After the Win: Rethinking Japan’s Economic Strategy under Takaichi

Introduction

On February 9, 2026, Sanae Takaichi achieved a historic milestone with a landslide victory in the Lower House elections, winning the Liberal Democratic Party (LDP) a remarkable two-thirds supermajority with 316 out of 465 seats. Together with coalition partner Nippon Ishin No Kai (Japan Innovation Party), the ruling bloc holds 352 seats, positioning it ahead of any future opposition roadblocks in the Lower House for the duration of the chamber’s four-year term unless the house is dissolved earlier.

As the fourth Japanese Prime Minister in the last six years, Takaichi navigates a demanding domestic environment while pursuing greater political stability to outlast her three predecessors. Domestically, she has faced longstanding public demand to reduce taxes and increase wages, along with growing anti-immigrant sentiment across various political parties. Takaichi continues to face pressure to revive the sluggish economy while addressing the country’s aging population and the resulting strain on human resources.

Background: Economic Challenges

The primary and most urgent challenge for Takaichi is managing the Japanese economy amidst high consumption taxes, stagnant wages, high cost of living, weak currency, and the highest public debt among G7 countries. The overwhelming majority in the Lower House could encourage Takaichi to introduce sweeping reforms and revive the fourth-largest economy in the world. Prior to the snap general elections, Takaichi had already introduced measures to abandon what she termed “excessive austerity” and “underinvestment” by injecting investments in 17 strategic sectors through government spending financed by debt.

Takaichi aims to spur consumption by cutting taxes, rather than relying on savings to boost economic growth. The 17 strategic domains identified for investment, including AI, semiconductors, shipbuilding, defense, and biotech are expected to strengthen the Japanese economy’s supply chain and create a cycle of global capital flowing into Japan, thereby generating higher tax revenues and offsetting the initial outlays over time. This approach minimizes net public expenditure while addressing long-term demographic and security challenges.

However, overreliance on specific sectors risks sacrificing broader economic diversification, especially in an unstable security environment. The global demand for these sectors is sensitive to geopolitical stability, and global capital flow is vulnerable to regulatory and macroeconomic risks. In an uncertain macroeconomic environment, households and firms are choosing to save rather than consume or invest. The recent instability surrounding the Strait of Hormuz has reoriented Japan’s focus towards upholding crude oil and gas supply for essential energy consumption. The Bank of Japan has reported a rise in Japan’s real wages, but the war’s prolongation has resulted in price rises of fuel, electricity and food, which could easily undo the gains achieved.

Plans for AI Utilization and ESD Implementation

In addition to the inflation concerns, Japan is combating labor shortages from an aging population. As a result, the emerging opposition party, Team Mirai, has proposed replacing workers with AI. Considering the broad shift towards automation in the manufacturing and industrial sectors, this proposal is unsuprising. One of the last policy actions under the Shigeru Ishiba cabinet, days before his resignation, was the full enforcement of the “AI Promotion Act” on September 1, 2025 to promote AI innovation while mitigating risks. Then, the Takaichi cabinet issued the “Artificial Intelligence Basic Plan” on December 23, 2025. In principle, Japan is calling for accelerating AI deployment and utilization into work while adopting “Trustworthy AI” through the AI Promotion Act and the Basic Plan. However, the principal concern revolves around the path of transitioning the existing labor force to adapt to an AI coworking environment.

Japan’s labor force is largely concentrated in the tertiary sector, which accounted for 74.2 percent of employment in 2024. The Statistical Handbook of Japan 2025 reports that the employment is concentrated in areas of medical, health and welfare, information and communications, scientific research, and professional and technical services. Meanwhile, the foreign labor force is largely concentrated in the manufacturing sector at 24.7 percent, and the tertiary sector at 15.2 percent. Within these overlapping occupations, there are sectors where AI adoption and deployment remain largely limited and large-scale replacement is not technically or economically viable in the short term.

The plans for increasing AI utilization in the workforce aligns with the increasingly popular rhetoric to restrict the inflow of foreigners, who currently represent 4.1 percent of Japan’s workforce. Foreign workers remain most vulnerable with the large number of foreign laborers employed in the sectors of manufacturing, where substantial AI-driven changes are projected. Yet, these plans could also backfire and negatively impact the low-wage local workers as the economy shifts towards higher-value, skilled workers.

The overlap of laborers, both local and foreign, in sectors where AI adoption is most advanced such as manufacturing, will result in significant displacement for both. Even in the tertiary sector, the aftermath of the COVID-19 pandemic pushed healthcare as a priority area for AI applications. This would mean that local workers, who are concentrated in the tertiary sectors, will be at risk unless they have greater access to upskilling and mobility.

At the moment, Takaichi’s government has focused on upskilling low-wage workers through the “Employment for Skill Development (ESD)” system, which will go into operation by April 2027. The ESD will replace the Technical Intern Training Program (TITP), which has been condemned for the disappearances of thousands of interns. The TITP was primarily an “internship” scheme to secure low-cost labor for shortages in industries while effectively fixing the foreign worker to a single employee. On the other hand, the ESD is designed as a genuine skill development path for foreign workers, which would grant them the right to change employers after a specified period of one to two years.

In theory, under the ESD, the foreign workers will be assessed against defined parameters such as language proficiency tests, skill tests, and Specified Skilled Worker (SSW) evaluation tests. The ESD system is expected to cap the entry at 426,000 foreign workers across 17 sectors, falling below the 449,000 enrolled in the TITP as of June 2025. Additionally, the number of workers qualified for SSW status, implemented in 2019, has dropped from 820,000 to about 806,000. The total intake of foreign laborers is therefore constrained to approximately 1.23 million until the end of fiscal 2028.

