Is a high-pressure economy strategy in Japan viable?

October 5, 2026
bill
Fiscal policy, Japan
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I am currently working on developing models that help evaluate the constraints on fiscal expansion in Japan arising from the ageing workforce in the construction sector. The current government under Ms. Takaichi is pursuing what they call a “responsible proactive fiscal policy” that aims to utilise large-scale public investment spending to crowd-in private investment expenditure and create a high-pressure economy, where productivity growth is enhanced. The strategy also involves significant fiscal reform – moving away from single-year fiscal cycles (obsessing about primary surpluses) to a long-term, multi-year spending plan that provides certainty to the non-government sector. The combined public-private investment blueprint proposes to spend ¥370 trillion in the period to 2040 across 17 strategic sectors. Most mainstream commentary is focused on the implications of the increase in public debt arising from the proposals (given that the government still unnecessarily matches net spending increases with debt issuance) for bond market yields and whether the government will run out of money. An irrelevant focus! However, the tntent of the plan can be contested given the need to reduce the ecological footprint of all nations. But even if we ignore that issue, the practicalities of the proposal can be contested within a Modern Monetary Theory (MMT) framework based on resource availability.

Aside from the concentration on bond markets, the mainstream macroeconomics debate in Japan seems to be centred on whether the current fiscal strategy pursued by Ms Takaichi is ‘reflationist’, which is a locally-developed concept that arose during the period of Shinzo Abe.

The mainstream criticism is that with the Bank of Japan in rate hiking mode to deal with the inflationary pressures, compounded somewhat (in mainstream reasoning) by the depreciation in the yen, surely a fiscal expansion of this magnitude will add to the inflationary pressures and require further rate hikes.

The government denies it is following the path set by the Abe government, which has been wrongly characterised as a large-scale aggregate demand (spending) expansion, aimed at stimulating production and economic growth in an environment where there was excess supply capacity.

Abe, in fact, ran a stifled fiscal policy with two sales tax increases prior to the large fiscal expansion associated with the pandemic.

The current government contrasts its approach by saying it is focused on deploying a combination of public-private investment and industry policy (‘picking winners’) in an effort to boost the productive capacity of the economy (aggregate supply).

One of the unique characteristics of investment expenditure (capital formation) both public and private is that it has a dual nature:

(a) It adds to immediate aggregate demand;

(b) It adds to future productive capacity through the expansion of infrastructure, equipment, plant, etc that it engenders.

Other components of aggregate demand do not have this characteristic.

The Takaichi strategy is thus to ensure that potential GDP growth expands (via the investment) and the new capital stock that is created is more productive than the older vintages.

Higher productivity growth has two advantages:

1. It allows real wages to grow to support higher consumption expenditure and push the economy onto a higher growth path.

2. It allows material standards of living to be sustained (or enhanced) with less labour resources, which within the Japanese context is extremely important.

In some circles, the economic stagnation (viewed in mainstream terms) that has marked the last few decades of Japanese history, it the result of the ageing society.

In 1990, the total dependency ratio, which compares dependents (children under 15 and adults 65 and older) to the working-age population (ages 15 to 64) per 100 people was around 43.2 per cent.

At present, the ratio is 70.2 per cent.

The following table compares the different age brackets in 2025-26 with the proportions found in 1990.

Age Group	Proportion 1990	Proportion (2025-26)	Proportion Projected 2050
0-14 years	18.2	11.2	9.0
15–64 years	69.6	58.8	54.0
65+ years	12.2	30.2	39.0

The current Japanese population is around 123 million, and, on current demographic trends will contract to around 105 million by 2050.

The current estimates for 2050 indicate that the total dependency ratio will rise from 70.2 per cent now to 89.0 per cent – which means that around 9 dependents for every 10 working-age individuals.

It is also forecast that for 25 out of Japan’s 47 prefectures, the elderlY will make up over 40% of the local population.

This recent Japan Times article (September 21, 2026) – Japan’s elderly population grows to its largest share yet – provides more detail.

Given these demographic projections, it is unsurprising that people would conclude that the slow growth of the Japanese economy is all down to a lack of people to spend enough.

The government, however, takes the view that the growth constraint comes from a lack of investment in productive capacity that has arisen from the low private investment ratio as corporations hoarded profits and declined to provide satisfactory wages growth to the workforce in the deflationary environent that set in after the 1991 asset bubble crash.

It recognises that the deflationary mindset is ingrained in corporate thinking and requires a large shock to shift the mentality.

That shock is intended to come from the significant fiscal injection into public infrastructure planned under its growth policy.

I agree with that assessment and have written about that in the past:

1. Major shifts in sentiment within Japan as they try to escape the cost-cutting excess profits mindset (July 31, 2025).

2. Japan – the challenges facing the new LDP leader (October 6, 2025).

3. Japan – the challenges facing the new LDP leader – Part 2 (October 9, 2025).

4. Japan – the challenges facing the new LDP leader – Part 3 (October 13, 2025).

5. Japan – where will the productivity growth come from? – Part 4 (October 20, 2025).

6. Japan challenges – is there really a labour shortage? – Part 5 (October 23, 2025).

7. Japan challenges – is there really a labour shortage? – Part 6 (October 27, 2025).

This sequence of work will come out in a new book to be published early in 2027.

