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.