Japan's Inequality Today and Policy Issues

Mizuho Economic Outlook & Analysis

Japan’s Inequality Today and Policy Issues September 30, 2015

Debate on inequality refueled under Second Abe Administration

Key points

・Concerns about widening disparities have resurfaced under the second administration under Prime Minister Shinzo Abe. ・Disparities have been frequently revealed in past decades, for example, urban-rural disparities during the period of rapid economic growth, wealth inequality between haves and have-nots during the “bubble economy” era, and economic disparities exacerbated by former Prime Minister Junichiro Koizumi’s structural reforms. ・The Abe administration’s economic policies have achieved some positive results in economic recovery, but not enough to have a trickle-down effect on overall economic growth.

1 1 (1) Awareness of Inequality – Same issues debated repeatedly

○ French economist Thomas Piketty’s best-selling book has raised awareness of inequality, but the same issues have been debated repeatedly. ○ Japan faced urban-rural disparities during the period of rapid economic growth, a wealth gap between haves and have-nots during the economic bubble, and the adverse effects of structural reforms implemented by the Koizumi administration. ○ The first administration under Prime Minister Shinzo Abe introduced the “Challenge Again” initiative to expand employment to temporary workers and promote job opportunities for young people.

[ Inequality debates in the past ] [ Outline of the “Challenge Again” initiative under the First Abe Administration ]

Period Debate on inequalities Policy measures

1960s to 1970s Economic and income Balanced development Rapid economic disparities between urban and nationwide growth rural areas Local industrial promotion

Wealth inequality between Late 1980s haves and have-nots due to Land price control policy Economic bubble soaring stock and land prices

Mid 2000s Income and employment inequalities under structural Koizumi and Abe “Challenge Again” initiative reforms (Increase in administrations temporary employment)

Generating a positive Mid 2010s Income, employment, and economic cycle with wage the Second Abe regional disparities under increases Administration Abenomics Revitalizing local economies

Source: Made by Mizuho Research Institute Ltd. (MHRI) Source: Made by MHRI based upon releases by the Cabinet Office

2 1 (2) Abenomics and Inequality Issues – Some positive results but insufficient for overall economic growth

○ Prime Minister Abe’s economic policies, known as “Abenomics,” have produced some positive results, but not enough to boost economic growth nationwide. ・ Abenomics consists of aggressive monetary policies, flexible fiscal policies, and economic growth strategies to encourage private investment. ・ While corporate performance has gradually improved with the weaker yen and higher stock prices, trickle-down effects have yet to reach employment and income distribution. ○ Criticized by small businesses, the low-income groups, and local communities, Abenomics economic policies have become the main issue in the lower house election in December 2014 and the nationwide local elections in 2015. [ Changes in major indicators under the Second Abe Administration ] [ Permeation of Abenomics ]

2012 2014～2015 Results &Small m & medium-sized Nikkei Stock Average 10,080 yen (December 25) 17,388 yen (September 30, 2015) enterprises Rural areas

Exchange rates 84.83 yen (December 25) 119.95 yen (September 30, 2015) (Yen/US dollar) Slow recovery Lacking a real Bankruptcy cases filed 12,124 (Jan-Dec) 9,731 (Jan-Dec) and earnings sense of recovery Large 49.9 trillion Metropolitan Current profit* (Oct-Dec) 65.7 trillion yen (Jan-Mar) yen enterprises areas

Number of employees* 62.52 million (December) 63.91 million (June 2015) Abenomics Non-regular employment 35.6％ (Oct-Dec) 37.9％ (Oct-Dec) ratio effects

Unemployment rate* 4.3％ (December) 3.4％ (June 2015) High-income Regular Jobs-to-applicants 0.83 (December) 1.19 (June 2015) employees ratio* bracket Wide gap between No si g n s o f regular employees Gross cash earnings 360,945 yen (Oct-Dec) 364,899 yen (Oct-Dec) improvement and temporary workers Real wage increase -1.3% (Oct-Dec) -2.8% (Oct-Dec) Low-income bracket Non-regular workers Note: Figures marked with asterisks are seasonally adjusted. The upward arrows show improvement and the downward arrows show deterioration. The weaker yen at the exchange rates is rated as positive. Debt from bankruptcy exceeds 10 million yen. Current profit is an annual rate. Source: Made by MHRI based upon Ministry of Health, Labour and Welfare, Monthly Labor Survey and General Survey on Source: Made by MHRI Employment Trends, Ministry of Internal Affairs and Communications, Labor Force Survey, Ministry of Finance, Financial Statements Statistics of Corporations by Industry, Tokyo Shoko Research, Nationwide Enterprise Bankruptcy Research, and Bank of Japan, Foreign Exchange Rates

