Shenwan Hongyuan Group: What are the similarities and differences between Naoe Economics and Abenomics?

Abstract In October, Takaichi Asana was elected as the Prime Minister of Japan, and her economic policy proposals are known as "Asana Economics." The market perceives Asana Economics as "Abenomics 2.0." However, due to differences in political and economic environments, it is not advisable to equate the two. (I) Asana Economics is not Abenomics 2.0: Fiscal Dominance vs. Monetary Dominance, Fighting Deflation vs. Fighting Inflation Although Takaichi Asana's economic policy proposals inherit from Abenomics, she places greater emphasis on fiscal policy. Abenomics, represented by the "bold monetary easing + flexible fiscal policy + structural reforms" three arrows, emphasizes monetary policy and aims to overcome deflation. Asana's focus is on responsible active fiscal policy, while also advocating for monetary easing, but this contradicts the economic policy focus on combating inflation. Asana Economics faces stronger internal and external constraints, and the political base needs to be consolidated. 1) The ruling party's share of seats in the parliament is only 49.7%, far lower than Abe's 67.9%; 2) Asana's approval rate is only 44%, while Abe's was 60% during the same period; 3) The cabinet and the Liberal Democratic Party personnel are restricted by the Aso faction; 4) During Abe's tenure, a global environment of low inflation and low interest rates created a favorable environment, whereas Asana needs to balance inflation and financial stability. (II) How proactive will Asana's government's fiscal policy be? Japan's fiscal deficit ratio may rise from 1.3% to around 2% in 2026 Upon taking office, Asana plans to first introduce a comprehensive stimulus package, which could increase next year's fiscal deficit ratio. Japan's deficit ratio in 2025 was 1.3%, and it may rise to 2.0% in 2026. While the expansion may be lower than the U.S., Germany, and Greece, it will be higher than France and the U.K. Japan's debt ratio is high in terms of stock, but in terms of flow, Japan's interest payment pressure is not high, external debt is low, duration is long, and debt risks are manageable. Japan's real economic growth rate next year may slightly increase to 0.9%, and the stimulative effect of fiscal policy on the economy may slightly increase. Japan's GDP grew by 1.7% year-on-year in the second quarter, and the annual real GDP growth rate is expected to be 0.7%, which may rise to 0.9% in the fiscal year 2026. Asana's supplementary budget may exceed last year's 13.9 trillion yen, with an expected impact on next year's GDP of around 0.25%, slightly higher than last year. (III) Bank of Japan's rate hike significantly "lags behind the curve," restarting the rate hike "arrow in the string," market expectations of a 50bp rate hike in 2026 Asana prefers loose monetary policy, but it may be difficult to change the direction of the Bank of Japan's rate hikes. During her election campaign, Asana mentioned considering revising the joint statement with the Bank of Japan to escape the 2% inflation target constraint, but after taking office, she stated that there is no plan for revision. In 2026, Asana may only be able to replace select monetary policy committee members, and the most practical means of influencing monetary policy might be through communication and coordination with the Bank of Japan. High inflation and a weak yen are dual constraints for the Bank of Japan to continue its rate hikes in 2026, and the market is watching whether the Bank will restart the rate hike process early next year. The Bank of Japan's rate hikes significantly lag behind the curve, delayed once again this year due to parliamentary elections and cabinet reshuffles. This is an important explanation for Japan's sticky inflation (a 10% depreciation of the yen is estimated to increase inflation by 0.3%). Wages are expected to increase by around 5% next year. The market expects the Bank of Japan to cut rates twice in 2026, with an overall decrease of 50bp, depending on the yen, inflation, Japanese government bond rates, and the political environment. Based on OIS market expectations, the Bank of Japan may remain unchanged in October and December, and there may be two rate hikes in 2026, with a 25bp hike in March to around 0.75% and another 25bp hike in September to around 1%. According to IMF forecasts, the terminal rate may be around 1.5%. End of report Asana Economics and Abenomics have both similarities and differences in their economic policy proposals. Takaichi Asana's policy proposals focus more on proactive fiscal policy, while Abenomics emphasizes monetary policy more. The three arrows of Abenomics emphasize bold monetary easing, flexible fiscal policy, and structural reforms, with a focus on overcoming deflation. The