Reshoring Without Workers?：The Overlooked Labor Constraint in Japan’s Supply Chain Strategy

Key Points

1. To secure strategic autonomy and strategic indispensability, the Japanese government—working in partnership with the private sector—has set out a policy of driving more than ¥370 trillion in domestic investment through fiscal year 2040, centered on 17 strategic sectors. That plan rests on an assumption that is easy to overlook: that Japan can secure enough labor to support the supply chains this investment is intended to build.
2. Labor shortages are evident across a range of occupations, from construction and production workers to the highly skilled technicians needed to operate automated equipment. Areas near major cities tend to offer better access to labor but have limited industrial land; regional areas tend to have more available land but may face more severe labor shortages and rising infrastructure maintenance costs over time.
3. Given these labor constraints, the short-term priority should be to narrow the list of critical goods targeted for reshoring, and to rely more heavily, for everything else, on a policy mix that includes friend-shoring, the development of substitute materials, and stockpiling. Over the medium to long term, Japan needs to pursue automation and labor-saving investment in tandem with investment in human capital.

The Push for Reshoring—and an Overlooked Assumption

Rising geopolitical risks and the pandemic brought the threat of disruptions to critical-goods supply chains into sharp relief, making supply chain resilience a priority of Japan’s economic security policy. The Economic Security Promotion Act, enacted in 2022, established the institutional framework for this effort: it designates specified critical goods and sets out measures to build resilience into their supply chains.

Policy tools for building this resilience include (1) various forms of support for expanding domestic production, including “home-shoring,” or bringing production bases for critical goods back to Japan; (2) “friend-shoring,” or relocating production to like-minded countries and regions; (3) support for research and development of substitute materials; (4) support for recycling technology R&D; and (5) stockpiling. Of these, expanding domestic production capacity is where the current administration has placed the greatest emphasis.

Indeed, Japan’s Growth Strategy, approved by the Cabinet on July 21, 2026, commits to driving more than ¥370 trillion in domestic investment through fiscal year 2040, centered on 17 strategic sectors. The government intends to pursue this investment in partnership with the private sector to secure Japan’s strategic autonomy and indispensability. Meanwhile, one survey of businesses found that roughly one in five Japanese companies operating overseas is considering bringing production back to Japan, citing rising local production costs and the weak yen.

Yet the view that subsidies alone will bring production back to Japan and expand domestic output has a blind spot: whether Japan can secure the labor needed to build, operate, and maintain these plants. Japan’s shrinking population is driving severe labor shortages across a wide range of occupations. And if subsidies were to spur a rapid expansion of domestic investment under these conditions, the resulting surge in labor and construction costs could partly offset the intended gains in domestic production. The sections that follow examine these constraints in turn.

Not Enough Workers to Build the Plants—or Run Them

The first challenge is finding enough construction workers to build new plants in the first place. As of June 2026, the effective job openings-to-applicants ratio (excluding part-time positions)—a Japan-specific labor market indicator that is not directly comparable with measures such as the U.S. JOLTS rate—stood at 1.13 across all occupations, but reached 5.49 for construction and mining workers and 6.24 for skilled technicians in building, civil engineering, and surveying (Figure 1). This shortage is already being felt on the ground: in a separate survey conducted at the end of 2025, roughly seven in ten large and mid-sized construction firms said they would be unable to take on new large-scale construction contracts during fiscal year 2026.

Second, even where a new plant can be built, staffing the production floor is no easier. The effective job openings-to-applicants ratio for production-process workers stood at 1.72, indicating that labor shortages are already evident. The supply-demand gap for these workers is also likely to widen further. The ratio of job openings to graduates of industrial programs at public high schools reached a record 31.9-to-1 in 2025, even as the applicant-to-place ratio for industrial programs at public high schools fell below 1.0 in 39 of Japan’s 47 prefectures in entrance examinations for the 2026 school year. One possible explanation is that the expansion of tuition support for private high schools may have encouraged more students to choose general academic programs.

Plants, moreover, are often sited on the outskirts of major metropolitan areas or in regional Japan, where industrial land is easier to secure than in the cities themselves—but labor shortages tend to be more severe in such areas. Regional effective job openings ratios (by location of application, all occupations) in 2025 illustrate the pattern: 1.15 in Southern Kanto (the greater Tokyo area), 1.21 in Northern Kanto, and as high as 1.58 in Hokuriku, the highest of any region (Figure 2).

Automation Faces Its Own Labor Constraint

A third challenge is the shortage of talent needed to implement automation. Factory automation and labor-saving equipment are often held up as the solution to the shortage of production workers, but implementing them requires advanced technical talent, which is also in short supply.

A 2023 survey of companies with annual sales of ¥5 billion or more found that more than 70 percent had already deployed robots or wanted to, but half cited a shortage of workers with robotics expertise as a key challenge. Separately, one estimate projects a shortfall of 1.25 million workers with the skills needed to implement AI and robotics in manufacturing alone by 2040. The shortage is already evident in the data: the effective job openings-to-applicants ratio for manufacturing engineers (development) stood at 2.24 nationally and reached as high as 5.29 in Ishikawa Prefecture, in the Hokuriku region discussed above.

This regional disparity is consistent with prior research. A study using German data finds that large cities, which offer both more job openings and more workers, give firms and jobseekers alike a wider range of options—resulting in more efficient matching between highly productive firms and skilled workers. Because more productive firms can afford to pay higher wages, this efficient matching allows highly skilled workers in large cities to earn wages commensurate with their capabilities. Regional areas, by contrast, cannot draw on these agglomeration benefits to the same degree, which may make it harder still to secure advanced technical talent outside the major urban centers.

