INVESTMENT STRATEGY REPORT: JAPAN Date: February 12, 2026 Subject: The “Dejà Vu” of Japanese Politics: Why the Takaichi Fiscal Optimism is a Prelude to Austerity

1. Executive Summary: The Cycle of False Hope

The recent electoral victory of Prime Minister Sanae Takaichi has ignited a “Takaichi Premium” in the markets, fueled by expectations of aggressive fiscal expansion. However, historical analysis suggests this optimism is premature. We identify a recurring 25-year pattern in Japanese politics: a charismatic launch of “growth reforms” followed by a strategic retreat into tax hikes and austerity. The current “National Council” (Kokumin Kaigi) is not a vehicle for decision-making, but a sophisticated apparatus designed to diffuse political responsibility and pave the way for a future consumption tax increase.

2. The “National Council” as a Decoy for Fiscal Realism

While overseas investors view the newly established National Council as a body for coordinating stimulus, domestic signals suggest a deliberate obfuscation of policy.

• Calculated Confusion: By tangling the debate in the complexities of “tax credits with benefits” and “time-limited tax cuts,” the administration is diluting its aggressive campaign promises into “realistic constraints.”
• The “Accomplice” Narrative: Critical domestic observers, such as economic analyst Keiichi Kaya, have already sounded the alarm, suggesting that temporary tax relief is merely a “blank check” for a future consumption tax hike.
• Opposition Skepticism: Yuichiro Tamaki of the Democratic Party for the People (DPP) has publicly pressured the LDP to show its hand, fearing the Council is a pretext for postponing tax cuts. However, history shows that such “inter-party friction” often concludes in a “painful cross-party consensus” to increase the public burden.

3. The Historical Pattern: A Quarter-Century of Structural Impasse

Investors must recognize that the Takaichi administration is following a script written over the last two decades. Every “pro-growth” era in modern Japan has ended in fiscal tightening.

Koizumi (The Origin)

• Narrative: “Structural Reform without Sanctuaries”
• Reality: Led to reduced local subsidies and increased social security burdens, stifling long-term domestic demand.

DPJ Era (The Pivot)

• Narrative: “People’s Lives First” / Ending “Wasteful Spending”
• Reality: Collapsed under fiscal pressure, ending with the Noda administration’s 2012 agreement to hike the consumption tax.

Abe Era (The Peak)

• Narrative: “Abenomics” / The Three Arrows
• Reality: Generated massive market enthusiasm, yet delivered two consumption tax hikes while failing to meet long-term growth targets.

Takaichi (The Re-run)

• Narrative: “Aggressive Fiscal Expansion”
• Reality: Currently utilizing the “National Council” to engineer a soft landing toward fiscal consolidation (tax hikes) once the honeymoon period ends.

4. The “Translation Gap”: Leadership vs. Avoidance

There is a profound disconnect between the Japanese political discourse and its English translation.

• The Global Script: Following the late Shinzo Abe’s playbook, PM Takaichi uses assertive, visionary language in international forums. This creates an illusion of “Decisive Leadership” for global funds.
• The Domestic Reality: In Japanese, the discourse is characterized by aimai (ambiguity) and the avoidance of accountability. The National Council’s chaotic proceedings reveal a lack of political will to break the cycle of stagnation.

5. Investment Conclusion: The Coming “Unwinding”

The “Takaichi Premium” is likely a transient phenomenon. Just as in the Koizumi and Abe eras, the initial euphoria will face the reality of Japan’s structural constraints: a cost-push inflationary environment, rising debt-servicing costs, and escalating defense requirements.

As soon as the National Council reveals itself as a “cloak for tax increases,” we expect a rapid unwinding of long positions by foreign capital. Japan has the ideas for growth, but the last 25 years prove it lacks the fortitude to execute them without defaulting to austerity. We recommend a cautious neutral stance, faded toward a “sell” as the Council’s final report nears.