3 2. Inequality from a Global Perspective

Income gap widening mainly in the US and the UK

Key points

・The income gap in developed countries, such as the US and the UK, has widened considerably since the 1980s. ・Income disparities in many countries, including emerging market (EM) countries, are wider than in Japan. ・Wealth inequality exceeds the income gap in most countries, with the level of inequality especially high in the US.

4 2 (1) International Comparison of Income Inequality #1 – Ever-widening gap in the US and UK

○ The income gap has expanded significantly in the US and UK since the 1980s, reaching its highest level since the 1920s. ・ Income disparities in developed market (DM) countries declined in the early 1900s and leveled off in the 1940s, but a rise in income inequality was seen in the US and UK starting in the 1980s. ・ Income inequality in continental Europe and Japan has been relatively benign since the 1980s.

[ Concentration of income in the top 1% of households (international comparison) ] （％）

20 17.5 USA (2013) Rising in 15 the US 12.7 and UK UK (2012) 9.5 10 Japan (2010) France 8.1 Slight changes (2009) in continental Sweden 7.1 Europe 5 and Japan (2012)

0 1920 30 40 50 60 70 80 90 2000 10 (Year)

Note: Data are based on income redistribution. Income does not include capital gains. Source: Made by MHRI based upon the World Top Income Database

5 2 (1) International Comparison of Income Inequality #2 – Wider gaps in many countries including EM countries

○ Income disparities in many countries, including EM countries, are greater than in Japan. ○ But the Gini coefficient of Japan’s income redistribution is slightly higher than the OECD average, indicating that Japan’s income gap is wide among the developed market (DM) countries.

0.60 [ International comparison of the income redistribution gap ]

Large (Gini coefficient) 0.50

0.40 OECD countries’ average

Gap 0.30

0.20

0.10

0.00 Luxemburg Japan Denmark Norway China India Sweden Turkey Israel Greece Spain New Zealand Italy Canada Ireland Poland France Germany Netherlands Slovakia Czech Republic Slovenia Iceland Brazil Russia Mexico US Portugal Britain Australia Estonia South Korea Switzerland Hungary Finland Belgium Chile Austria Small Small

Notes: 1. International comparison of the Gini coefficient: The Gini coefficient is an index for measuring distribution inequality like income. The values of the coefficient range from 0 to 1, where a coefficient close to 0 indicates a smaller gap, while a coefficient close to 1 indicates a larger gap. 2. The Gini coefficient Non-OECDof China is calculated in 2014, US and India in 2013, Brazil in 2011,OECD Japan countries in 2009, and all others in 2012. Note that the calculation criteria of India, China, and Brazil are different from those of countriesother countries. Source: Made by MHRI based upon OECD Data

6 2 (2) International Comparison of Wealth Inequality – Exceeding income inequality in all countries, especially the US

○ All developed countries have greater wealth disparities than income disparities. ・ The United States has a high level of both wealth inequality and income inequality, with 76% of its wealth concentrated in the top 10% of households.

[ International comparison of wealth and income concentration in the top 10% of households ] （％） 90 Wealth

80 Income

70 Wealth concentration of upper-income househo l 60 exceeding income concentration

0 US UK France Canada Italy Spain Germany Finland Norway Note: Data are based on the statistics in 2012 or the latest available year. Source: Made by MHRI based upon OECD Data

7 3. Inequality in Japan

Abenomics – Limited impact on income and wealth inequalities

Key points

・Income and wealth inequalities have not changed much since the implementation of Abenomics. ・The effects of Abenomics are slow to spread to rural areas and differ depending upon regions (in rural areas). ・Regional populations are polarized between metropolitan and rural areas.

8 3 (1) Income and Wealth Inequalities – Limited effect of Abenomics on widening disparities

○ Income inequality (annual income inequality) has not changed much since the implementation of Abenomics.

○ Wealth inequality (savings gap) has gradually increased but is still around the same level as 2011.