A Longer-Term Constraint: Population Decline

Fourth, over the longer term, population decline in regional Japan may increasingly constrain where companies can locate new plants. Two conditions are particularly important when companies decide where to locate a plant: whether labor can be secured on a sustained basis and whether essential services can be sustained over the long term. Even where industrial land can be secured cheaply, companies in areas where population decline raises concerns about the long-term sustainability of public transportation, water and sewer systems, hospitals, and other essential infrastructure may face rising costs of securing workers and sustaining business operations over time. The advantage of low siting costs today may therefore be offset by higher costs in the future.

At the same time, areas near major cities—where manufacturing tends to cluster and companies find it easier to secure labor over the long term—often have little vacant space in industrial parks with adequate infrastructure, and securing new industrial land there is difficult. In other words, there is often a trade-off between access to industrial land and access to labor.

That said, Kumamoto’s successful effort to attract Taiwan Semiconductor Manufacturing Company (TSMC) may offer a useful case in point. In Ozu and Kikuyo, the towns where TSMC’s plant is located, the population grew by more than 2 percent from 2020 to 2024, and land prices rose by more than 30 percent from 2023 to 2024. Both towns, however, sit close to Kumamoto City, a major urban center with a population of approximately 730,000 and well-developed urban infrastructure. The area also had an existing cluster of semiconductor-related industries. Locations that meet such favorable conditions are, in practice, extremely rare in Japan.

Bringing in More Foreign Workers—Promise and Limits

Finally, consider expanding foreign worker programs as a response to labor shortages. In 2024, the government moved to phase out the Technical Intern Training Program, a scheme originally intended to transfer skills to developing countries. It will be replaced by a new Employment for Skill Development Program (ikusei shuro seido) aimed explicitly at training and securing a stable foreign workforce. Building on this, in January 2026 the current administration set a target of accepting approximately 1.23 million foreign workers by the end of fiscal year 2028 across the Specified Skilled Worker program—a separate immigration status for foreign workers in designated labor-shortage industries—and the new Employment for Skill Development Program. Under this plan, construction is slated to receive approximately 200,000 workers and industrial product manufacturing approximately 320,000, providing a partial response to the severe labor shortages in these sectors.

Whether the new program will actually ensure that workers are available where and when needed, however, remains to be seen. The yen’s recent depreciation, in particular, has eroded Japan’s wage-based appeal to foreign workers. As Japan’s competitive position in the international race for talent weakens, an expanded quota does not necessarily translate into successful recruitment. Ensuring successful integration with local communities is also an important policy challenge as Japan expands foreign worker admissions. Immigration policy was a major issue in the February 2026 Lower House election, and political debate over the acceptance of foreign workers is likely to continue.

When Subsidies Meet a Labor Bottleneck

Expanding output requires both labor and capital investment. But as this analysis has shown, securing the necessary workers and building plants and other infrastructure quickly is far from straightforward. These overlapping labor shortages risk becoming a serious bottleneck to the expansion of domestic production.

If the labor shortage goes unresolved while the government rapidly expands subsidies and companies simultaneously ramp up domestic investment, firms will compete for a limited pool of workers and construction capacity, driving wages and construction costs even higher. Because companies base investment decisions on medium- to long-term profitability, some will scale back or abandon investment plans if cost increases become too severe. In sectors where long-term returns are more assured, by contrast, subsidies can offset part of the cost increase and encourage companies to proceed with planned investments. Even so, unless the underlying labor supply constraint is addressed, the expected gains in domestic production may fall short of expectations.

One could, of course, take a more positive view of these economy-wide increases in wages and construction costs: broader wage growth could help raise real wages, while higher costs could promote desirable structural adjustment by prompting less productive firms to exit. Economic security policy, however, requires Japan to strengthen supply chain resilience under the time pressure of rising geopolitical risk. Japan may not have the luxury of waiting for a gradual, market-driven process of structural adjustment. Moreover, because markets determine which firms survive based on productivity, not on their strategic importance to economic security, there is even a risk that such strategically important firms could be forced out as well.

Ultimately, labor is indispensable to Japan’s efforts to strengthen supply chain resilience and secure strategic autonomy and indispensability. Yet Japan’s ability to secure the workers needed to support these efforts remains an overlooked and fundamental vulnerability.

Policy Implications

The implications of this analysis are clear. Because there is no quick fix for the labor shortage, the effects of subsidy-driven reshoring and domestic production expansion are likely, at least for now, to be partly offset by labor constraints. Policies for strengthening the supply chains of critical goods should therefore be designed around three principles that take these labor constraints as a starting point rather than an afterthought.

First, in the short term, policymakers should strategically narrow the list of critical goods targeted for expanded domestic production, while relying on a policy mix that includes friend-shoring with like-minded countries and regions, the development of substitute materials, and stockpiling. Precisely because there is no easy fix for the labor shortage, policymakers need to be strategic about where they direct limited policy resources.

Second, while expanding the intake of foreign workers is a viable option, plans should avoid excessive reliance on it, given the weak yen’s effect on Japan’s attractiveness as a destination for foreign workers and the political constraints involved. The weak yen—one of the very factors driving heightened interest in reshoring—is, ironically, also exacerbating the labor constraints that stand in the way of achieving it.

Third, over the medium to long term, stronger support for automation and labor-saving investment will likely become a central pillar of efforts to address the underlying labor shortage. As noted above, however, implementing automation itself requires another scarce resource—advanced technical talent—so its short-term impact will necessarily be limited. Even over the medium to long term, realizing the full potential of automation will ultimately require overcoming this same labor constraint. Policy should therefore pursue automation investment together with investment in human capital—including developing STEM talent, promoting reskilling, and providing financial incentives for workers to move into growth industries.

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