first arrow, in terms of monetary policy, focused on large-scale monetary easing to combat deflation, with effective intervention and influence on the Bank of Japan through personnel and legal agreements. Asana's stance on monetary policy is more dovish, with a cautious approach to interest rate hikes, emphasizing the need for coordination between the government and the central bank. Asana respects the independence of the Bank of Japan and advocates for policy coordination rather than administrative directives to influence monetary policy. The second arrow, in terms of fiscal policy, involves more flexible fiscal policies by the Abe administration, with multiple rounds of stimulus and two consumption tax hikes during his tenure. Asana continues the path of loose fiscal policy, advocating for responsible active fiscal policy and suggesting that debt issuance may be necessary to support important policies. However, Asana has moderated her fiscal policy stance after taking office, focusing on fiscal stimulus bills and compiling supplementary budgets while emphasizing fiscal sustainability to maintain market confidence. The third arrow, in terms of structural reforms, focuses on crisis management investments, with a government-led approach in areas such as semiconductors, AI, biotechnology, nuclear fusion, and defense. Whereas Abenomics focused more on market reforms and rule changes, Asana's proposals have a stronger industrial policy flavor. Asana faces political constraints, and her ability to implement policies may be lower than that of her predecessor, Abe. The ruling party's weakening majority in parliament makes it more difficult to pass legislation. While Abe had a stable majority in both houses of parliament after 2013, securing the passage of bills through the lower house was easier. Asana's support rate is also lower than Abe's, which may affect her political mandate. Additionally, Asana's cabinet and the distribution of LDP personnel may pose constraints, as she needs to balance different political factions within the party. With weaker control over political affairs and a lower approval rate, there is a 53% probability that Asana may not serve a full term of two years. The economic environment facing Asana and Abe has significant differences, with Abe benefiting from a global environment of low inflation and low interest rates. Asana, on the other hand, faces a different economic landscape, with rising inflation and wage growth in Japan. The different economic conditions have led to a focus on combating deflation during Abe's tenure and a need to balance inflation and financial stability during Asana's tenure. Responsible active fiscal policy is a key part of Asana's economic agenda, with plans to implement a comprehensive stimulus package and supplementary budgets to support economic growth. Initiatives such as energy and gas subsidies, abolishing temporary gasoline taxes, and increasing support for small and medium enterprises are part of her policy priorities. Japan's fiscal deficit ratio is expected to rise in 2026, but at a level lower than other developed economies. While Japan's debt burden is high in terms of total debt, its debt servicing costs are relatively low due to factors such as low external debt and long debt maturity. Japan's real economic growth rate is projected to increase slightly in 2026, with fiscal stimulus expected to have a positive impact on the economy. Private consumption and exports are expected to contribute to growth, following a slowdown in exports in 2025. Asana's supplementary budget is expected to have a modest impact on GDP growth, slightly higher than the previous year. Japan's high debt levels pose risks, but the country's debt risk is relatively low due to factors such as low external debt and the majority ownership of bonds by domestic entities. Japan's debt servicing costs are low compared to other developed economies, although rising interest rates may increase pressure on debt servicing. The composition of Japan's bond market buyers provides a certain level of risk resilience, with the Bank of Japan holding a significant portion of government bonds. The Bank of Japan's approach to monetary policy is expected to be cautious, with the potential for normalizing policy gradually. Interest rate hikes this year have been delayed due to various factors, but there is a possibility of rate hikes in 2026. Asana's influence on monetary policy may be limited, and communication and coordination with the Bank of Japan will be crucial in determining the direction of monetary policy. Risks such as geopolitical conflicts, a slowdown in the U.S. economy, and unexpected hawkish shifts by the Federal Reserve could impact Japan's economic outlook. These risks should be monitored closely for their potential impact on Japan's economy and financial markets.