[ Changes in annual income inequality [ Changes in savings gap (two-or-more-person household) ] (two-or-more-person household) ]

Notes: 1. Changes in Gini coefficient: A coefficient close to 0 indicates a smaller gap, while a coefficient close to 1 Notes: 1. Changes in Gini coefficient: A coefficient close to 0 indicates a smaller gap, while a coefficient close to 1 indicates a larger gap. indicates a larger gap. 2. The Gini coefficient is calculated by the number of households by income bracket and average annual 2. Savings include bank deposits, life insurance, and securities. income. 3. The Gini coefficient is calculated by the number of households by the current savings amount and Source: Made by MHRI based upon Ministry of Internal Affairs and Communications, Family Income and average savings. Expenditure Survey Source: Made by MHRI based upon Ministry of Internal Affairs and Communications, Family Income and Expenditure Survey

9 3 (2) Wage Inequality – Wage gap in the working-age groups is hardly affected by Abenomics

○ There is a wide gap in wage distribution between full-time regular employees and full-time non-regular workers. The increase in non-regular workers has been a major factor in widening wage disparities in the working-age population since the late 1990s.

○ The Gini coefficient of working-age household income does not indicate growing inequality since the beginning of Abenomics.

[ Income distribution of full-time regular employees [ Changes in income gaps in working-age households ] and full-time non-regular workers ]

(Composition ratio: ％) 30 Disparity in income distribution Full-time regular employees 25 Full-time non-regular workers 20

5 Gaps remain unchanged 0 Below 0.5 million yen . 0.99 million yen 0.5 - 1.49 million yen 1 - 1.99 million yen 1.5 - 2.49 million yen 2 - 2.99 million yen 2.5 - 3.99 million yen 3 - 4.99 million yen 4 - 5.99 million yen 5 - 6.99 million yen 6 - 7.99 million yen 7 - 8.99 million yen 8 - 9.99 million yen 9 - 12.49 million yen 10 - 14.99 million yen 12.5 - Above 15 million yen ( Income )

Note: Income shown here is annual income (including taxes) from regular work. Full-time work refers to Notes: 1. Changes in Gini coefficient: A coefficient close to 0 indicates a smaller gap, while a coefficient close to 1 working over 35 hours in a week and over 200 days in a year. indicates a larger gap. Source: Made by MHRI based upon Ministry of Internal Affairs and Communications, Basic Survey on 2. The coefficient is calculated by average household income (annual cash earnings) by quintile and other data Employment Structure (2012) on average household income. Source: Made by MHRI based upon Ministry of Internal Affairs and Communications, Family Income and Expenditure Survey

10 3 (3) Regional Disparities – Effects of Abenomics are slow to spread to rural areas

○ In general, Abenomics has not been effective enough to generate momentum in rural areas. ○ Current business conditions do not show a significant gap between metropolitan and rural areas. ・ Various factors are behind this trend, including the fact that the manufacturing industry is not serving as the driver of the economic recovery, the reinforcement of public works, the positive effect of inbound foreign visitors upon tourism, and the opening of the Hokuriku Shinkansen bullet train service.* *The Hokuriku Shinkansen is a high-speed railway line connecting Tokyo to Nagano, and ultimately Osaka, through the Hokuriku region in the northwestern part of Japan’s main island. The Tokyo- Nagano route was first opened in time for the 1998 Nagano Winter Olympics. (It was called Nagano Shinkansen before its extension to Kanazawa.) The Nagano-Kanazawa route opened in March 2015. ○ In addition to the severe job market in rural areas compared with metropolitan areas, note that employment conditions also vary in both metropolitan and rural areas. [ Business conditions DI (by region) ] [ Unemployment rate and jobs-to-applicants ratio (by region) ] No major difference

