Prime Minister Shinzo Abe’s economic policies could improve income inequality, helping younger people especially, if he fully implements a planned labor market overhaul, according to economists at the International Monetary Fund.
But achieving only the Bank of Japan's 2% inflation target through quantitative easing without accomplishing those changes will worsen income inequality even as it broadly raises incomes, they said a working paper, an IMF report said.
Abe’s pro-growth policies, known as Abenomics, have been criticized as mostly benefiting the affluent, while doing little for ordinary Japanese, thrusting the issue of inequality to the forefront of public debate in Japan.
The economists’ findings would surely be welcome news to many ordinary Japanese whose real incomes have fallen – largely due to a sales-tax increase last year – during two years of Abenomics even as stock prices have soared and corporate profits have hit record levels.
The IMF economists say rising income inequality in Japan since the 1980s has been driven primarily by two factors: low female participation in the workforce and the rise of the non-regular labor market, comprised of temporary, often part-time jobs that usually pay less than full-time positions. This inequality has been borne most heavily by women, children and workers in non-regular positions, they said.
Planned measures to increase the number of working women and restructure the labor market, they wrote, will increase inclusiveness in the society by boosting average income growth and reducing income inequality for working-age generations.
Yet for that to happen, they said, Abe will have to implement all the parts of his policy package.
“The best way for Abenomics to ensure gains in both growth and equity is to successfully launch the third arrow,” they said, speaking about the set of pro-growth reforms Abe is discussing. The other two arrows are monetary policy and fiscal stimulus.
Deflation or Inflation?
Is Abenomics a busted flush? To sceptics it must certainly look that way. Japan’s growth has faltered. A downward revision this week showed the economy expanded at an annualized rate of 1.5% in the fourth quarter. That may not sound too bad for a mature economy that has not exactly dazzled in recent years.
Economists say Japan needs to shake off 20 years of deflation. Banishing deflation was supposed to be the core of Abenomics, introduced by Abe in December 2012. Here again, news looks bad. Haruhiko Kuroda, the central bank governor, promised to hit 2% inflation within ‘about two years’ of April 2013. Unless oil prices stage a sudden rally, Japan could soon find itself back in deflation. Abenomics without inflation is like Hamlet without the ghost.
Weak inflation puts pressure on the Bank of Japan to undertake yet more quantitative easing after its surprise second salvo last October. If it does not act, it could lose credibility both with markets and with a public that needs convincing inflation is here to stay. Low inflation stems in part from a policy blunder: last year’s three-point rise in consumption tax just when consumers were being asked to spend. Instead, they snapped their wallets shut.
All this makes it hard to argue that things are going as per the plan. And yet the picture is more positive than it appears. The bigger reason for disinflation is the low oil price. That may present the BoJ with a quandary — but for the economy overall it is excellent news. It should also allay concerns about current account deficits. This year, Japan’s surplus should hit a robust 3 percent.
