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Containing Japanese inequality

by Jun Saito


Policy-makers often cite Japan as an example of how countries can effectively contain the threat of widening inequality. According to traditional indicators such as the Gini coefficient and data on the income share of the top percentile of earners, Japan outperforms the US and major European economies.

However, the situation is more serious if one examines Japan’s relative poverty rate. Among members of the Organisation for Economic Co-operation and Development, Japan’s relative poverty rate is high, close to the US and much higher than the UK, and is continuing to rise. There are several reasons for this.

The first is Japan’s aging population. The relative poverty rate is higher among elderly people, who, in the light of Japan’s demographics and low fertility rate, make up a larger share of population than in other countries. The number of Japanese aged 65 or older has almost quadrupled over the last 40 years. The fertility rate has recovered somewhat but is still below 1.5 births per woman, far below the replacement rate of 2.1. This contributes to the increase in the country-wide relative poverty rate.

Second is the increase in the number of irregular workers, those who work part-time or under agency, and fixed-term contracts, over the last 30-40 years. They are paid less and enjoy fewer benefits than those in regular, full-time employment. The government has said it wants to narrow the wage gap between irregular and regular workers as part of Prime Minister Shinzo Abe’s labour reform programme. Regardless, since the share of irregular workers among all employees is increasing, reaching almost 40% in 2017, the relative poverty rate should again increase.

The third is poverty in single parent households, which are becoming increasingly common owing to Japan’s rising divorce rate. This is especially the case for single mother households, which tend to rely on a disproportionate amount of irregular work.

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Limited globalisation
These observations imply that inequality is becoming an increasingly serious issue in Japan. However, market watchers should take note of the major difference in the country’s composition of inequality when compared with other nations. In Japan, inequality among prime-age workers — those between 24-54 years old — has not increased. There are two possible answers that may explain this variation between Japan and other developed countries, all of which have had to contend with the impact of technological disruption and globalisation.

One is that Japanese labour market polices have successfully restrained the rise in inequality. However, public expenditure on such policies is low compared to other countries. Indeed, Japan belongs to the group of nations, alongside the US, which spends the least on such measures.

This leaves the other answer: Japan has not had to grapple with disruptive technological advances and the negative consequences of globalisation to the same degree as other countries. Low growth in Japanese labour productivity, as well as import protection in the agricultural sector, limited inward foreign direct investment, and restricted immigration seem to confirm this idea.

Stability v. growth
Widening inequality is a serious threat to society and should be avoided as much as possible. However, if the cost of containing widening inequality is to give up growth opportunities, this creates different problems for countries. So far Japan has opted to sacrifice some elements of technological change and globalisation, consequently sacrificing growth, to preserve social stability.

But the Japanese economy needs to strengthen. If growth prospects are to improve, the country must orientate its policies towards enhancing technology and globalisation. These measures would inevitably involve pressures that could widen inequality, and should therefore be complemented by mitigating policies, including expanded education and retraining programmes.

The alternatives are that Japan will continue to suffer from low growth, or that increased exposure to globalisation and technological disruption will lead to heightened social instability. Neither situation is attractive for the world’s fourth largest economy.

Jun Saito is Senior Research Fellow at the Japan Center for Economic Research.