Active opening ratio (left scale: Jan-Mar 2015) Improved (% pt) (%pt) Active opening ratio (left scale: Oct-Dec 2015) Nationwide (Ratio) （Inverse scale: %) 20 (Outlook) Metroplitan areas Unemployment rate (right scale: Jan-Mar 2015) 13 Hokuriku 1.5 Unemployment rate (right scale: Oct.-Dec. in 2015) 2.0 10 Local areas Kyushu & Okinawa 1.4 11 2.5 0 1.3 Employment conditions Chugoku 3.0 -10 9 1.2 Varying in regions Tohoku Nationwide 3.5 -20 77 1.1 Kanto & Koshinetsu 6 1.0 4.0 -30 5 Kinki 0.9 -40 Tokai 4.5 Shikoku 0.8 -50 5.0 0.7 Hokkaido -60 0 0.6 5.5 Worsened South 2005 06 07 08 09 10 11 12 13 14 15 Tokai KinkiHokkaido Tohoku Chugoku Shikoku Kyushu Performance during Kanto Okinawa (Year/quarter) Jan.-Mar. in 2015 Metropolitan areas Rural Areas Note: Business conditions diffusion index: The values of metropolitan areas refer to the average of the Kanto-Koshinetsu, Tokai, and Kinki regions, while the values of rural areas refer to the Source: Made by MHRI based upon Ministry of Health, Labour and Welfare, Job Placement Services average of the other regions. Statistics, and Ministry of Internal Affairs and Communications, Labor Force Survey Source: Made by MHRI based upon Bank of Japan, Sakura Report (Regional Economic Report), and regional branches of the Bank of Japan, Tankan Survey (Business Short-Term Economic Sentiment Survey)

11 3 (4) Population Gap – Polarization of regional populations is widening discrepancies

○ Regional populations have moved in the direction of urban-rural polarization since the late 1990s, with the concentration of people especially high in metropolitan areas. ・ The population of shrinking prefectures is falling at an accelerating pace. Populations are also declining in Miyagi, Hiroshima, and Ishikawa prefectures, which are adopting a central role in local economic development. ・ Population growth is dominated by prefectures with metropolitan areas, except for Okinawa Prefecture with its high fertility rate.

[ Changes in population growth rate by prefecture ] (%) Concentrated in metropolitan areas 6 Population growth rate in 2005-2010

Population growth rate in 2000-2005 2

-2

Accelerating polarization of regional populations -4 Yamagata Wakayama Yamaguchi Kagoshima Yamagata Osaka Saitama Aichi Fukui Toyama Kumamoto Gunma Hiroshima Tochigi Akita Kochi Tottori Fukushima Tokushima Ehime Ishikawa Fukuoka Tokyo Nagasaki Shimane Niigata Hokkaido Saga Okayama -6 Aomori Shiga Chiba Kagawa Nara Gifu Oita Shizuoka Miyagi Kyoto Ibaraki Hyogo Okinawa Kanagawa Nagano Miyazaki Mie Iwate

Source: Made by MHRI based upon Ministry of Internal Affairs and Communications, Population Census (2000, 2005, and 2010)

12 4. Essence of Inequality Problems in Japan

Significant increase in poverty

Key points

・Japan’s inequality problems are related more to the increase in poverty and the shrinking middle-class than concentration of wealth. ・The increasing number of non-regular workers, aging society, and job polarization due to advances in information technology are major factors behind the widening inequalities. ・With an increase in relative poverty rates, the number of welfare recipient families is also on the rise. ・The number of households with an annual income below five million yen is increasing, lowering income levels in the middle class as well as income distribution.

13 4 (1) Views on Inequality – Japanese perceptions of inequality

○ Inequality issues need to deal not only with the actual conditions but also how people look at or feel about inequality. ○ Opinion polls show that many people think inequality is increasing, and that income should be redistributed to address inequality problems. ○ As there are different views on the perception of inequality, awareness of inequality, and actual level of inequality, it is important to fully understand the range and scale of inequality. ・ Exaggeration and biases concerning inequality can lead to one-sided views that ignore the different patterns and paces of change of inequality. ○ Various issues involve income and wealth disparities, such as wealth concentration and inheritances, and hardships and loss of opportunities for the poor. ・ Inequality issues in Japan are associated more with increasing poverty and the shrinking middle-class rather than concentration of wealth.

[ Attitudes toward inequality and actual levels of inequality ] [ Inequality problems in each income class ]

Exaggeration Facts and misconceptions Income and wealth inequality: - Too much concentration of wealth - Ever-widening disparities High-income Wealth concentration, monopoly, and inheritances (a fixed - Views based on individual cases class dominant position)

Attitudes toward inequality

Middle-income Declining and shrinking middle class and rich-poor Different pace of change class polarization Biases Actual levels of inequality Employment inequality: Inequality by business scale “Negative attitudes toward and type: Increasing poverty and decreasing living standards Pace of recovery differs from increasing temporary employment” (→falling consumer demand) “Disparities increased by economic policies sector to sector. focusing on large companies” Low-income Affecting stable and healthy lifestyles Actual conditions One-sided views class Loss of opportunities - a fixed status of poverty and generational reproduction of poverty Actual conditions Regional inequality: Financial burden on revitalization programs Disparities differ in patterns and scales Different patterns within both urban and rural areas.

