Summary: In October, Hiromu Hayashi was elected as Japan's Prime Minister, and his economic policy approach is termed "Hayashi Economics." The market perceives Hayashi Economics as equivalent to "Abenomics 2.0." However, due to differing political and economic environments, it is inappropriate to equate the two.
(1) Hayashi Economics is not Abenomics 2.0: Fiscal-led vs. Monetary-led; Combating Deflation vs. Combating Inflation Although Hayashi's economic policy proposals inherit elements from Abenomics, they position fiscal policy in a more central role. Abenomics is characterized by the "three arrows" of aggressive monetary easing, flexible fiscal policy, and structural reform, emphasizing monetary action aimed at escaping deflation. Hayashi focuses on responsible proactive fiscal policy but also advocates for monetary easing, which contradicts the focus on combating inflation. Hayashi Economics faces stronger internal and external constraints, and its political foundation needs to be solidified: 1) The ruling party's representation in the Diet is only 49.7%, significantly lower than Abe's 67.9%; 2) Hayashi's approval rating is only 44%, compared to Abe's 60% at the same time; 3) Cabinet and LDP personnel decisions are constrained by the Aso faction; 4) The low global inflation and low interest rates during Abe's era created favorable conditions, while Hayashi must balance inflation and financial stability.
(2) How proactive will Hayashi's government's fiscal policy be? Japan's fiscal deficit rate may rise from 1.3% in 2025 to around 2% in 2026. After taking office, Hayashi plans to introduce a comprehensive stimulus package, which may elevate next year's fiscal deficit rate. The fiscal deficit rate is projected to rise from 1.3% for the 2025 fiscal year to 2.0% for 2026, expanding less than that of the US, Germany, and Greece, but higher than that of France and the UK. In terms of total debt, Japan has a high debt-to-GDP ratio, but its interest payment pressure is relatively low, with a low proportion of foreign debt and a long duration, making the debt risk controllable. Japan's actual economic growth rate is expected to slightly improve to 0.9% next year, with the fiscal stimulus marginally increasing its impact on the economy. Japan's GDP growth rate in the second quarter reached 1.7%, and the annual real GDP growth rate is forecasted to be 0.7%, potentially rising to 0.9% in 2026. Hayashi's supplementary budget may exceed last year's ¥13.9 trillion, with a marginal effect on GDP of about 0.25%, slightly higher than last year.
(3) The Bank of Japan's rate hike significantly "lags behind the curve," and a renewed rate hike is "on the table," with the market anticipating a 50bp increase in 2026. Although Hayashi prefers a loose monetary policy, it may be difficult to change the Bank of Japan's stance. During the campaign, Hayashi stated he would consider revising the joint statement with the Bank of Japan to remove the 2% inflation target constraint; after taking office, he changed his stance to say that there was currently no plan for revision. In 2026, Hayashi may only be able to replace a few monetary policy committee members, and communication and coordination with the Bank of Japan may be the most realistic means. High inflation and a weak yen will be dual constraints for the BOJ's decision on rate hikes in 2026, with attention on whether the BOJ will restart its rate hike process in early next year. The BOJ's rate hikes significantly "lag behind the curve," and this was once again delayed due to the Diet elections and cabinet reshuffles. This is an important explanation for the stickiness of inflation in Japan (a 10% depreciation of the yen raises inflation by approximately 0.3 percentage points). Wage growth expectations for the spring labor negotiations next year remain around 5%; the market expects the BOJ to lower rates twice in 2026, totaling 50bp, with the pace depending on the yen, inflation, Japanese bond rates, and the political environment. According to OIS market expectations, the BOJ may hold off in October and December, with two rate hikes anticipated in 2026: one in March to 0.75% and another in September to around 1%. According to IMF forecasts, the terminal rate may be around 1.5%.
Report Body I. What are the Similarities and Differences Between Hayashi Economics and Abenomics? Hiromu Hayashi's economic policy proposals inherit from Shinzo Abe but place active fiscal policies in a more central role. Abenomics is characterized by aggressive monetary easing, flexible fiscal policy, and structural reforms, emphasizing monetary primacy to overcome deflation.
