This blog post continues my exploration of the available productive resources in Japan which would allow a nominal fiscal expansion to be accommodated without adding to the inflationary pressures. People consistently point to the low official unemployment rate as a proxy for a shortage of labour in Japan. It is good that the official unemployment is consistently low and that is a good thing. But the official rate might not be a very good indicator of the degree of labour market slack, especially as Japan has endured many years of low economic growth and falling real wages. A focus on underemployment probably provides a better guide to the availability of idle labour resources. That is what I consider in today’s instalment.

I do not have much time to write today as I am moving house later this afternoon and have a few work meetings to attend before that. So the next topic might take two shorter parts. As predicted, Ms Takaichi became the first female Prime Minister for Japan on Tuesday after consolidating a coalition with the unlikely 日本維新の会 (Japan Innovation Party or Ishin for short), who are based in Osaka and is a sort-of right wing group that opposes central government in Tokyo and is a mixture: free market narratives, anti-immigration, mixed with things like government-provided free education for all. It is an unlikely coalition that only a place like Japan could conjure up. But she is now PM and the ailing LDP elite rules on, although for how long is another matter. The new PM is, as I have indicated against using monetary policy as the main macroeconomic policy tool and favours further fiscal expansion under the new heading 責任ある積極財政 (Responsible and proactive fiscal policy), which was a term given to her by my research collaborator here at Kyoto University (Prof. Fujii), who will become one of her senior advisors in the new government. The question I am toying with as we prepare for this major symposium at the Diet on November 6, 2025, is what actual scope is there for fiscal expansion when we are told that there is a drastic labour shortage. That is what I am discussing in this part of the series today.

This Tuesday report will provide some insights into life for a westerner (me) who is working for an extended period at Kyoto University in Japan but who over the years of working here has increasingly began to understand the language and local cultural traditions.

A few weeks ago I wrote this blog post – Japan – the challenges facing the new LDP leader – Part 2 (October 9, 2025) – documenting the viability of a fiscal expansion in Japan given the availability of idle labour resources, which are in short supply. I noted that the recent estimates from the Bank of Japan of the Labour Input gap were +0.47 per cent, which means the available labour force is working over their trend potential, and raise the question: How can output growth be possible with the labour capacity already well above potential? Which is what today’s discussion is about.

This Tuesday report will provide some insights into life for a westerner (me) who is working for an extended period at Kyoto University in Japan but who over the years of working here has increasingly began to understand the language and local cultural traditions.

This is a second part of an as yet unknown total, where I investigate possible new policy agendas, which are designed to meet the challenges that Japan is facing in the immediate period and the years to come. This is also in the context of the elevation of Ms Takaichi to the LDP presidency and soon Prime Minister. She has suggested that her policy agenda will shift somewhat from the current government position, in the sense that she wants lower interest rates, while the majority of economists want higher, and she is advocating further fiscal expansion, while the mainstream want austerity. In the first part I examined the inflation issue in Japan, which suggests that the mainstream view that rates have to rise is misguided. Today, I am considering the scope for fiscal expansion.

This Tuesday report will provide some insights into life for a westerner (me) who is working for an extended period at Kyoto University in Japan but who over the years of working here has increasingly began to understand the language and local cultural traditions

This Tuesday report will provide some insights into life for a westerner (me) who is working for an extended period at Kyoto University in Japan but who over the years of working here has increasingly began to understand the language and local cultural traditions