As of October 2025, approximately 2.57 million foreign nationals across all visa categories were working in Japan. The cap of 1.23 million on admissions under the new ESD and SSW scheme, through a control on the rate of net inflow, will potentially slow the growth rate of foreign labor relative to past trends. If the rate of inflow remains controlled and the transition to long-term residency is restrictive, the foreign labor force could decline significantly in the long run. A failure to meet the new ESD and SSW objectives may widen the labor shortage.

Amidst Japan’s declining birth rate, these ESD and SSW measures offer short-term fixes and rely on the inflow of foreign laborers. The Japanese government requires urgent change to promote a sense of security through employment prospects, address the rising cost of living, and reform Japan’s “karoshi”(overwork) culture, where professional demands endanger workers’ health. To climb up the corporate ladder, workers often suffer from physical and mental exhaustion, and suppress household and child-rearing responsibilities.

Abe and Takaichi’s Approach

Takaichi’s attempts at revitalizing Japan’s economy closely mirrors the 2013 “Japan is Back” growth strategy of late Prime Minister Shinzo Abe. Abe’s plan targeted high-value manufacturing and services, similar to Takaichi’s investments in the 17 strategic sectors across AI, semiconductors, shipbuilding, biotech, and other areas. Abe also sought to attract global goods and FDI, echoing Takaichi’s plan to create a “virtuous cycle” in which global capital flows into Japan. Both Abe and Takaichi’s policies jumpstart growth by pushing for fiscal stimulus financed by debt, employing long-term tax revenues to offset initial spending.

On the other hand, Takaichi’s policy significantly diverges from Abe’s approach. Abe focused on attracting global talent, while Takaichi has pushed for restrictions on foreign labor. Takaichi faces an economic agenda in a climate where immigration is increasingly transforming into a political liability, catalyzing the growth of ESD implementation and skilled labor demand.

Abe’s approach to attract global talent acknowledged that domestic supply alone could not meet Japan’s structural needs. In contrast, Takaichi is adopting a politically viable but economically risky position, while hoping that the AI adoption and the ESD system will fill the gap. Based on the two approaches, Abe’s was better calibrated to the scale of the problem. Takaichi’s policy plan is aligned more with the political accommodation of the anti-immigrant sentiment, which could impact the long-term workforce strategy as the local talent undergoes an increasing strain on human resources with the aging population.

Policy Recommendations

The reversal of Japan’s demographic trajectory is unlikely for the foreseeable political cycle. However, the consequences for the labor market are manageable if the Takaichi government includes complementary measures grounded in the structural realities.

First, the ESD system and the SSW must reflect Japan’s labor gaps more accurately. The government should verify the ESD intake based on empirical data on sectoral or occupational shortfalls, which are updated annually. This step would preserve the skills developed under the ESD, with priority given to sectors with persistent gaps including logistics and resource recycling, and linen supply services, rather than subjecting intake to arbitrary numerical restrictions that risk misallocating labor across sectors.

Second, the upskilling or reskilling program for any AI transition must possess an institutional infrastructure that is nationally adopted and applicable to all workers. This would require a dedicated reskilling or upskilling fund, which could be drawn from the fiscal stimulus that is designated for the 17 strategic sectors. The focus needs to be on sector-specific digital competencies rather than generic AI literacy.

Third, Takaichi should address labor retention in Japan and the karoshi crisis independently of the labor supply shortage. The Takaichi cabinet, with an overwhelming majority, has the necessary legislative mandate to usher in work-culture reforms across full-time, corporate, and freelance employees. Legally binding caps are necessary on overtime hours, with penalties for non-compliance. This would also lead to an increased participation in the labor markets from women and older workers, who are directly constrained by overwork norms.

These measures, in combination with the aforementioned investment across 17 strategic sectors, capped immigration through ESD, AI deployment and utilization, would progress Takaichi’s strategic policy agenda in an economically coherent, politically sustainable and structurally durable manner.

Conclusion

Japan’s current socioeconomic climate compels Takaichi to integrate economic revitalization with strategic risk management. Yet, Takaichi’s government risks exacerbating labor shortages through an aggressive push for a domestic, highly tech-savvy workforce. In order to successfully manage growing concerns of the labor market, the Takaichi government must implement an ESD system and an SSW that accurately reflects Japan’s labor gaps, a dedicated upskilling fund with a sector-specific digital curriculum, and restrictions on overtime hours. Takaichi holds the mandate to enact systematic change—whether she uses it to rejuvenate Japan’s economy or merely to manage the optics of the demographic crisis will define her tenure.

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Tunchinmang Langel is a Research Fellow at the Indian Council of World Affairs (ICWA). He completed his PhD from the Centre for Indo-Pacific Studies (CIPS), School of International Studies (SIS), Jawaharlal Nehru University (JNU). His area of research interests includes the geopolitics of Northeast Asia in the context of the Indo-Pacific. He has had prior work experience with several reputable think tanks and organizations, including the Confederation of Indian Industry (CII), the Foundation for National Security Research (FNSR), and the National Maritime Foundation (NMF). He has various publications in peer-reviewed journals and international forums, such as the Journal of the Indian Ocean Region (JOIR), The Diplomat, The Korean Herald, The Japan Times, and South Asian Voices of the Stimson Center.

Image Credit: 内閣広報室｜Cabinet Public Affairs Office, CC BY 4.0, via Wikimedia Commons