The first arrow focuses on monetary policy, where Abe adopted large-scale monetary easing to counter deflation, effectively intervening and influencing the Bank of Japan through personnel appointments and legal agreements. In 2013, Abe nominated Haruhiko Kuroda as the BOJ governor and signed a joint statement with the Bank of Japan to set a 2% inflation target, making quantitative easing (QQE) the primary approach. In contrast, Hayashi maintains a dovish stance on monetary policy and is cautious about rate hikes, stating that current inflation is "cost-pushed" and not suitable for hasty rate increases. The BOJ must align with government objectives. Hayashi also respects the independence of the BOJ, asserting that "specific monetary policy tools are determined by the BOJ," and that communication and coordination, rather than administrative directives, should be the means of influence.
The second arrow focuses on fiscal policy; Abe implemented more flexible fiscal policies, stimulating demand through government spending, initiating multiple rounds of stimulus during his tenure, and raising the consumption tax twice in 2014 and 2019. Hayashi continues a path of broad fiscal policy, advocating for a responsible proactive fiscal policy and suggesting that it may be necessary to issue bonds to support key policies. However, after becoming Prime Minister, Hayashi has moderated his dovish rhetoric on fiscal policy, prioritizing fiscal stimulus legislation and preparing a supplementary budget, while publicly emphasizing the need for fiscal sustainability and reducing the debt ratio to maintain market confidence.
The third arrow pertains to structural reforms, where Abe promoted structural reforms through the "Japan Revitalization Strategy," enhancing private investment by relaxing regulations and opening up to foreign investment. Hayashi explicitly defines the third arrow as crisis management-driven investment, emphasizing government-led investments in sectors such as semiconductors, AI, biotech, nuclear fusion, and defense. Abe's policies focus more on market and regulatory reforms, while Hayashi's proposals reflect more industrial policy characteristics.
Hiromu Hayashi faces political constraints and may have weaker policy implementation capabilities than Abe. On one hand, the ruling party's advantage in the Diet has diminished, making passing legislation more difficult. After 2013, Abe formed a stable majority in both houses of the Diet, ending the "distorted Diet" situation, maintaining a two-thirds majority in the House of Representatives, allowing for ordinary bills to be forced through even in the face of opposition in the House of Councillors. This ensured Abe could push for multiple rounds of budget outside stimulus (2013, 2019) and national security legislation (2025). However, by 2025, the LDP holds only 196 seats in the House of Representatives and, when allied with the Nippon Ishin no Kai, totals 231 seats, still 2 seats short of a majority, with no majority advantage in the House of Councillors; thus, passing ordinary legislation will be more challenging for Hayashi than it was for Abe.
On the other hand, Hayashi's approval ratings are relatively low. Abe's approval rating was 60% when he took office in 2012 and soared to 73% in three months, representing a rare strong start in Japanese politics. The exceptionally high approval ratings supported his political leverage for expansion in fiscal and monetary policy. However, Hayashi's support rate is significantly lower; according to a recent survey by the Japan Times in October, Hayashi's support rate is just 43.8%. Lastly, the personnel composition of the cabinet and the LDP also poses constraints. Hayashi relies on the “Aso faction” for cabinet appointments, which may restrict decisions on budget allocations, regulatory bills, and communication with the BOJ, necessitating a balance of different political lines within the LDP. Due to Hayashi's relatively weak control over politics and lower approval ratings, the market expects a 53% probability that his term may not exceed 2 years.
The economic environment faced by Hayashi and Abe has significantly diverged. Abe's era benefitted from low global inflation and low interest rates, creating favorable conditions for Abenomics. When Abe assumed office in December 2012, the yen was in a strong cycle, trading around 84 yen to the dollar, squeezing exports and corporate profits. However, by October 2025, the yen has depreciated to around 150 yen. In the 2010s, Japan was deeply mired in deflation; the global oil price collapse from 2014 to 2016 resulted in import-driven deflationary pressures. By 2025, Japan has experienced post-pandemic inflation recovery and rising wages; Abe introduced QQE in 2013 and negative interest rates in 2016, aiming for a 2% inflation target. By 2025, the BOJ has exited negative interest rates and raised policy rates. The divergence in economic environments has led to similar fiscal and monetary stimuli during Abe's term focusing primarily on combating deflation, while during Hayashi's era, the need to balance inflation suppression and financial stability is crucial.
