'Borrowing for Growth' by Takaichi in Japan...Interest Rates Pose a Challenge [Weekend Money]

Japan Pushes Bold Expansionary Fiscal Policy
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Although the Japanese government is betting on "Sanaenomics," which aims to expand the size of the economy through aggressive fiscal policy, analyses suggest that the sharp rise in long-term interest rates—unseen in 30 years—and the increase in bankruptcies among small and medium-sized enterprises have emerged as unexpected obstacles.

"Not the Same as Abenomics"...The Takaichi Cabinet Eyes 700 Trillion Yen in Nominal GDP

Recently, Lee Seungjae, a researcher at iM Securities, analyzed, "The key difference between Abenomics and Sanaenomics lies in nominal GDP (gross domestic product). The Takaichi Cabinet wants to increase the overall scale of the economy itself."

In the past, Abenomics focused on revitalizing the economy primarily by having the Bank of Japan inject liquidity and lower interest rates. Although fiscal stimulus and structural reforms were implemented in parallel, the central pillar was to encourage companies and households to spend through ultra-low interest rates.

Sanaenomics—championed by Japanese Prime Minister Sanae Takaichi—places even greater emphasis on fueling nominal GDP growth by using the government as a catalyst for strategic investment and spurring increased corporate investment. Put simply, it seeks to grow the economy as a whole, including price increases. The underlying intention is to build a new foundation for growth by focusing fiscal resources on advanced industries such as artificial intelligence (AI), startup businesses, and quantum technology.

Researcher Lee explained, "While Sanaenomics partly inherits some features of Abenomics, it is based on the judgment that government-led investment is necessary to break free from prolonged deflation and structurally low growth rates."

Another reason Sanaenomics is drawing attention is its attempt to reverse the course set by the Japanese economy in the three decades since the bubble burst. The hallmark of Japanese companies over this period has not been 'borrowing for investment' but rather 'repaying debt first.' Sanaenomics is based on the reasoning that even if national debt increases, the burden can be managed as long as the economy and tax revenue rise at a faster pace.

Lee elaborated, "Supporters of expansionary fiscal policy in Japan argue that while real GDP has stagnated, a boost in nominal GDP can partially offset increases in government bond issuance and interest costs via expanded tax revenue, thereby enabling more sustainable fiscal policies."

Spurring Corporate Investment Needed...Rising Interest Rates Could Undermine Policy Effectiveness

The problem is that interest rates are rising rapidly just as increased corporate investment is needed. Expansionary fiscal policies can add pressure on the yen and lead to higher inflation. The resulting rise in import prices puts further strain on businesses and consumers, and as wages rise, the burden of labor costs on companies is increasing as well. In addition, as the Bank of Japan begins to normalize interest rates, the key rate has climbed to 1%.

The outlook for increased government bond issuance is also pushing up long-term rates. In July, the Takaichi Cabinet announced its basic principles for economic and fiscal management and reform, which included plans for an additional 10 trillion yen in annual fiscal spending from 2027 onward. The removal of references to "fiscal consolidation" from this policy guidance heightened concerns about fiscal soundness. The yield on the Japanese 10-year government bond reached 2.830% during trading on July 6, marking the highest level in nearly 30 years since October 1996.

This is where the paradox of Sanaenomics emerges. Even if the government injects funds to encourage corporate investment, if borrowing costs rise too high, companies have little incentive to take on debt and invest. Especially for Japanese firms, which have long become accustomed to debt-free management and deleveraging, high interest rates can diminish the intended effects of such policies.

Lee pointed out, "If the main goal of Sanaenomics is to fundamentally change the investment paradigm, then a sharp rise in long-term interest rates is not desirable. High interest rates lead to less incentive for companies to raise funds and invest."

A Surge in SME Bankruptcies and Worsening Labor Shortages...Balanced, Qualitative Growth Is Key

An employee is holding a Japanese yen banknote at the Counterfeit Currency Response Center of Hana Bank in Jung-gu, Seoul. Photo by Yonhap News

As interest rates rise and the burden of import prices and labor costs mounts, the operational pressure on small and micro-enterprises is becoming more pronounced. Last year, the number of corporate bankruptcies in Japan reached 10,300, the highest level since 2013. In the first seven months of this year, there were 6,374 bankruptcies, up 7.11% from the same period the year before. Less than 200 of these involved companies with capital of 50 million yen or higher, indicating that the vast majority were small and medium-sized enterprises.

Most notably, the collapse of microenterprises unable to withstand the pressures of rising wages and labor shortages is becoming acute. Bankruptcies caused by labor shortages surged from 56 cases in 2021 to 427 last year—an eightfold increase. While the expansionary fiscal policy may increase the size of the overall economy, policy momentum could be lost if polarization and bankruptcies among smaller firms continue to intensify.

Lee anticipated, "Ultimately, increasing the size of the economic pie is important, but ensuring balanced, qualitative growth will also be a key metric by which Sanaenomics is judged." In other words, the success of Sanaenomics hinges not merely on the scale of government spending, but on whether that money actually translates into increased private sector investment.

This content was produced with the assistance of AI translation services.