Japan 2025: Key Policy Goals Amid Political Uncertainty

Following the snap elections held on October 27 in Japan,  the ruling Liberal Democratic Party (LDP), led by Prime Minister Shigeru Ishiba, lost its majority in the Lower House for the first time in 15 years, opening up a period of unprecedented political instability. 

Amid low approval ratings, the LDP-Komeito coalition must cooperate with opposition parties to push its policy agenda while yielding concessions. At the same time, the ruling minority, the Democratic Party For the People (DPP), and the Japan Innovation Party (JIP) collaborated to pass a supplementary budget bill for 2024, signalling that effective case-by-case cooperation is possible.

Read on to learn about the government's policy goals in key areas for 2025, divergent and aligning viewpoints of the opposition parties, potential implications for businesses, and future outlook.

Economy: Extra Budget Bill Passed to Tackle Inflation

Prime Minister Ishiba’s political aspirations are centered on revitalising the country’s slowing economy through improved fiscal conditions and wage hikes. Specifically, he aims to raise the average hourly minimum wage from the current 1055 yen to 1500 yen in the next five years.

On December 9, 2024, the LDP-Komeito coalition submitted to the Lower House of the Parliament a supplementary budget bill worth 13.9 trillion yen (approximately $90 billion USD), applicable for the remaining of fiscal year 2024 until March 2025. The bill is intended to finance an economic stimulus package worth 39 trillion yen ($250 billion USD) approved by the government on November 22, which features large funds to support low-income households, spur tech innovation, and support regional economies. The bill passed at the LDP-led Upper House on December 17.

The bill passed after the minority government and the DPP reached an agreement. As part of the deal, certain provisions proposed by the DPP were included in the aforementioned economic stimulus package, such as cutting the provisional gasoline tax rate and raising the nontaxable annual income threshold. For the DPP, raising the threshold is crucial for fulfilling a pledge made during its campaign in October. However, the ruling minority and the DPP are at odds over the proposed increase, with the ruling coalition advocating for a rise to 1.23 million yen from the current 1.03 million yen (about $6,700). On the other hand, the DPP supports a higher threshold of 1.78 million yen (approximately $12,000).

Despite divisions with opposition parties, the approval of the budget bill is a victory for the minority government. At the same time, the key test for the LDP-Komeito coalition will be reaching a deal on the 2025 fiscal year budget, which is fundamental for advancing its economic agenda.

Technology: Boosting AI and Semiconductors to Enhance Competitiveness

Ishiba's primary objective is to drive economic growth by leveraging technological innovation, particularly in strategic sectors such as AI, quantum technology, and biotechnology. He also pledged to advance the development of cutting-edge technologies, including blockchain, and support start-ups through the Five-Year Plan for Promoting Startup, which aims to make Japan Asia’s largest start-up hub.

The approved budget bill includes large funds to boost the domestic chip and AI sectors through subsidies and financial aid. This aligns with Ishiba's plan to support the tech industry with 10 trillion yen ($65 billion) by 2030. This initiative aims to strengthen Japan's semiconductor supply chain in response to geopolitical tensions.

The DPP, like the LDP, supports advancements in cutting-edge sectors, especially the crypto industry. During the electoral campaign, DPP leader Yuichiro Tamaki proposed tax cuts and measures to boost NFTs and Web3 technologies. Tamaki's plan includes separating taxation for crypto assets, encouraging crypto trading, and improving the regulatory framework.

With both the ruling minority and the DPP expected to collaborate on technology policy, Japan is likely to advance investments in next-generation technology in 2025. This will provide opportunities for businesses while reiterating its status as an innovation-friendly nation.

Energy: Balancing Renewables and Nuclear to Achieve Energy Security

Ishiba has strongly promoted the development of renewable energy, emphasizing its significance before the general elections and in his inaugural speech. He also advocates for the exploration of alternative energy sources like geothermal, which is abundant in Japan but still underutilised. In addition, Ishiba plans to continue making use of nuclear power.

In May 2024, the government began discussing revising the 7th Strategic Energy Plan (SEP), Japan's key energy policy document, three years after its last update. The new version, which will be presented to the Cabinet for approval in early 2025, is expected to set new targets for greenhouse gas emissions and the country's energy mix for the next decade. 

However, the LDP-Komeito coalition and opposition parties diverge on energy policy. The Constitutional Democratic Party of Japan (CDP), more vocal than the LDP in advocating for achieving carbon neutrality, strongly promotes measures to combat the climate crisis by targeting a 50% share of power generation from renewable energy by 2030. In addition, it supports capital investment for decarbonisation, and promotes electric, hydrogen, and fuel-cell vehicles in the transportation sector. The Japanese Communist Party (JCP) also supports the realisation of zero nuclear power, while the JIP and the DPP are promoting policies to utilise and construct "next-generation" nuclear reactors.

Energy security is a government priority, but party divisions over which sources to prioritise, especially nuclear energy, are likely to hinder energy policy cooperation.

Foreign Policy: Increasing Defense Expenditure and Pursuing Strategic Autonomy

Before being elected president, Ishiba served as director-general of the Japan Defense Agency from 2002 to 2004, and as Minister of Defense from 2007 to 2008. He is notably a promoter of enhancing Japan's defense capabilities vis-à-vis rising regional geopolitical tensions.

One of Ishiba's key foreign policy priorities is the proposal to establish an Asian equivalent of NATO to bolster peace and security in the region as a deterrent to China. However, the initiative could encounter hurdles as several Southeast Asian countries may be hesitant to participate in a coalition that risks straining their relationships with Beijing. In addition, Ishiba aims to revise Article 9 of the Constitution to allow Japan to maintain military forces on its territory to enhance the country’s strategic autonomy. Finally, he aligns with Kishida's goal of increasing Japan's defense budget to 2 percent of the GDP, as stipulated in the 2022 National Security Strategy.

Among Japan's six major political parties, all except the JCP believe in the necessity to boost the country’s defense capabilities. However, the JIP and the DPP oppose raising taxes for this purpose.

Amidst perceived regional tensions caused by North Korea and China, Japan is likely to continue prioritising its alliance with the United States. In addition, recently elected President Trump has already expressed his willingness to meet with Ishida, underscoring Japan's importance for Washington’s Asian foreign policy.

Future Outlook

Despite Ishiba's weakened leadership, the LDP-Komeito coalition still controls the Upper House of Parliament until the elections in July 2025. With only 124 seats at stake, the coalition may retain its majority. However, challenges from opposition parties could make it difficult for the government to implement significant economic reforms and policy initiatives.

As Japan poses itself as a key player in the Asia-Pacific for attracting investments in strategic sectors, including advanced technologies and energy, businesses should stay on top of the country’s internal dynamics and policy priorities. With FiscalNote, teams can gain actionable intelligence on how to stay on top of further developments in Japan. FiscalNote Professional Services provides insights with our award-winning policy analysis delivered right to your inbox.