II. Responsible Proactive Fiscal Policy: Japan's Fiscal Deficit Rate Set to Increase in 2026 Upon taking office, Hayashi's policy priority list includes implementing a comprehensive stimulus package and supplementary budget, introducing electricity and gas subsidies, repealing the gasoline tax, increasing support for small and medium-sized enterprises, and advancing investments in sectors like semiconductors. Specific points include: 1) Stimulus Package and Supplementary Budget: Upon taking office, Hayashi stated that his top priority was to develop a stimulus policy and promptly prepare a matching supplementary budget. This year, the supplementary budget may exceed last year's ¥13.9 trillion, covering household inflation subsidies, industrial investments, and business support. 2) Electricity and Gas Subsidies: The electricity and gas subsidies for July to September 2025 have expired, and some utility companies are raising fees starting in October; the new government needs to quickly issue a new round of subsidies. 3) Repeal of the Temporary Gasoline Tax: In July, the ruling and opposition parties reached a consensus to abolish the temporary gasoline tax, possibly becoming one of Hayashi's priority legislations. 4) Paid Tax Credits: For low to middle-income groups, tax credits will be offered for personal income tax, with cash refunds provided for any inadequacies. 5) Defense Spending: The Japanese government originally planned to increase defense spending to 2% of GDP by the fiscal year 2027; Hayashi plans to advance this target to 2026. Japan's deficit level for next year remains low, but the increase will expand. The fiscal deficit rate is projected to be 1.3% for 2025, which is relatively low among developed economies, and may rise to 2.0% in 2026, still lower compared to the US and France. However, from an incremental perspective, next year's deficit rate may widen by approximately 0.77 percentage points, just below the US, Germany, and Greece, but higher than the Eurozone and France. Japan's actual economic growth rate is expected to slightly improve to 0.9%, with the fiscal stimulus marginally increasing its impact on the economy. According to the Cabinet Office's projections, Japan's real GDP growth rate is predicted to be 0.7% in 2025, increasing to 0.9% in 2026. The main contribution will come from domestic demand, with Japan’s private consumption increasing moderately to 1.1%. Net exports will weigh down economic growth in 2025 due to tariff impacts, but the increase in exports in 2026 may accelerate to 2.2%, restoring its contribution to GDP to 0%. The fiscal impact on Japan's economy next year is expected to slightly increase, and Hayashi's supplementary budget may exceed last year’s ¥13.9 trillion, with an expected GDP impact of approximately 0.25%, slightly higher than last year.
Japan's stock of debt is enormous, but debt risks on a cash flow level remain relatively low, with some fiscal expansion space in the short term; however, interest payment pressures are rising. Japan has the highest debt-to-GDP ratio among developed economies, yet due to low foreign debt, long duration, and the predominant holding of bonds by domestic institutions and the central bank, the probability of a debt crisis is relatively low. Based on IMF forecasts, the interest expenditure as a percentage of GDP is expected to reach 4% in the US by 2026, 2.9% in the UK, 2.2% in France, 1.5% in Japan, and 1.2% in Germany. In terms of interest expenditure as a proportion of total government expenditure, the estimates for 2026 are 11.59% for the US, 6.89% for the UK, 3.83% for France, 3.77% for Japan, and 2.41% for Germany. Japan is below the US and the UK, indicating relatively lower pressure. However, as the BOJ is still in a rate hike cycle, the pressure related to interest payments is inclined to increase. The buyer structure in the Japanese bond market shows some risk resistance strength; by the end of 2024, the BOJ held 45.5% of Japanese government bonds, with 14% held by foreign investors, lower than in the US, France, and the UK, making Japan's risk from simultaneous equity, debt, and currency declines relatively low.
III. Limited Monetary Easing: The BOJ’s Rate Hikes Have Lagged Significantly Behind the Curve Since taking office, Hayashi's stance on loose monetary policy has moderated, showing relatively weaker influence over the BOJ, making it challenging to reverse the central bank's positions. After being elected Prime Minister, Hayashi's stance on monetary policy shifted from aggressive to more moderate. During the campaign, Hayashi mentioned he would explore the need to revise the 2013 "government-BOJ joint statement" to escape the constraint of the 2% inflation target, but after assuming office, he stated, “currently, there are no revision plans,” insisting that “specific monetary tools are determined by the BOJ, and the government needs to enhance communication and coordination with the BOJ.” Hayashi’s influence on monetary policy appears relatively weak.
