In the Lower House election that was held on October 27, 2024, the Liberal Democratic Party (LDP) suffered a crushing defeat in which it lost its majority. For the administration’s framework to hold together, the party will now have to depend to some extent on its opposition for support. And in exchange for that cooperation, the LDP will likely be forced to accept some of the economic policies being advocated by the opposition party, which has touted measures to address high prices (mainly involving things like tax relief and expanding benefits), as well as measures to stimulate consumer spending. Yet if the government does put such policies in place, it’s possible that fiscal conditions could get even worse.

Ishiba Administration to carry on with the Kishida Administration’s growth strategies

Although cutting taxes and expanding benefits will temporarily boost consumer spending, these things are not likely to have a sustained effect on the growth rate. To encourage consumers to have a bright outlook for the future, the key is to promote expectations that real wages will rise going forward. That will require raising labor productivity and increasing the country’s economic potential. And the kinds of policies that are most likely to achieve those ends are growth strategies and structural reforms. The Ishiba Administration has announced that it intends to carry on with the growth strategies from the previous Kishida Administration, but the important thing will be to follow through on them without wavering.
Prime Minister Ishiba himself has put forth the idea of advancing a regional revitalization initiative, which constitutes one of those growth strategies.
This regional revitalization idea is being deployed as one of the six pillars of the LDP’s campaign promises, with the administration set to launch what it is dubbing “Regional Revitalization 2.0”. The stated aims include doubling grants to local governments for regional development, as well as creating a new headquarters for the revitalization of regional economies and living environments. These policies both enjoy strong support from Prime Minister Ishiba himself.
Moving forward with this regional revitalization and with correcting the population overconcentration in Tokyo in a unified manner will be an extremely important growth strategy. Prime Minister Ishiba has also demonstrated interest in addressing the declining birthrate by encouraging more women to relocate to rural areas. His intention in all of this is likely to promote as an integrated whole the three growth strategies he has inherited from the Kishida Administration. My own hope is that doing so will boost the productivity of the Japanese economy overall and raise its growth potential.

Tokyo’s extreme population density an impediment to raising productivity

Tokyo's excessive population concentration may well be stifling the efficiency of the Japanese economy overall. When we calculate how the per capita GDP—i.e., productivity—in various capital cities stacks up against their countries’ national averages, Tokyo’s per capita GDP as of 2015 was 1.13 times that of the national average, versus New York’s at 1.37 times, London’s at 1.74 times, and Paris’ at 1.68 times, which is comparatively quite low (Fig. 1).

Typically, as a country’s population becomes more concentrated in its metropolitan areas, its economy tends to become more efficient, with an attendant rise in productivity. However, when this kind of population concentration continues, it leads to infrastructure deficiencies, deterioration in living environments, and other issues that likely prevent productivity from rising further. It could well be the cast that Tokyo’s population has already gone beyond that critical point and reached a level of excessive concentration.
For Tokyo and other prefectural areas, I calculated the total per-capita production (i.e., productivity) based on the gross prefectural production and prefectural population statistics. Furthermore, looking at the trends in their population growth rates, we can see that since 2014, Tokyo’s productivity growth rate has consistently fallen below those of the other prefectural areas (Fig. 2).

Following the advent of the COVID-19 pandemic in 2020, as well as the subsequent prevalence of remote work, the growth of the “workation” trend, and other developments, we did see some population outflow coming from Tokyo, but my sense is that was merely a transient phenomenon. Without a remedy for this extreme population concentration, Tokyo’s productivity growth rate is now persistently falling below the average of the other prefectural areas.
If we look at annual averages over five years up to 2021, the other prefectural areas’ productivity growth rate averaged out to +0.5%, whereas Tokyo’s was at -0.7%, sinking into negative territory.

The problem posed by the uneven distribution of social capital

One conceivable reason that Tokyo’s productivity growth rate is so sluggish is a lack of social capital. Social capital includes things like roads, sewerage systems, aviation, seaports, parks, schools, soil and water conservation, and national forests, all of which make up the civil infrastructure that is indispensable for industrial activity and public life.
During high-growth periods, aggressive public investments have also been made in rural areas, ensuring a sufficiency of social capital. Yet subsequently, as the migration of people from rural to urban areas accelerated, the amount of social capital available to individuals swelled in these rural areas, thus producing a tendency toward excess social capital. The flip side of this was that in metropolitan areas like Tokyo with their growing populations, social capital has tended to be lacking, and this likely has impeded productivity growth.
If we compare Tokyo’s per capita social capital stock value since 1960 to that in other prefectural areas, we see that up until around 1995, their values were at roughly the same level, standing shoulder-to-shoulder as they rose. Yet, since then Tokyo’s per capita social capital stock value has been on a downward trend, with social capital apparently in increasingly short supply.
Moreover, in the five-year period from 2015 to 2020, this disparity between these two regions has grown sharply, and as of 2020, the per capita social capital stock value in prefectural areas other than Tokyo has reached 1.78 times that of the Tokyo metropolitan area (Fig. 3).

Inbound demand as a catalyst for revitalizing regional economies

If the population and the companies that have become excessively concentrated in Tokyo were to shift toward rural areas, thereby equalizing this per capita social capital stock, the resulting surplus of social capital in rural areas could be used more effectively, and the dearth of social capital in metropolitan areas could be alleviated, which would in all likelihood increase Japan’s overall economic efficiency.
The regional relocation of central government ministries—which the Japanese government has long sought to achieve—has not made much progress, and thus its policy to correct population overconcentration in Tokyo has produced no solid results as of yet. And if no steps are taken going forward, this overconcentration in Tokyo may well continue.
As such, efforts that seek to revitalize regional economies and promote regional revitalization as the means to correct Tokyo’s population overconcentration will be crucial. Furthermore, one potential catalyst for revitalizing regional economies could be redirecting inbound demand to rural areas.
The boost to Japan’s nominal GDP in 2023 from inbound demand came out to 0.79%. Inbound demand has an extremely significant influence on the economy.
If the redirection of inbound demand can lead to a growth in tourism-related business, then perhaps rural areas will be able to absorb both people and companies from Tokyo and other metropolitan areas.
To achieve this, the government must promote efforts to better show people overseas the appeal of the tourist attractions in Japan’s rural areas, as well as take more aggressive steps to reduce over-tourism, provide multilingual services, secure enough staffing for lodging facilities, and so forth.
In addition, if more foreign staff can be utilized by the rural tourist industry, Japan will likely be able to both accommodate foreign tourists and address the labor shortage at the same time.
For that reason, an overhaul of Japan’s specified skilled labor visa system for foreigners is an issue that needs to be discussed.
It is my hope that Prime Minister Ishiba will pool together all of these growth strategies—namely regional revitalization, correcting Tokyo’s population overconcentration, addressing the declining birthrate, inbound demand strategies, and utilizing foreign nationals—in intensively promoting the revitalization of Japan’s economy.