Index Group Driving Japan’s Construction Transformation with Digitalization, PPPs and Decarbonization

Japan’s construction industry experienced its first major boom over 50 years ago, driven by the 1964 Tokyo Olympics. Today, many of those projects are aging and in need of repair. While the Scrap-and-Build policy has led to a temporary rise in new construction, this is expected to plateau by 2040 as the effects of Japan’s population decline become more pronounced. From your perspective, how would you assess the current state of Japan’s construction market? And what do you see as the industry’s real needs moving forward?

Japan is currently facing a challenging environment due to population decline and rising costs. Labor shortages, combined with increased demand from sectors like the semiconductor industry, have kept the construction sector very busy. However, prices have surged to the point where they no longer make practical sense.

One of the most pressing issues is in the public sector—covering hospitals, schools, and urban infrastructure. These public entities are coming to us for guidance on how to manage projects amid such inflated pricing. Many of Japan’s general contractors are already at full capacity, leaving little room for additional work. As you mentioned, much of the country’s public infrastructure is aging and urgently needs to be rebuilt. But if you approach a general contractor today for one of these projects, you’ll likely receive a quote that’s at least double what it would have been just five years ago.

It’s becoming financially unfeasible to move forward under current conditions, and we’re seeing some developers delay or pause projects entirely. This situation is becoming increasingly serious, and it’s clear that viable, cost-effective solutions are urgently needed.

Kindai University Osaka Medical Campus, Japan ©Shinwa Co.,Ltd

Another major challenge facing the industry is the labor shortage. In the construction sector in particular, one in four workers is over the age of 60, and this demographic trend is expected to worsen in the coming years. How is this shift impacting your business, and what solutions do you believe are most effective in addressing the labor shortage going forward?

From my perspective, the only realistic long-term solution to the labor shortage is to bring in more foreign workers. However, that would require changes to Japan’s immigration laws—something that I believe is still a long way off. Another potential solution is digitalization and automation, but implementing those technologies at scale will take time—probably another five to ten years.

Historically, Japan has followed a pattern of knocking down older buildings and replacing them with new ones. I believe now is the time to move away from that cycle and focus more on renovating and preserving existing infrastructure. The government is beginning to support this shift, and I think that’s a very important step forward.

Given the labor shortage, another promising avenue is wood construction. Wooden buildings represent a major departure from the conventional approach. Currently, regulations allow us to build up to five stories with wood, but if those regulations evolve, it could be possible to go even higher. In fact, based on what I’ve seen, the cost of wooden construction is now almost equivalent to that of steel buildings—making it a practical alternative worth pursuing.

You mentioned digitization as a key factor for the future. Do you believe Japan has been slow to adopt digital tools—particularly in the construction sector? Do you see this as a barrier to attracting young graduates who might otherwise be interested in the industry?

I believe this issue extends beyond construction and affects the broader infrastructure sector as well. One of the most urgent challenges is the aging workforce. The increasing average age within the industry discourages younger generations from entering the field. I think that once digitalization becomes more widespread, it will help attract younger talent who are more comfortable and engaged with digital tools.

When a senior executive from a major Spanish water utility visited a regional water treatment plant in Japan, he asked the local operator how many workers were on site. The answer was over 100. Surprised, he remarked that in Spain, a facility of the same scale would require only about 10 people. At the time, I wondered why so many personnel were needed, but I soon realized it was due to the delayed adoption of IT in Japan’s water sector. This example underscores how digitalization can significantly improve operational efficiency—not just in water utilities, but across Japan’s infrastructure as a whole.

It also shows the strength of Japanese digital technology and why the Japanese government is aggressively promoting digital transformation, alongside efforts toward decarbonization. Embracing digitalization isn’t just about efficiency—it’s also essential for making the industry more appealing and sustainable for future generations.

You mentioned decarbonization, which has become an increasingly important priority within the construction industry. Index, as a group, is actively supporting clients in this area. Could you tell us more about your approach to decarbonization and the specific ways you're helping clients work toward carbon neutrality?

Yes, we’re seeing increasing demand from clients for carbon neutrality—even starting at the design stage. While material selection certainly plays a role in reducing carbon impact, I believe the most critical phase for achieving carbon neutrality is actually during operational management.

