In a bold move, Japanese Prime Minister Sanae Takaichi called a snap election, which ultimately yielded a successful outcome.

The results granted Takaichi and her Liberal Democratic Party a commanding majority, securing 316 seats out of 465, a feat few of her predecessors have achieved in recent years, given Japan's history of frequent leadership changes.

The focus now shifts to how Takaichi will utilize this mandate, particularly in addressing a longstanding challenge: stimulating more rapid economic expansion.

Japan faces numerous economic hurdles, including slow growth, the world's largest public debt, and a workforce that is simultaneously aging and declining in size.

According to some analysts, Takaichi is poised to potentially redefine Japan's economic trajectory, which could, in turn, influence global perceptions of the world's third-largest economy, behind the United States and China, but ahead of Germany, and the fourth-largest in terms of purchasing power parity.

According to Tomohiko Taniguchi, a policy adviser and former speechwriter for the late Prime Minister Shinzo Abe, Japan is expected to be guided in a positive direction under new leadership.

A successful outcome would provide a model for other countries facing similar demographic challenges, serving as a key example for ageing societies globally.

During her campaign, Takaichi pledged to increase expenditure, focusing on strategic investments in vital industries to stimulate economic growth.

This approach marked a departure from that of her predecessors, as she emphasized the importance of reducing taxes to enable greater consumer spending, prioritizing growth over saving.

Initially, investors expressed concerns about the feasibility of these plans, but the decisive majority has seemingly alleviated these doubts, as evidenced by the positive market response following her victory on Sunday night.

A notable investment strategy, dubbed the "Takaichi trade", has emerged, where investors purchase Japanese equities while simultaneously selling the yen and government bonds. Notably, the yen's value has appreciated, which can be beneficial for certain investors.

However, the situation is more nuanced than initially meets the eye.

Following Takaichi's assumption of office in October, a significant increase was observed in government bond yields, which represent the interest rate Japan must pay to secure loans.

This development is a source of concern for investors, given Japan's substantial public debt burden. The government's planned increase in spending and reduction in taxes, as promised by Takaichi, will necessitate additional borrowing, thereby exacerbating the issue.

As one of the world's largest bond markets, Japan's market fluctuations can have far-reaching consequences, influencing global borrowing costs, investment choices, and currency values, even with relatively minor changes in Tokyo.

The Bank of Japan's efforts to shift away from its long-standing policy of ultra-low interest rates are being closely monitored by investors, as the central bank seeks to rein in inflation.

A notable example of the rising prices is the cost of rice, which has increased by 100% in 2025, marking a significant departure from the country's historical experience of stable or declining prices.

The issue of rising prices was a key factor in Takaichi's ascent, as many voters have seen their purchasing power decrease and are feeling the effects of higher prices, an issue that previously led to the departure of her predecessor.

Takaichi's plan to implement tax cuts may provide temporary relief to households, helping to alleviate some of the financial strain they are currently facing.

However, according to Keio University economics professor Keiichiro Kobayashi, increasing spending in this manner poses a risk, as it could exacerbate inflationary pressures and further drive up the cost of living.

According to his view, the government should permit the Bank of Japan to maintain its current trajectory of increasing interest rates to combat inflation, coupled with a reduction in government expenditures, which would also align with investor expectations.

Japan's appeal to foreign investors diminishes when interest rates are low and government spending is elevated, resulting in decreased demand for the currency and subsequently weakening its value.

A depreciation of the yen leads to higher import costs, particularly for energy and food, although it can provide a competitive advantage to exporters vying with Chinese products.

Takaichi faces a highly complex dilemma in achieving the growth she has pledged, one that necessitates careful navigation.

However, the obstacles extend beyond the realm of financial markets.

For years, Japan has grappled with a declining population, which has also led to a shrinking workforce. As a result, the country has become one of the oldest societies globally, placing a significant burden on its public services, including healthcare and social care systems.

The nation is currently experiencing severe labour shortages in key sectors such as construction, care work, agriculture, and hospitality. With a dwindling workforce, the country's output is likely to decrease, ultimately leading to slower economic growth.

Allowing more immigration could help alleviate these pressures. According to official statistics, the government has made some adjustments to its rules in recent years, resulting in an increase in the number of foreign workers. However, Japan still lags behind Europe and North America in terms of the proportion of foreign workers in its workforce.

Takaichi has indicated that she is unlikely to implement significant changes to the country's immigration policies, given the sensitive nature of the issue, particularly among her conservative supporters.

Takaichi and her allies argue that rather than relying on immigration, Japan should focus on leveraging technology, automation, and increasing the participation of women and older workers in the workforce to boost productivity and drive economic growth.

According to economic experts, current measures may be insufficient. Like other developed economies, Japan requires a significant influx of foreign labor to maintain its economic stability.

Analysts note that the country's hesitation to adopt immigration policies is symptomatic of a broader aversion to change, which has historically hindered innovation and reform efforts.

Japan's need for transformation is becoming increasingly urgent, as China has surpassed it in terms of scale and industrial capacity, with Vietnam and other Asian nations rapidly closing the gap.

Notably, China is Japan's largest trading partner, a factor that holds significant implications for Takaichi's strategy, as the country will need to rely on trade to stimulate growth until domestic demand recovers.

The ongoing tensions between Tokyo and Beijing, including a dispute over rare earth exports, have highlighted Japan's vulnerability in critical supply chains, a concern echoed by Naoki Hattori, Mizuho's chief Japan economist, who warns that these tensions could disrupt production in key sectors such as electric vehicles and defense equipment.

Prime Minister Takaichi is prioritizing efforts to decrease Japan's reliance on China for essential resources, including rare minerals and pharmaceuticals. Additionally, she has been engaging with Trump and has agreed to increase the defense budget, a move that is contentious under Japan's current constitution.

In response to Trump's endorsement, Takaichi expressed her gratitude for his supportive comments, stating that she anticipates visiting the White House in the spring and believes the potential of the US-Japan alliance is vast.

According to Taniguchi, Takaichi does not support maintaining equal distance between the US and China, instead emphasizing the importance of the alliance with Washington for Japan's security and economic stability.

However, Japan is not in a position to explicitly take sides between the two global powers.

Professor Kobayashi notes that it is sensible for Japan to strengthen its relationships with both the US and China, particularly in light of China's current property crisis and slowing economic growth, which may impact Beijing's regional influence.

The economic strategy employed by Takaichi bears resemblance to that of her mentor, Shinzo Abe, characterized by significant expenditure to boost growth and low interest rates to facilitate investment.

During Abe's tenure, he faced a unique set of challenges, including declining prices, a strengthened yen, and a less dominant China, which was a far cry from the global landscape of today.

In contrast, Takaichi is confronted with a more severe set of circumstances, including an aging population, sluggish economic growth, and a world that has undergone significant changes since Abe's time.