Source: Made by MHRI Source: Made by MHRI

14 4 (2) Major Factors in Widening Inequality – Increasing temporary employment and aging

○ The biggest factor in widening inequality among the working-age population is the expanding low-income class due to increasing temporary employment. ・ With companies focused on cutting costs, more temporary workers are hired given their relatively lower wage levels and ease of labor adjustment. ・ The main source of income for almost half of all temporary workers is their wages. ○ The wage gap continues to widen with innovations in information technology creating job polarization, in other words, decreasing the demand for unskilled workers and increasing the demand for skilled workers. ○ Increasing numbers of the elderly with a wide income gap and non-employed people are also contributing to widening inequality.

[ Reasons for companies to hire temporary workers ] [ Major factors in widening inequality ]

Saving wage costs 43.8

Adjusting to busy or slack times in a day and week 33.9

Saving labor costs other than wages 27.4

Securing experienced and skilled workers 24.4

Responding to specialized work 23.9

Providing re-employment opportunities for the elderly 22.9 Adjusting employment according to economic conditions 22.9 Responding to long business (operation) hours 20.2

Responding to temporary and seasonal demands 19.1

Unable to secure full-time employees 17.8

Focusing full-time employees on important tasks 17.3 Alternative measure to provide full-time employees with childcare and nursing leave 6.7

0 1020304050(%) Note: The percentage is based on companies hiring temporary workers which answered each question with multiple answers allowed. Source: Made by MHRI based upon Ministry of Health, Labour and Welfare, General Survey on Diversified Types Source: Made by MHRI of Employment (2010)

15 4 (3) Growing Poverty #1 – Relative poverty rates increasing since the 1980s

○ Japan’s relative poverty rates (the percentage of people with a disposable income less than half the median income) rose from 12.0% in 1985 to 16.1% in 2012. ○ The percentage of households on welfare (percentage of public assistance recipients) has grown in single-mother households and other households (mostly working-age group). The percentage of senior public assistance recipients has gradually increased since the 2000s, despite the decrease in past decades because of well-developed pensions programs.

[ Changes in relative poverty rates and poverty line ] [ Percentage of welfare recipients by household type ] （Percentage of recipients: ％） (%) Rising poverty rates(10,000 yen) 25 18 250 15.7 16.0 16.1 Rising in all households 15.3 16 Relative poverty rates (left scale) 14.9 20 200 14 14.6 13.5 13.7 13.2 Single mothers 12 Poverty line (right scale) 12.0 150 15 10 128 130 123 120 117 114 108 113 112 111 8 100 10 6 Seniors 4 50 5 Total 2 Others

0 0 0 (Year ) 1985 88 91 94 97 2000 03 06 09 12 1985 88 90 92 94 96 98 2000 02 04 06 08 10 12 (Fiscal Year) Note: The poverty line refers to the income level of half the median equivalent disposable income (disposable income per person considering household size). Amounts on the graphs are calculated based on the Note: The percentage of welfare recipients by household type is calculated by dividing the number of different consumer price index for 1985 as the base year (aggregate index except the imputed rent of owner-occupied types of households on welfare by the number of each household type. Iwate, Miyagi, and Fukushima housing for 2010 as the base year). Prefectures are not included in 2011 and Fukushima is not included in 2012. Source: Made by MHRI based upon Ministry of Health, Labour and Welfare, Comprehensive Survey of Living Source: Made by MHRI based upon National Institute of Population and Social Security Research, Annual Conditions (2013) Statistical Report on Social Security (2014)