The challenge, however, is that very few major companies have practical experience in this area. This is one of the reasons why progress can be slow—especially when it comes to public-private partnerships (PPP), where processes and systems are often complex and take time to change.

That said, we see a real opportunity here. By integrating AI and digital technologies, it's possible to streamline operations and reduce the need for manpower. This not only supports decarbonization goals but also helps overcome the labor and efficiency challenges the industry is facing.

Energy remains a critical issue in Japanese infrastructure. Following the Fukushima disaster, all nuclear reactors were shut down, and only a handful have since resumed operations. In response, Japan has made a strong push toward renewable energy—and now even hosts the world’s largest floating solar power station. However, renewables are inherently intermittent, and there are ongoing concerns about potential blackouts if the energy mix isn’t properly balanced. From your perspective, what do you believe is the ideal energy mix for Japan moving forward? And do you think public-private partnerships (PPPs) are the most effective way to achieve that balance?

My home prefecture of Aichi is home to a high concentration of automobile-related companies. As a result, it also hosts one of Japan’s largest coal-fired power plants, which is now transitioning to ammonia-based fuel. Many local companies are now incentivized to use ammonia, and the blending ratio has reached around 20%, with a target of increasing to 50%. This transition is part of a broader national strategy, with the government actively promoting the import and use of both ammonia and hydrogen to support decarbonization efforts. You can see that government policy is increasingly focused on enabling private-sector transformation, which I believe will be crucial moving forward.

However, these kinds of policies require coordination and implementation on a global scale, which will take significant time and effort. While the central government is strongly backing offshore energy generation, it’s also essential to engage local communities in those discussions.

As for the ideal energy mix, offshore wind is a natural choice given Japan’s geography—being surrounded by ocean. But the challenge lies in the depth of those waters. Japan’s coastal areas are relatively deep, which limits the suitability of traditional offshore wind farms. That’s why I believe floating wind farms are the most promising solution. In fact, Aichi has recently launched an experimental floating wind farm project. Japan once had a technological edge in this area, though China currently leads. Still, Japan continues to possess advanced capabilities in floating energy generation technologies.

In August of this year, we launched the “Basin Carbon Neutral Platform” to promote carbon neutrality in watershed areas where efforts in energy generation and energy conservation had been lagging. This initiative brings together relevant public and private sector stakeholders. Within each watershed, the project includes more than 30 concrete initiatives, many of which are being advanced through public-private partnerships. That said, progress on hydrogen-powered energy projects has been relatively slow, and much of the supporting infrastructure is outdated. This means there’s substantial room to expand hydrogen utilization, and many new projects are already in the pipeline. I believe that the Basin Carbon Neutral (Basin CN) Project is just one part of a broader national shift toward decarbonization, and it has the potential to serve as a model for future initiatives targeting Japan’s 109 First Class Rivers.

Public-private partnerships (PPPs) are one of your company’s core strengths and a key factor in your international success. In our research, we noted your involvement in major projects in Ghana, Vietnam, and the Philippines. What are some of the unique technologies or operational models you’ve developed that have enabled you to realize and manage these international projects effectively?

When we talk about PPP and methodology, I believe Japanese general contractors need to rethink their approach when operating in markets like the Philippines. Traditionally, the Japanese general contractor model follows a sequence where the contractor handles the design and planning phases, presents the proposal and estimated costs, and then moves forward with the project—often with minimal client involvement until completion.

This can result in a situation where the client remains unaware of the real-time financial status of the project. As construction costs continue to rise—as I mentioned earlier—this model becomes increasingly risky. If costs spiral out of control without transparency, projects can reach a point where the client simply refuses to pay. We saw many examples of this during the COVID-19 pandemic, where the lack of visibility and flexibility made projects extremely difficult to manage.

In Japan’s construction industry, “ukeoi” (turnkey contracts) are the standard form of agreement. It’s a model where the contractor and client go back and forth over adjustments and cost negotiations. In some cases—especially when dealing with large developers willing to absorb cost overruns—contractors can actually generate significant profits using this method. The value of turnkey contracts is influenced by various factors, but it is particularly sensitive to fluctuations in construction demand. An increase in large-scale projects or public works can significantly impact the supply-demand balance across the entire construction industry. In some cases, contractors may generate substantial profits, while in others, they may accept projects even at a loss.

