports that "thousands of Chinese travellers" are rethinking their plans to visit Japan after she said that a crisis in the Taiwan Strait would pose a threat to Japan's security.

A minority is what they are. A strong Japan is generally seen as beneficial to the region throughout much of the rest of Asia.

A Japan with strong views and record-high defense spending no longer seems like a bad thing, especially with the US becoming a less certain ally than it once was and China becoming more assertive economically and in the South China Sea.

Additionally, Takaichi enjoys great popularity at home.

In theory, she can do almost anything she wants thanks to her supermajority. This is especially true in light of the scope of her backing.

Her election is said to be a result of an aging population that is becoming more and more right-wing. Not really. She is well-liked by those over fifty, but exit polls also indicated that she is well-liked by those under thirty. She is undoubtedly under a mandate.

If the money flooding Tokyo's stock market is any indication, it's good to see what she will do with it.

Readers who have followed us for a long time will know that we have been optimistic about Japan for more than ten years.

However, most people have now joined our bandwagon. Everyone is now in favor of Japan.

The Nikkei has increased by 9% so far this year and reached a record high in the days following Takaichis' triumph.

Political stability is a major source of excitement. There aren't many democracies right now where a leader can claim to have been elected with such a strong majority and a well-defined set of policies. Additionally, those policies are at issue.

Lack of investment has long been a problem for Japan. Lack of investment and a drop in the capital stock have contributed to Japan's economy's slow growth rate over the past 20 years or so.

For this reason, spending increased by 6.2% in Takaichi's 2026 budget, and in November of last year, a £135 billion stimulus package was approved and will now be put into effect.

An industrial policy that directs capital toward AI, semiconductors, quantum computing, defense, and shipbuilding is to be linked to that fiscal expansion.

Even without China's tourists, all of these sectors should anticipate a strong tailwind, as well as some robust growth and inflation in the future.

Two not-so-nasty economic challenges for Japan.

According to what we've been told, Japan's economy faces two formidable obstacles: its staggering public debt and its declining population.

I think the first is overhyped.

Currently, the government's debt stands at 230 percent of GDP. It's not the whole story, though. The total amount of financial assets owned by Japan's government sector is an astounding 140% of GDP (net net, which already puts Japan below the UK). Furthermore, the Bank of Japan's holdings, which account for roughly half of all Japanese government bonds (JGBs) in circulation, are not even included in this.

It does contain a significant amount of domestic deposits and stocks, as well as foreign exchange reserves that are owned by the finance ministry.

"You'll see that everything is kind of fine if you do the math," says Gavekal Research.

With an effective interest rate of about 0.7 percent, the government pays interest on outstanding debt at a rate of about 0.5 percent of GDP. The total comes to about 2.5 percent of GDP if the US foreign exchange reserves, which make up around 30 percent of GDP, earn the Federal Reserve rate of 3 percent and the remaining amount receives the Bank of Japan policy rate of 0.75 percent.

"There is ample fiscal room to absorb higher debt servicing costs from existing resources alone" according to that perspective. Perhaps the bond market won't notice anything here (until interest rates increase excessively, that's another column).

It is also not the second headwind that you may believe it to be. Japan's population has been declining for years, and a few years ago, the working-age population began to decline as well. However, it coincides well with the development of the automation and artificial intelligence technologies needed to replace humans.

In Japan, there is a lot of room for automation.

As a small illustration, not all convenience stores in central Tokyo have self-checkout lanes.

There is a lot of space for manufacturing to go "dark" on a much larger scale. Fanuc already has a factory that can operate full-time for 30 days without any human supervision at all; these factories are referred to as "dark factories" because robots don't require lights during the night shift. Expect more of these.

However, as demonstrated by Takaichi's votes, the younger generation is content with the status quo. They live in a world where everyone is kind to them, where they should inherit a few homes, and where their wages and disposable income are increasing quickly (one well-known company in Tokyo recently increased new graduate salaries by 30%). They also don't remember the deflationary years very well. Being a limited resource isn't always a bad thing.

Much of the positive news is likely priced in, based on the steep increase in Japanese stocks. It is reasonable to anticipate that tech, industrial, and defense stocks will continue to gain momentum, however, given the increasing flows of investors leaving the US.

According to Chris Wood of Jefferies, there is also a great chance that Japanese institutional investors will finally shift some of their money from fixed income to stocks given the indices' all-time highs and the optimism that followed the election. This will cause the market to "rerate in terms of multiple expansion."

The Merryn Talks Money podcast is hosted by Merryn Somerset Webb for Bloomberg. She can be found on X @MerrynSW.