Growing income inequality troubles Japanese

Economic reform may test Prime Minister Shinzo Abe's agenda.

While Japanese Prime Minister Shinzo Abe was campaigning to succeed Junichiro Koizumi earlier this year, much of the discussion focused on foreign policy and whether a hawkish Mr. Abe would continue his predecessor's "fighting diplomacy."

Yet the recent news that Japan's economy has unexpectedly slowed is a reminder that it could ultimately be domestic concerns that create the biggest challenge for Abe's new government.

Last year, the government announced that the population had started to contract, and current projections suggest that unless Japan can raise its birthrate above the its current 1.25 children for every Japanese woman, its population will drop by half by the end of the century. On top of this, there is evidence of growing income inequality and rising poverty.

Indeed, it is these last two points that many Japanese find most troubling. A poll conducted earlier this year by the Asahi Shimbun newspaper found that 81 percent of respondents were worried about running into financial difficulty. This July, a report on Japan from the Organization for Economic Cooperation and Development (OECD) noted that income inequality had risen above the OECD average, while the rate of relative poverty was among the highest of any OECD nation.

This hits hard in a country that in many respects defines itself by its egalitarianism, and in which 90 percent of the population have traditionally considered themselves to be middle class.

Tadashi Nakamae, president of the Nakamae International Research Institute, says that while this notion of egalitarianism was once accurate, the last decade has seen a noticeable rise in inequality. He believes that one of the main factors is the increasing use of part-time and temporary workers.

"In order to reduce costs, big companies increased their use of part-timers, as the cost of employing these part-timers is roughly a quarter or less than of regular workers," he says.

Toshiaki Tachibanaki, an economist at Kyoto University, suggested in a paper published in the Japanese Economic Review earlier this year that inequality has been growing since the 1980s. He cited figures from the Labor and Welfare Ministry, showing that the Gini coefficient – the standard inequality equation used by economists, which runs from 0 (full equality) to 1 – was 0.381 in 2002 after social security benefits were taken into account. That was up from 0.314 in 1981. This paper also pointed to a survey of 8,000 people in which almost two-thirds of respondents said that inequality is too high.

"There is a rising sense of unfairness among Japanese," says Naoko Sakaue, a researcher for the main opposition Democratic Party of Japan. "People in Roppongi Hills can earn millions with just a click, while those working in factories can work 10 or 12 hours a day for minimal wages."

Many Japanese are nervous about growing inequality and feel that rising poverty has been accelerated by economic reforms. Among the controversial changes were Mr. Koizumi's efforts to create a more competitive labor market by making it easier to take on part-time and temporary workers. Koizumi also pushed to reduce public-works subsidies and to open the bidding processes to increased competition. But while some economists believe that Japan has no choice but to continue with these reforms, polls also suggest many Japanese are concerned that they are heading toward a society of economic winners and losers.

This creates a dilemma for Abe, who has pledged to continue the process Koizumi started, but whose party is also facing House of Councillor elections next summer. While it is unlikely the Liberal Democratic Party (LDP) would lose its majority, a decline in its seats could complicate Abe's legislative agenda with an opposition Democratic Party of Japan (DPJ) that has been revitalized under its new leader, Ichiro Ozawa.

Mr. Ozawa's more combative approach has already reaped some success in local elections, and his party hopes to capitalize on growing discontent with the notion of a winners-and-losers society when it announces a raft of new policies next year.

In apparent recognition of the danger to his conservative agenda, Abe campaigned for the LDP leadership in part on the idea of a second-chance economy, especially for Japan's estimated 640,000 jobless youths.

The DPJ believes the government will have to move quickly or inequality will be locked in for these young people. "If the inequality of opportunity is fixed, the income gap will be carried over to future generations," says Ms. Sakaue.

Aya Ezawa, a professor at Swarthmore College in Pennsylvania, says she has already seen evidence of this. "In some localities, there are families which have been reliant on public assistance for several generations," she says.

Ms. Ezawa says that the problem is particularly pronounced among single mothers. Between 65 percent and 70 percent of single mothers who do not live with their parents have an income that hovers around the poverty line – a problem she says is compounded by the fact that, despite relatively high employment rates, they still earn significantly less than men.

"A single mother with 2 or 3 children, with no more than a high school education, probably isn't going to earn more working than she will from public assistance," she explains.

Debating domestic issues may not be easy for a prime minister who owes much of his political success to international affairs. It was Abe's tough stance after North Korea tested seven rockets in July that helped cement his front-runner status.

If Abe's popularity begins to wane, he may be tempted to fall back on his much-discussed nationalism – the economy and poverty are not issues on which he has dwelt heavily in the past.

But with a growing public sense that the country's long term economic prospects are at a critical juncture, Abe may find he has no choice but to tackle these issues head on if he wants to have any chance of realizing his campaign promise of a "beautiful country."

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