The Inequality Games: Where Does Japan Place?

Published in Japan Forward 9/11/2021

Suddenly, inequality is near the top of the political agenda almost everywhere, or so it seems.

American President Joe Biden aims to introduce tax proposals that will “make billionaires cry”, according to Senator Elizabeth Warren, a strong supporter. In Britain, the conservative government has taken the tax take of GDP to new highs as part of Prime Minister Boris Johnson’s “levelling up” agenda. Even meritocratic Singapore is considering a wealth tax in order to promote social cohesion.

Strikingly, Chinese President Xi Jinping is starting to sound like an actual communist. Mega-rich tech oligarchs and swanky celebs have become non-persons overnight. Meanwhile, the government has unveiled the “Common Prosperity” concept, aimed at channeling money and resources to the country’s less developed regions.

Is the same medicine required in Japan?  In his campaign for the leadership of Japan’s ruling Liberal Democratic Party, Prime Minister Kishida criticized “neo-liberalism” and claimed that there could be “no growth without redistribution”.

He coasted to victory in that party election and then went on to achieve a surprisingly strong result in the recent general election. It seems that he “read the air” correctly. But did he get the facts right?

Inequality is much talked about, but rarely put in context. The standard measure of inequality of income is the Gini Coefficient, named after Italian statistician Corrado Gini. It’s usually expressed as a number between 0 and 1.

“0” would signify a pure communist state where everybody receives the same income, while “1” would mean absolute absolutism where one person gets everything. Most developed countries are in the range between 0.25 and 0.40.

There is a widespread perception that the gap between rich and poor is widening in an unprecedented and disturbing way. On a worldwide basis, that is far from the case. Zsolt Darvas of the Bruegel Group, shows that the global Gini peaked at a very high 66.9 in 1988, but has subsequently fallen every year, reaching 58.5 in 2017.

However, when you divide the world into countries and weight them for their population size, you get a very different answer. The world’s average Gini actually rises in that period –  albeit from a much lower level.

Two huge developing countries, China and India, grew rapidly in that time, narrowing the income gap with richer countries. But within those two countries, inequality rose as they transitioned from an “everybody poor” situation to one in which entrepreneurs and corporate executives appeared on the scene and increased their income much more than the average person.

Since politics is conducted on a national basis, it is no surprise that income inequality within countries gets much greater attention than the more encouraging global picture.

According to Forbes magazine, China and the U.S. together have half the world’s 2,755 billionaires. Unsurprisingly, both sport high Gini scores. In the case of China, such politically sensitive data is not readily available, but the C.I.A. estimates a Gini of 46.5 – not much different from notoriously unequal Brazil. The U.S. comes in at 0.390, high for a rich country, but not off the charts. In both cases, the political momentum towards a flatter distribution is easy to understand.

What about Japan? As of 2017, its income Gini was 0.33, higher than the European social democracies, but lower than Israel, South Korea, the UK, the US and Mexico amongst other O.E.C.D. countries. Crucially, there is no evidence that inequality has risen during the Abenomics era from 2013 onwards. On the contrary, Japan’s income inequality was slightly lower in 2017 than at the turn of the century. The real damage was done earlier, in the miserable years after the collapse of the bubble economy. Bad times hurt the poor more than the rich.

It is important to note that the raw Gini coefficient, before adjustment for taxes and social insurance, does show inequality increasing year by year, from 0.47 in 1999 to 0.56 in 2017. In other words, Japanese government policy has successfully suppressed a powerful trend towards income inequality.

The amount of redistribution increases year by year, putting an effective block on “neo-liberal” market outcomes. For example, the low-paid contribute small amounts to the Japanese health insurance system, whereas high-earners may find themselves paying huge amounts.

Other measures tell a similar story. According to the U.N.’s data, the ratio of the average income of the richest 10% in Japan to the poorest 10% is 4.5x. That is the lowest ratio of all the countries in the database.

Almost everywhere, single parent households are much poorer than two parent households on average. The O.E.C.D. reports that proportion of single parent households in the EU countries is 6.8% and in the United States it is 9.6%. In Japan, the number is 2.6%. easily the lowest of all 32 member countries.

Real destitution is hard to define, but the Ministry of Health, Labour and Welfare assesses the number of homeless in Japan at 3,992 in 2020, whereas charities believe that on a broader definition the number would be two or three times greater.

To provide some perspective, the homeless charity Shelter estimates there are 280,000 people in the UK who have nowhere to live. The majority are housed in temporary facilities, but 24,000 are sleeping rough or in cars, sheds, abandoned buildings, etc.

In the US, the estimate for homelessness is 553,000, out of which 192,000 are sleeping in places not meant for human habitation and 40,000 are ex-military veterans.

If you are poor, you would be better off in Japan than in very many other countries.

Income mostly passes through the tax system, so the information about it should be reasonably reliable. Yet there is a flaw in income measures that is peculiar to rapidly ageing societies like Japan’s. Retired people may have little current income, but nonetheless be asset-rich. Even if owning large houses and stock portfolios and taking extensive foreign holidays, they would be classified as “relatively poor.”

Much more important is wealth, which is far harder to track. Three scholars – Professor Anthony Horrocks of Manchester University, Professor James Davies of the University of Western Ontario and Doctor Rodrigo Lluberas of the Uruguay Central Bank – have made a heroic effort to create a global wealth Gini, including property as well as financial assets in the calculation.

Their findings are published in the latest edition of Credit Suisse’s Global Wealth Report. As you might expect, wealth is much more unequally distributed than income, both within countries and globally. Thanks to the extraordinary changes in China and India, the global wealth Gini has declined somewhat this century, but nearly all of the largest ten economies have experienced an increase in wealth inequality.

The two exceptions are Germany and Japan. On these metrics, the idea that “Abenomics widened the gap between rich and poor” simply does not stack up.

As the chart shows, currently Japan has by far the lowest wealth Gini: 64.4, against 85 for the U.S. and 77.9 for Germany. The same goes for the share of total wealth owned by the top 1%. In Japan it is 18%, compared with 35% in the U.S. and 29% for Germany.

In other words, when it comes to the all-important criterion of wealth, Japan has a significantly more equal distribution than the major European countries, let alone the US and China.

Like most countries, Japan has plenty of economic and social problems to deal with. The numbers show that excessive neo-liberalism is far from a prime concern, and inequality is low on many key metrics.

Today, Japan is in a good place, partly due to the successes of Abenomics. Prime Minister Kishida has an excellent opportunity to extend the winning streak.