However, I believe the future lies in a different direction. In Europe, for example, there’s a growing emphasis on tighter cost control and more transparent project management. Even within Japan’s construction industry, some forward-thinking contractors have already begun adopting this mindset. A number of general contractors are shifting away from the traditional turnkey approach and moving toward models that prioritize accountability and efficiency, such as the open-book (Cost + Fee) Construction Management (CM) method. I believe that this evolution is essential for Japanese general contractors to succeed in international PPP projects.

Expo 2025 Osaka, Kansai, Japan, Qatar Pavilion

Historically, international PPPs have focused on helping developing countries build essential infrastructure—such as the Thai-Lao Friendship Bridge, which was constructed through a Japanese consortium under a PPP framework. One of your firm’s key strengths is your ability to identify promising and profitable overseas PPP opportunities early on for Japanese companies. Could you share how you go about identifying and evaluating these early-stage international PPP projects?

Fourteen years ago, in my role as Policy Advisor to the Ministry of Land, Infrastructure, Transport and Tourism (MLIT), I helped promote the framework for the Aichi Prefectural Toll Road Concession—Japan’s first toll road PPP model. In Japan, most public infrastructure such as roads, water and sewage systems, as well as social infrastructure including MICE facilities, arenas, and stadiums, are developed and operated by local governments, with the exception of privatized national airports. As a result, Japanese companies—including major general contractors—have had limited experience in operating infrastructure under PPP models.

Today, however, Japan is entering a new era marked by population decline and a rapidly aging society. Local governments are facing increasing fiscal pressure, while aging infrastructure presents an urgent challenge. One of the most viable solutions is the promotion of infrastructure PPPs.

Looking overseas, official development assistance (ODA)-funded infrastructure investments in ASEAN countries are steadily declining, while PPP-based investments are on the rise. Yet Japan continues to lag behind in this global shift. Furthermore, in many overseas markets, infrastructure projects that can be fully funded and operated by private investment alone are now largely limited to the energy sector.

This makes it essential to adopt hybrid models that combine public sector support with private capital. That is where our strength lies. We understand how to structure financing models that effectively integrate both ODA and private investment. Moreover, Japan has a strong advantage in its world-class EPC (Engineering, Procurement, and Construction) companies with advanced technical capabilities.

Above all, what we value most in promoting infrastructure PPPs is the philosophy of “triple-win”—for beneficiaries, the public sector, and the private sector. Infrastructure is a global public good, and for long-term operations to be successful, transparency and fairness must guide the equitable sharing of benefits and risks among all stakeholders.

Traditionally, Japanese companies have attempted to complete international projects independently. But with the rise of PPP frameworks, I believe a more collaborative model is necessary—what I call the Core-Japan approach. We are open and willing to partner with foreign companies, especially those with regional expertise in the project’s target market. For example, in the Indo-Pacific region, we are working with a French company that understands the local landscape. In Ghana, we are working with a Portuguese partner, while in Africa more broadly, we are partnering with Spanish companies. These partners recognize the unique value we bring to the table. This Core-Japan model, built on cooperation and shared strengths, will be central to how we expand our business—not just in Asia, but in Africa as well.

You mentioned the importance of partnerships in your international strategy. As you continue to expand, are you currently seeking new international partners? Are there any specific regions or sectors you're targeting—especially in light of your recent office opening in Spain?

Our current mid-term strategy was established about four years ago, during which time we successfully laid the foundation for our business model. Building on this, we have now launched a new three-year plan starting in 2025, called IGV2028. The central focus of IGV2028 is to establish ourselves as a leading Japanese player in the PPP space, particularly in overseas markets.

Our business model centers on identifying high-potential project opportunities abroad and proactively presenting proposals to host countries in collaboration with the Japanese government. We take the lead in conducting the necessary PPP feasibility studies, supported by JICA. From there, we move forward into full-scale implementation.