However, notwithstanding my agreement that if Japan wants to break out of the deflationary mindset that has persisted since the 1990s, a large fiscal shock is required, I still question whether the supply-side will be able to respond as the government proposes.

Clearly, pushing a large fiscal expansion into an economy where supply cannot expand quickly enough to absorb it will be inflationary.

The question then is whether the supply-side can expand quickly enough, which is the focus of some of my current research here in Kyoto.

The question might be rephrased to be: while investment expenditure has a dual characteristic, distinguished by its different temporal impact – demand boost short-run, supply boost – medium to longer term, are there sufficient productive resources in the target sectors to allow the expenditure to be effective?

The infrastructure development will require the construction sector to increase its output.

Are there sufficient labour resources going to be available over the next 14 years to permit such an expansion?

It is all very well to talk about the creation of a high-pressure economy, which was a term that the US economist – Henry Wallich in 1956, and subsequently expanded on by the work of – Arthur Okun.

Arthur Okun’s 1973 Brookings article – Upward Mobility in a High-Pressure Economy – was very influential in my early career .

He showed that when there was a recessed state (high unemployment, lower participation rates, and lagging productivity growth – pushing the economy into higher states of activity with fiscal expansion had a series of beneficial upgrading outcomes.

These outcomes are summarised with the expression that JFK introduced “a rising tide lifts all boats”.

By pushing the economy at rates of growth that exceed the current projected potential, the supply-side also adapts in a number of ways – for example, increasing the female participation rate (remember: this was written in 1973 when female participation was low and the ‘married woman’ effect was about to begin).

But the question that I am exploring in the context of the contemporary conditions in Japan is whether these upgrading effects will emerge and whether the supply side can grow quickly enough.

One methodology that I am using to evaluate the resource constraints in Japanese sectors is called the Cohort Change Rate (CCR) Method, also referred to as the Hamilton-Perry Method.

This is a relative simple technique that involves population projection to assess future demographic proportions.

When applied to the industrial structure, CCR projects how specific age cohorts of workers move in and out of the workforce and between specific industries.

The CCR method uses the following steps:

1. Create a demographic benchmark at some point in time specified in terms of the age and gender groups by industrial sector (construction, manufacturing, etc).

2. Calculate Sector-specific Cohort Change Rates – that is, compute the net changes as a cohort ages from one time period to the next across the industrial structure.

3. Calculate entry rates into the labour force for younger workers – this estinmates the number of workers in each new generation that will join each respective industrial sector.

4. Use the rates to forecast future supply – for example, the current 25–29 aged group in an industry is multiplied by that industry’s specific CCR to project the available supply of workers who will be aged 30–34 in the next forecast period.

5. Aggregation – the different age cohort projections are summed across each sector.

Some available work already points to the likelihood that the available construction workforce in Japan will decline significantly by 2050, mostly because there will be a significant decline in new entrants to the sector.

For example, the work of 2012 research paper by T. Uemura found that the construction workforce in Japan would contract from 5.5 million workers in 2005 to around 1 million workers by 2050.

Moreover, the rural municipalities would experience a much faster and larger contraction in their construction workforces relative to the major urban centres.

Reference:

Uemura, T. (2012) ‘Cohort analysis and projection on labour force numbers in construction industry using national census survey data’, Planning and Public Management, 35(1), 47–54.

More recently (February 2026), Jun Sakamoto found that the policies designed to address the declining construction workforce – such as, reducing excessive working hours, improving wages growth, skills training targetted at young workers, and policies to increase female retention – are not sufficient.

The positive impacts of these policies are being overwhelmed by the demographic decline.

His contribution is that his analysis is at the municipal level.

Reference:

Sakamoto, J. (2026) ‘Cohort-Based Analysis for the Prediction of Labor Force Numbers in the Construction Industry in Japan’, Journal of Urban Planning and Development, 152(2), (paywall – https://ascelibrary.org/doi/10.1061/JUPDDM.UPENG-5915).

We are building on this work.

The point is that if these projections are valid, then the Takaichi approach will have to introduce additional features to ensure that the money going into the infrastructure sector does not hit a resource dead end.

I will discuss the additional aspects necessary in future posts.

Already the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) has introduced its – i-Construction 2.0 [Japanese version) – which is designed to automate construction sites and boost productivity.

It aims to reduce the labour input necessary by 30 per cent while increasing productivity by 1.5 times by 2040.

It has three pillars:

– Construction Automation: Using AI, remote control, and self-driving heavy machinery.

– Data Integration Automation: Sharing 3D models and data via BIM/CIM across all project stages.

– Management Automation: Conducting remote inspections and digital management to reduce site visits.