16 4 (3) Growing Poverty #2 – One in six children is relatively poor

○ The relative poverty rate of children in 2012 is 16.3%. One in six children live at less than half the average living standard. ○ The poverty rate of children in single parent households is 51%, the highest among OECD countries (around 2010). Major factors in child poverty include unstable employment status of single mothers, low possibility to receive child support from divorced fathers (20% of single-mother households), and inadequate social security systems to support single-parent or working-poor households. ○ Parental income affects disparities in children’s academic performance, academic and career decisions, and food expense per person per day. Child poverty also causes opportunity inequalities for education and health. [ Parental annual income and high school [ Relative poverty rates of children ] students’ plans after graduation ] Increasing to 1 in 6 children (%) （％） Parental income affecting disparities among children 17 70 16.3 62 15.7 16 60 55 Four-year university 49 15 14.5 50 44 14.2 13.7 14 13.4 40 31 Vocational school 12.9 12.8 or two-year college 13 30 30 12.1 21 12 20 Spending an additional year 16 10.9 for entrance exam study 10 11 10 or undecided 6 Work or others 0 10 Below 4 - 6 6 - 8 8 - 10 Above 0 4 million yen million yen million yen million yen 10 million yen 1985 88 91 94 97 2000 03 06 09 12 (Year) (Parental annual income) Note: The relative poverty rate of children is the percentage of children under the age of 18 with less Notes: 1. Parental annual income is the total annual income including taxes. than half the median equivalent disposable income (disposable income per person considering 2. “Work or others” include full-time work, part-time work, study abroad, helping with the family business, household size). housekeeping, and others. Source: Made by MHRI based upon Ministry of Health, Labour and Welfare, Comprehensive Survey of Source: Made by MHRI based upon Department of University Management and Policy Studies, University of Tokyo, Living Conditions (2013) The First Report on High School Graduates Follow-up Survey (2007)

17 4 (4) Declining Middle Class – Growing number of households with an annual income below five million yen

○ The percentage of households with an annual income over five million yen has dropped. ・ The distribution of household annual income has shifted to lower income groups below the five million yen mark.

○ Disposable income (median) per person has fallen since the 2000s, with the real value in 2012 at 2.21 million yen, equal to levels in the 1980s. ・ Middle class income levels are decreasing, raising the risk of slipping into poverty.

[ Distribution of household annual income ] [ Median disposable income per person ] (1,000 yen) (%) 2970 Nominal value 5 million yen 3000 14 2890 Real value (based on 1985) 2012

 2000 12 2800 2740 2700 1994 10  2600 2600 2540 8 2500 2590 2440 2550 6 2400 2460 2270 2400 4 2330 2160 2200 2280 2260 2240 2 2210 2160 Falling to the 1980s levels 10 million 9 - Below 1 million 2 - 3 million million 3 2 - million 4 3 - million 5 4 - million 6 5 - million 7 6 - million 8 7 - million 9 8 - 1 - 2 million million 2 1 - 0 11 million 10 - 12 million 11 - 15 million 12 - 20 million 15 - million yen million

Above 20 Above 2000 1985 88 91 94 97 2000 03 06 09 12(Year) yen yen yen yen yen yen yen yen yen yen yen yen yen yen

Note: The graph shows changes in the equivalent disposable income (disposable income per person considering （Household annual income） household size). The real value is adjusted based on the consumer price index for 1985 as the base year (aggregate index except the imputed rent of owner-occupied housing for 2010 as the base year). Note: The average annual income was the highest in 1994. Source: Made by MHRI based upon Ministry of Health, Labour and Welfare, Comprehensive Survey of Living Source: Made by MHRI based upon Ministry of Health, Labour and Welfare, Comprehensive Survey of Living Conditions (2013) Conditions (1994, 2000, and 2012)

18 5. Policy Issues about Inequality

Assistance to low-income groups as a top priority

Key points

・Measures to support non-regular employees and to expand assistance to the unemployed are vital. ・Educational support and income security are urgently needed to alleviate child poverty. ・Poverty is expanding with overall income levels declining during the prolonged economic slump. ・Boosting economic growth to exert a trickle-down effect is the key to addressing inequality issues.

19 5 (1) Employment Issues – Expanding public assistance to the unemployed

○ The number of temporary workers converting to full-time employees is on the rise due to the labor shortage during the economic recovery. The percentage of temporary workers is expected to stop rising. ○ Tax and social security systems need to offer more incentives for companies to increase stable employment. ○ Inadequate policy measures for income security and job assistance make it difficult for low-wage workers with low savings to search for better job opportunities. Developing comprehensive income security and support programs for the unemployed are also important.

