Japan will pay a heavy economic price if it pursues Takaichi's militant agenda

The consequences of the diplomatic tensions between China and Japan unilaterally sparked by Japanese Prime Minister Sanae Takaichi's erroneous and dangerous remarks on the Taiwan question on Nov 7 pose real challenges for Japan's economic outlook.

The overtly militaristic stance she expressed, which is in defiance of the postwar constraints on Japan's militarization, not only runs against the trend of the times and jeopardizes regional stability, but also threatens to exacerbate Japan's economic difficulties.

By stating that Japan could intervene militarily in the Taiwan Strait, Takaichi indicated a significant departure from the Japanese government's long-held policy toward the Chinese island.

Her provocative remarks have understandably drawn sharp rebukes from China and triggered a wave of economic consequences that have fueled concerns for Japan's fragile economy, as China is Japan's largest trading partner.

Amid the frictions caused by Takaichi's remarks, a growing number of Chinese citizens have dropped plans to visit Japan and seafood imports have also been suspended, moves that could cost Japan billions of dollars in lost revenues. Before the diplomatic row, Chinese tourists constituted a significant portion of Japan's tourism industry, contributing billions of dollars annually. A decline in the number of Chinese visitors would be a heavy blow for Japan's tourism sector, which is a key pillar of its economy.

The economic repercussions of Takaichi's policies are compounded by Japan's existing challenges, which have already been aggravated by the United States' tariff hikes. Inflation has accelerated in the country in recent months, reaching 3 percent in October, yet wages have stagnated for decades.

Moreover, Takaichi's plan to maintain low interest rates as a means to spur economic growth is likely to backfire. While cheap credit may provide a temporary boost, it also risks devaluing the yen, which has already fallen by 9 percent against the dollar in the past six months, and further amplifies inflationary pressures. All this would erode household purchasing power.

Takaichi's ambitious defense spending plans, aimed at countering what Tokyo describes as China's increasing military buildup, also threaten to inflate Japan's already enormous national debt. The supplementary budget approved by Japan's Cabinet last month will boost defense spending to 2 percent of GDP two years ahead of schedule. This comes after Japan already increased defense spending by 21 percent year-on-year to reach $55.3 billion in 2024.

With government bonds yielding higher interest rates, Japan faces escalating interest payments that could strain public finances and divert resources from essential social services. The International Monetary Fund's projection of Japan's deficit rising to 4.4 percent of GDP by 2030 underscores the unsustainable nature of Takaichi's economic strategy.

Japan's intractable economic woes mean that Takaichi is seeking to consolidate her position at home by trumpeting nationalism and security issues. Meanwhile, prolonged economic stagnation, deflationary pressures, and social anxiety have provided fertile ground for the spread of right-wing rhetoric. This is a vicious circle that will only do more harm to the Japanese economy.

On the diplomatic front, Takaichi's hard-line right-wing stance risks isolating Japan from its Asian neighbors, who are already concerned at Japan's attempts to abandon its pacifist Constitution and remilitarize. Her bluntly jettisoning the nuanced diplomacy required to manage the complex regional dynamics has added greater urgency to the ringing of alarm bells.

Thus during a meeting between Foreign Minister Wang Yi and Russian Foreign Minister Sergei Lavrov in Moscow on Tuesday, they affirmed that the two countries will coordinate and cooperate to resolutely curb the provocative acts of Japan's farright forces that undermine regional peace and stability.

In pursuing a right-wing agenda, Takaichi appears to be prioritizing short-term political gains over long-term national interests, but the economic and diplomatic costs are likely to weigh heavily on the Japanese economy.

It is foreseeable that the shortsighted policies of the Takaichi government, if they remain unchanged, will further exacerbate geopolitical tensions, undermine China-Japan economic relations, and erode foreign investors' confidence. This will also amplify the fragility of Japan's financial markets, creating a hard-to-break negative spiral that will further harm Japan's economic resilience.

Rather than retracting her erroneous and dangerous remarks and correcting her mistakes as Beijing clearly and solemnly demands, Takaichi is still resorting to word play to seek space for her militant agenda.

The Takaichi government should reconsider the wisdom of its course. Failure to do so will leave Japan economically vulnerable and increasingly isolated in an interconnected world.