Hayashi's influence on the BOJ faces several constraints: 1) Article 3 of the Bank of Japan Act clearly establishes the independence of monetary policy; 2) Hayashi may not emulate Abe's approach to replace the BOJ governor, as the current governor's term ends on April 8, 2028; 3) Hayashi may only be able to replace a few BOJ committee members, exerting limited marginal influence. Among the current members of the BOJ’s Monetary Policy Committee, two members, Asahi Noguchi and Junko Nakagawa, will complete their terms in 2026, and both hold relatively hawkish views; Hayashi can nominate dovish committee members with parliamentary consent. Currently, among the BOJ's policy committee members, five lean hawkish and four hold relatively neutral positions; even if Hayashi successfully appoints dovish members, reversing the BOJ's direction will be challenging. Communication and coordination with the BOJ are likely to remain the most critical and pragmatic means for Hayashi to influence monetary policy.
The risk of rising inflation in Japan, strong expectations for next year's wage growth, and depreciation pressures on the yen may all limit dovish options for the BOJ next year. Year-to-date, inflation in Japan initially fell and then stabilized, rebounding again in September. Structurally, food inflation remains strong, energy has shifted from a drag to a driver, goods inflation has weakened, and services inflation shows strong stickiness. In September, Japan's CPI was up 2.9% year-on-year, with core CPI (excluding fresh food) also up 2.9%, both rebounding, while September's core-core CPI (excluding both fresh food and energy) was up 3.0% year-on-year. Food continues to be the most stable driver, with September's year-on-year growth excluding fresh food hitting 7.6%, contributing 1.9 percentage points to Japan's core CPI growth; government electricity subsidies have declined in September, leading energy inflation to shift from -4% in August to 1.9% in September; services inflation in September was up 1.4%, in line with overall growth rates at the beginning of the year; goods inflation rose to 4.2% in September, down from 6.3% in January. Looking ahead to next year, wage growth and currency rates both pose potential inflationary pressures. The wage growth result from the spring labor negotiations in 2025 was 5.25%, marking a 34-year high, likely driven by labor shortages and minimum wage increases, thus still possibly achieving a 5% wage increase in 2026. This year, the yen has fluctuated around 150; if the yen continues to weaken, it may elevate inflation expectations. According to estimations by the Ministry of Finance, a 10% depreciation of the yen raises inflation by approximately 0.3 percentage points. The BOJ's monetary policy may cautiously normalize next year. In 2025, the BOJ raised interest rates once in January, bringing the policy rate from 0.25% to 0.50%. The BOJ held rates steady in April, July, and September, with two members (Takeda Sho and Tamura Naoki) advocating for a hike to 0.75%. Market expectations indicate that policy rates are expected to remain unchanged in October and December. In 2026, there are anticipated two rate hikes, one in March bringing rates to around 0.75% and another in September pushing rates closer to 1%. According to IMF projections, the terminal rate may settle around 1.5%. In terms of purchasing bonds, the BOJ aims to reduce the monthly bond purchase scale to around ¥2.1 trillion by the first quarter of 2027. By the third quarter of 2025, the average monthly bond purchases had decreased to ¥3.6 trillion; from January to March 2026, it is expected to further decrease by approximately ¥400 billion to ¥2.9 trillion, followed by a mid-term assessment in June 2026. Regarding the disposal of ETFs and J-REITs, the disposal of ETFs and REITs began in September 2025, with principles to avoid disturbing the market, pricing at market rates, and subject to adjustment or suspension based on market conditions. The rhythm is expected to be moderate, with annual disposals of ETFs at around ¥330 billion and J-REITs at ¥5 billion, continuing with minor sales in 2026.
Risk Tip: 1. Escalating Geopolitical Conflicts: The Russia-Ukraine conflict is not yet resolved, and geopolitical tensions may heighten oil price volatility, disrupting global "de-inflation" processes and expectations for a "soft landing." 2. US Economic Slowdown Exceeding Expectations: Attention is called to the risk of weakening employment and consumption in the US. 3. US Fed Turns Hawkish Beyond Expectation: Should US inflation demonstrate greater resilience, it may affect the Fed's future rate cut trajectory.