Using more vertical space means I need a narrower living space which means cities can be more compact.

So I don’t think it would qualify.

Sort of the whole point of a futon is that you put it in the closet during the day so you can reuse the space as your living room. Your bed just takes space that you don't use for 2/3 of the day.

Similarly, kotatsu don't require chairs.

You should see how compact things are in Japan :)