Correcting inequalities can boost Japanese growth – Analysis – Eurasia Review


By Richard Katz *

Running for president of the Liberal Democratic Party (LDP) of Japan, Fumio Kishida said that there can be “no growth without redistribution” and “no redistribution without growth”. But no sooner was he chosen president of the PLD and sworn in as prime minister than he backed down on earlier promises of economic reform, even withdrawing a proposal to ensure that multimillionaires pay a tax rate as high as those of the lowest incomes.

Kishida was closer to the truth in her first statement. Improving income equality alone will not solve Japan’s growth deficit, but if done right, it could help.

The OECD Note that The worsening inequalities in Japan between 1990 and 2010 made a bad situation worse. If inequality had not intensified, GDP per capita would have grown about 25 percent faster to 0.9 percent per year instead of the 0.73 percent recorded. This would have left the GDP per capita in 2010 higher by about $ 1,200, or nearly $ 3,000 more for an average household of 2.5 people. With faster growth, a country has more wealth to redistribute.

Measures to tackle inequality could in part restore higher levels of Japanese growth. The first priority of the Kishida government should be to reverse the trend 14 percent decrease real wages since their peak in 1997. This would not only raise living standards, but promote growth by increasing the purchasing power of consumers.

One tool could be to accelerate increases in the minimum wage, which, at a national average of 902 yen (US $ 8), is lower than the base rate of US $ 11 levied in the UK, Germany and France. In 2010, the Democratic Party of Japan government set a minimum wage target of 1,000 yen. In 2015, former Prime Minister Shinzo Abe pledged to reach a minimum wage of 1,000 yen by 2020, but to no avail.

Putting in place a minimum wage of 1,000 yen, then moving closer to European levels, would help tens of millions of people. This is because a minimum wage would raise wages not only for those who are below, but also for those who earn a little above. Given that the average hourly wage for part-time workers in Japan is around 1,100 yen and they represent one-third of all employees, this would catalyze a dramatic increase in personal income, mainly by reversing the decline in the share. labor in the national income. For this reason, the International Monetary Fund called for a faster acceleration of the minimum wage beyond 3 percent per year.

Opponents claim that this would lead to substantial job losses. Yet David Card received the 2021 Nobel Prize in Economics for refuting this claim. Meta-analyzes found that the impact of a minimum wage on employment, whether positive or negative, is close to zero.

Tokyo should also enforce Japan’s labor laws, which already require equal pay for equal work between men and women as well as between regular and non-regular workers. Currently, non-regular workers are paid a third less than regular workers per hour. No government department is mandated to investigate breaches by employers and impose dissuasive fines.

Japanese households devote 15% of your budget to food, well above the 10 percent average for other G7 countries, and South Korea’s 11 percent. One of the reasons is that the agricultural cooperative, Japan Agriculture (JA), is largely exempt from Japan’s anti-monopoly law, with some exceptions. JA’s monopoly power allows it to charge high prices to farmers for equipment and seeds while imposing high food prices on consumers. Lower food prices would increase the purchasing power of consumers and help reduce inequalities.

Japanese government spending on education as a percentage of GDP is second lowest among 39 OECD countries. Parents with two children pay thousands of dollars a year even for public schools. Among students from families with an annual income of less than $ 35,000 (almost half of all families), only 60% can attend university compared to those earning $ 70,000 to $ 88,000 per year. Japan needs to invest more in human capital.

The poor distribution of national income between businesses and households is a major obstacle to growth in Japan. Corporate profits are not always fed back into the economy through wages, investments, interest, dividends or taxes. Like abandoned farmland, money is lying fallow in financial institutions. Since 2010, additions to the fallow have on average about 5 percent of GDP per year.

When businesses accumulate cash, overall private income goes down because everyone’s income comes from someone else’s expenses. This is why the Japanese government has had to become the “buyer of last resort” in the economy. The resulting budget deficits are not the cause of the economic problems, but a symptom.

Lobbyists have argued that cutting corporate taxes will encourage companies to invest more. This does not happen. Instead, the fallow has expanded even more. It would have been much more efficient and less costly to increase the investment tax credit.

Policy measures that can increase personal income and tackle inequalities while simultaneously contributing to growth are available. Yet questions remain as to whether the Kishida government will override special interests and implement them.

* About the author: Richard Katz is Senior Fellow at the Carnegie Council for Ethics in International Affairs. This is digested from Toyo Keizai.

Source: This article was published by East Asia Forum


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