In terms of regional focus, our priorities remain unchanged: Africa, the Indo-Pacific region, and ASEAN countries are at the top of our list. These are the markets where we see the greatest potential, and we are actively expanding our presence through strategic partnerships that emphasize diversity.

Consensus building must be a significant challenge, especially given the wide range of stakeholders involved—local communities, municipalities, international partners, and Japanese institutions. How do you manage and navigate so many differing opinions to move projects forward effectively?

Currently, our overseas infrastructure PPP team at Index Group (IG), known as Index Strategy, consists of approximately 15 members, each assigned to a different country. For the development of Index’s overseas infrastructure PPP business, it is not essential for team members to be based in Japan. This decentralized model has proven to be far more effective—especially when managing diverse stakeholders across multiple regions.

Expanding and strengthening this structure is a key part of our current vision. It allows us to stay close to the communities and partners we work with, making consensus building more effective and locally responsive.

You’ve established a representative office in Spain. Is this part of the next phase in your broader strategy? And do you have plans to open representative offices in other regions as well?

If there is sufficient demand in a particular region, we’re certainly open to establishing a representative office there. That’s exactly what led to the decision to open our office in Spain. This move was driven by our close relationships with three key European partners—one in France, one in Spain, and one in Portugal. These companies are major players in global PPP infrastructure projects and are also active in markets like the United States. Having a presence in Europe allows us to deepen our collaboration with them and engage more closely in shared opportunities.

While I cannot share full details at this stage, I can say that Index Strategy is serving as the project manager for Mongolia’s large-scale Karakorum Smart City initiative. The master plan is being led by world-renowned architect Kengo Kuma, and the project also includes collaboration with engineering firms from Malaysia and the Netherlands, along with teams from France and Indonesia. Together, we plan to participate in the bidding process for the upcoming feasibility study phase.

The total investment is expected to exceed JPY 3 trillion, with funding structured across public infrastructure and social infrastructure. The investment composition will include public investment (such as ODA), private investment, and PPP funding—with PPP expected to account for more than half of the total.

We believe this project has the potential to realize a cutting-edge, future-oriented city that coexists harmoniously with Mongolia’s vast natural environment.

Master Planning of The “New Kharkhorum City”, Mongolia. ©Infinite Vision　

As the president and founder of the company, what goals or dreams would you like to achieve before you eventually retire and hand over the business to the next generation?

I am currently 65 years old and intend to remain at the forefront of this field for another decade. At the same time, I have begun to reflect on the legacy I hope to leave behind. Today, Index Group has grown into one of Japan’s largest overseas infrastructure PPP companies, and I believe that during the IGV2028 phase, we will achieve even greater scale and impact. Looking ahead, our next phase—IGV2031, beginning in 2028—aims to take this success global and establish Index Group as the world’s leading PPP infrastructure company.

One of our greatest strengths lies in our ability to unite Japanese companies and financial institutions around a shared vision and purpose, and to organize and execute complex projects with precision and coordination.

A core concept that defines our corporate philosophy is “shikkai.” The term originates from traditional Japanese kimono-making. In the Edo period, a “shikkai-ya” was the person responsible for coordinating the more than 40 specialized steps and craftsmen involved in completing a single kimono. I often use the example of a kimono artisan who travels across Japan in search of the finest fabric—this spirit of exploration and discernment is what we strive to embody as project managers in the construction and infrastructure sector.

“Shikkai” also draws from a deeper philosophical source: in Buddhism, it refers to the idea that all life forms and the earth itself are interconnected and should be treated as one. We believe this spirit of shikkai gives us a unique competitive edge when managing global projects.

By applying this philosophy, we can clearly chart a path to profitability rooted in purpose, and more importantly, ensure that the value generated through infrastructure operations is appropriately reinvested into society—producing meaningful social impact.

Japan, amid its aging and declining population, must pursue increasingly efficient infrastructure operations. But in regions where populations continue to grow—such as ASEAN, Africa, and the Indo-Pacific—future infrastructure development must follow a balanced model grounded in PPP principles and focused on long-term value creation.

Our goal is to redefine this model and share our philosophy globally. Ideally, we envision the shikkai spirit becoming a new global standard in the world of infrastructure.

For more information, please visit their website at: https://index-group.co.jp/en/index

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