[ Number of temporary workers [ Public spending on unemployment benefits and job support ] converting to full-time regular employees ]

Number of converted full-time regular employees (GDP compared: %) (10,000 people) rose during the economic recovery. 42 41 4.4 40 5.0 40 39 4.5 ②Job support (job training) Number increased again. 4.0 38 37 3.5 2.6 36 2.5 Total（①＋②） 3.0 36 35 35 35 2.0 2.5 OECD average（total：1.5％） 34 34 1.6 1.2 34 2.0 0.9 1.5 0.8 0.8 32 0.6 0.5 32 31 1.0 30 0.5 ①Unemployment benefits 30 0.0 Netherlands Spain France Australia Germany Sweden Britain South Korea Japan Italy USA

0 2002 03 04 05 06 07 08 09 10 11 12 13 14 (Year) Japan at low levels of

Note: Converted full-time employees refer to previously employed workers who left a job in the past year. Note: The proportion of GDP (%) is based on the results in 2011. providing public assistance Source: Made by MHRI based upon Ministry of Internal Affairs and Communications, Labor Force Survey (detailed Source: Made by MHRI based upon OECD Statistics for the unemployed tabulation 2002-2014)

20 5 (2) Pension Issues – Restricting the number of future low-paid pensioners to correct income disparities

○ Public pension payments are related to people’s working styles and income levels during their working years. ・ Only regular employees can receive pensions surpassing the average monthly expenses (154,000 yen) of a single-senior household. ・ Temporary workers only joining the national pension plan receive 64,000 yen a month even after paying premiums for 40 years. ○ Future income disparities during retirement age should be corrected by raising income levels for the working-age groups and by extending the coverage of employees’ pension insurance. ・ In fact, the coverage of employees’ pension insurance will be extended in October 2016, but only about 250,000 people will be qualified. Further extensions are necessary. [ Pension by working style (university graduates at 2014 prices) ] [ Extending employees’ pension coverage to part-time workers ] (1,000 yen) [Employees’ pension insurance subscribers] [Basic pension] Average monthly 200 expenses of a single- Extending the coverage to part-timers senior household Current standards (starting Oct. 2016) (154,000 yen) 150 Over 30 hours a week ① Over 20 hours a week Male Female 100 176 160 140 ② Monthly wages of over 88,000 yen 126 (annual income of over 1.06 million yen) 50 94 91 84 82 64 64 ③ Over one year of employment

0 30 hours a week 20 hours a week only pensions National Temporar employee Regular

④ Not applicable to students y ⑤ Companies hiring over 501 workers Full-time workers Part-time workers Notes: 1. Pensions (monthly payments at 2014 prices) refer to the amounts people will receive if they start working at age 23 and continue working for the same company in the same employment status until the retirement age of 60. Qualified : about 250,000 people They also include the national pension plan from 20 to 23 years old which they joined and paid in full. 2. Pensions of full-time employees are calculated based on wages in different categories, such as college degrees, gender, age groups, and years of employment. Pensions of part-time workers are calculated based on wages by Notes: 1. The number over 500 workers ⑤ is based on insured workers applied to the current standards. educational background, gender, age group, and years of employment. 2. The new system will be reviewed within three years after introduction and necessary measures will be 3. The average monthly expenses of a single-senior household are the total consumption and non-consumption taken based on the results. expenditures of a single non-employed household aged 60 or over. 3. The coverage of health insurance will also be extended. Sources: Made by MHRI based upon Ministry of Health, Labour and Welfare, Basic Survey on Wage Structure (2014), and Source: Ministry of Health, Labour and Welfare Ministry of Internal Affairs and Communications, Household Expenditure Survey (2014)

21 5 (3) Tax Issues – Adopting tax systems to create work incentives, including tax refunds to low-income earners

○ Other countries offer tax refunds (subsidies) called “the earned income tax credit (the EITC)” to low-income earners. ○ The EITC, which is designed to encourage work, consists of three ranges: the “phase-in” range where benefits increase with earnings, the “flat” range where the tax credit amount remains constant, and the “phase-out” range where benefits are reduced. ○ In the United States, the EITC has helped increase the labor supply of single mothers. This system can also effectively help the working poor in Japan.

