The Prime Minister’s Office of Japan has now released the transcript of the – Policy Speech by Prime Minister TAKAICHI Sanae to the 219th Session of the Diet (October 24, 2025). This was her first major speech after taking on the office of Prime Minister and allows us to see some detail beyond the rather general statements she had made previously about being supportive of fiscal expansion. The detail does not build much confidence.

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.

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 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 week (July 29, 2025), the Cabinet Office in Tokyo released the Economic and Fiscal Report – 年次経済財政報告 – which is a comprehensive statement of where the Economic and Fiscal Policy Ministry thinks the Japanese economy is going and the challenges it faces. It is a long and very thorough document. But like many official documents that the Japanese government publishes, it reads quite unlike what other governments that are sort of in IMF-spin mode pump out. The fundamental takeaway from reading the Report is that the Japanese government is still uncertain about whether the country has evolved out of its deflationary mindset and become a ‘growth-oriented’ nation driven by real wages growth. There is certainly criticism (implied in the Japanese fashion) for corporations sitting on large cash assets who are underinvesting in local productive capital. But the overwhelming hope of the government is that the nascent wage increases that have been offered mostly by the large major corporations continue and spread throughout the economy into the dominant small and medium enterprises. Most governments are still in the corporate cost-cutting mindset – thinking that is somehow how productivity and improved material well-being will occur. So their foci is on deregulation and attacking trade unions and that sort of ‘supply side’ nonsense. The Japanese government is firmly banking on a consumer-led, domestic economy growth strategy fostered by extensive wage rises outstripping the growth in prices.

The – Japanese asset price bubble – burst in spectacular fashion in late 1991 (early 1992) following five years in which the real estate and share market boomed beyond belief. The boom coincided with a period of over-the-top neoliberal relaxation of banking rules which encouraged wild speculation. The origins of the boom can be traced back to the endaka recession in the mid-1980s, after the signing of the – Plaza Accord – forced the yen to appreciate excessively. This was at the behest of the US, which wanted to reduce its current account deficit through US dollar depreciation. The narratives keep repeating! This post, however, is not about the boom, but its aftermath. The collapse in 1991-92 marked the beginning of what has been termed the – Lost Decades – which was marked by a trend slowdown in economic growth, deflation, and for the purposes of this post, cuts in real wages as nominal wages stagnated. While the long period of wages stagnation was bad enough for Japanese workers, there is still hardship coming as the cohort who entered the labour market during this period reach retirement age. This post is part of work I am doing on Japan, which I hope will come out in a new book early next year after I return from my annual working period in Kyoto towards the end of this year.

My colleagues and I at Kyoto University met the night before I flew back to Australia this year to discuss the on-going research collaboration, which will define part of my work over the next few years. I hope we can announce a major event in Kyoto or Tokyo in October or November 2025 to disseminate the first stage of the research results. The topic is broadly characterised by the working title – The Future of Japan – Challenges and Opportunities – and aims to articulate the contemporary challenges facing Japan – juxtaposing the mainstream framing (with associated economic narratives) with a framing based on Modern Monetary Theory (MMT). It is a very broad project and we will have to work over the next few months to make it tractable. The Project aims to develop an alternative blueprint for economic development, one that is centred on advancing the needs and aspirations of the people and moving away from a compliance to the corporate needs. My contribution will draw on the current work I am doing on degrowth and delinking (breaking the yoke of Colonialism in poorer nations) and explore the notion that Japan can actually take ‘advantage’ of its shrinking population to demonstrate how key degrowth strategies can actually be implemented. We will also be running at odds to the Japanese government’s recently announced (October 2024) – JIIA platform – which is the government’s major national strategy statement. The fact that the current government thinking is a reflection of its neoliberal leanings, which have not served the nation well, stands in contrast to the ‘opportunities’ we identify once we adopt an MMT lens. Here is a bit about that thinking and, of course, over the next year (at least), I will periodically update readers with the progress of our work.