The economy will be the central issue in the next week’s leadership election of Japan’s governing Liberal Democratic Party (LDP) that has almost continuously held power since 1955.

The frontrunner is Sanae Takeichi, Japan’s former internal affairs minister. This is her third attempt to win the LDP’s presidency. And if next week is her third time lucky, she could be Japan’s first female prime minister.

Predictably, in her first press conference last week, she announced that she wanted to accelerate Japan’s economic growth with expansionary fiscal and monetary policies.

It appears that, in her view, Japan’s growth rate of 1.5% in the first half of this year was not enough. Equally, she seems to consider that an average inflation rate of 3.2% over the last four months (much above the official policy target of 2%) should be no barrier to cheaper and abundant money supply.

The usual election time rhetoric? Of course, especially since Takeuchi’s opponents would not dare to contradict her optimistic promises voters want to hear.

Jumping over the speed bumps

The bad news is that Japan will continue to stumble along with huge structural problems that are undermining an erstwhile stable and steady economy.

So, as the old saying goes, election promises are made to be broken. And this time will be no different as binding policy constraints reassert themselves.

In fact, all that is already clear: with a 1.5% GDP growth, Japan’s economy is jumping over the speed bumps set by structural limits creating supply shortages and inflationary flareups.

Those structural limits are a very low annual labor force growth of 0.3%, a dismal labor productivity growth of 0.1% and a capital stock growth of 0.2%. Those are long-term averages calculated between 2010 and 2024.

What those numbers are telling us is that Japan’s economic growth speed limits are set by a potential and noninflationary growth rate of 0.4% (the sum of labor force growth and labor productivity growth).

The growth rates in question reflect the stock and quality of human and physical capital. Labor productivity indicates the output of labor force outfitted by the best available technology.

Japanese politicians running for office probably know a great deal about these structural economic issues because they are not recent developments. But measures to deal with labor force and productivity problems require policies that are incompatible with short-term electoral cycles. And some of those issues may also require major changes in the composition of the country’s economic growth.

Politicians usually don’t go for long-term payoffs of structural changes. Typically, they reach for fast-acting fiscal and monetary policies – tax cuts, government spending and interest rates.

Exports to East Asia

The problem is that Japan’s current budget deficits, huge public debt and high inflation leave no room for such election time largesse.

Japan’s economic recovery over the last four years has allowed to bring the budget deficit down to 2% of GDP in 2024. A further progress is expected this year based on estimates of a continued rebound of economic activity. Government’s improved financial balances have also led to a significant progress on public debt – which still remains excessive at 217% of GDP.

There is, therefore, no room here for “prudent” tax cuts and government spending increases. Tempering with Japan’s precarious fiscal position is not a good idea.

And neither is there any room for interest rate cuts in an economy running way above its physical limits to growth and struggling with an inflation rate of 3.2%.

So, what can Japan do?

Exports -- representing one-fifth of the economy -- are the answer. Nearly all the growth in the first half of this year came from domestic demand (household spending, business and residential investments and government spending), even though exports recovered considerably this year after a slump in 2024.

There is now an excellent opportunity for Japan to boost exports to its East Asian neighbors -- the fastest growing area of world economy. Asia accounts for one-half of Japan’s total foreign trade. The U.S. and the E.U. are much smaller markets, representing 15% and 10%, respectively, of Japan’s trade transactions.

ASEAN (ten Southeast Asian nations) and China are Japan’s largest trade partners, taking 37% of its foreign trade. They are also part of RCEP (Regional Comprehensive Economic Partnership), the world’s largest free trade area of which Japan is a member.

On current evidence, Japan’s best option is to use an export burst to the rest of Asia while pursuing fiscal consolidation, restoration of price stability and structural improvements (labor force growth, productivity and technological advances) that would increase its potential for a faster noninflationary growth in the years to come.