[ Marginal tax rates by income class with EITC in the US ] [ Changes in EITC benefits (image) ]

Marginal tax rates Earned income after tax 50％ Earned income tax credit (EITC)

40％ Decrease in benefits (Phase-Out) 30％ Benefits remaining constant ) 20％ (Flat)

10％ Increase in benefits (Phase-In) ％ 0 ) -10％ No EITC -20％

-30％ Tax refunds to low-income earners -40％

-50％ 0255075100125150 Earned income before tax Income (2004) (1,000 dollars)

Source: Eissa and Hoynes (2011), “Redistribution and Tax Expenditures: The Earned Note: w refers to marginal earned income, ߬௦ benefit payment rates, and ߬௣ benefit reduction rates Income Tax Credit,” National Tax Journal, 64(2), pp. 689-730 Source: Eissa and Hoynes (2011), “Redistribution and Tax Expenditures: The Earned Income Tax Credit,” National Tax Journal, 64(2), pp. 689-730

22 5 (4) Child Poverty Issues – Educational support and income security are priorities

○ In Japan, educational costs place a heavy burden on families, and there are not many scholarship programs available. These types of educational disparities can easily produce a generational reproduction of poverty. ・ Necessary measures should be taken, such as providing free pre-school education, promoting study support for children in low-income households, and developing scholarship programs with no repayment required. ○ To address the poverty issues of children in single-mother households, assistance programs should be further developed to promote income security and stable employment for single mothers. ・ Other necessary measures include strengthening the collection of child support payments from divorced fathers, establishing a “child tax credit” system to provide tax deductions and credit for amounts not fully deducted to low-income families with children, and offering job training programs for low-income parents. [ International comparison of higher education tuition and scholarship support ] [ Changes in the number of single-mother households ] (Tuition of national and public higher education in dollars) (10,000 households) 6 000 90 Increase Higher tuition and less USA 82 scholarship support 80 4 500 Japan 72 71 Australia Higher tuition Higher 70 63 3 000 60 New Zealand 59 60 55 Netherlands 50 1 500 48 48 Italy 50 Austria Spain Belgium France Finland Norway Sweden 0 40 0255075100Iceland (Percentage of students receiving public educational loans, scholarships, and grants : %) 0 More scholarship support 1986 89 92 95 98 2001 04 07 10 13(Year)

Note: Data are obtained from the 2006-2007 school year. (Educational costs in the United States, France, Note: Single-mother households consist of females under 65 who are widowed, divorced, unmarried, or Belgium, Italy, Sweden, and the Netherlands are from the 2007-2008 school year.) Tuition of each country have no spouse for other reasons (including when the spouse is missing for a long period of time) is calculated in US dollars using purchasing power parity (PPP) rates. and a child or children (including adopted) under the age of 20. Source: Made by MHRI based upon OECD, Education at a Glance 2010 - Tables and Charts Source: Made by MHRI based upon Ministry of Health, Labour and Welfare, Comprehensive Survey of Living Conditions (2013)

23 5 (5) Regional Revitalization and Population Gap – Community-based management to deal with population declines

○ Regional population gaps are caused by social mobility rather than birthrate disparities. ・ Countermeasures against declining birthrates can increase fertility rates, but children are likely to leave their hometown for college and/or employment. ・ More women have chosen the path to higher education, especially since the late 1990s, resulting in a growing number of women leaving their hometown for college and/or employment. ○ To deal with regional depopulation, it is important to revitalize local economies and provide job opportunities that attract young women. ・ The outflow of young women pursuing higher education is less likely to affect the Nagoya area, which is enhancing the development of its manufacturing industry. ○ Many regions cannot avoid a population decline, with regional gaps expected to widen. It is essential to develop local business plans based on a declining population. [ Changes in the percentage of [ Number of Japanese in-migrants students going to college by gender ] by gender and age (the Nagoya area in 2014) ] (%) （Person） 60 2,500

2,000 50 Male Male 1,500 40 1,000

Female 30 500

20 Female 0

-500 10 Outflow of women did not stop. Gender gap narrowed to one third. -1,000 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90～ 0 ～4 ～9 ～14 ～19 ～24 ～29 ～34 ～39 ～44 ～49 ～54 ～59 ～64 ～69 ～74 ～79 ～84 ～89 1954 60 65 70 75 80 85 90 95 2000 05 10 12 (Age) (Year) Source: Made by MHRI based upon Ministry of Education, Culture, Sports, Science and Technology, Source: Made by MHRI based upon Ministry of Internal Affairs and Communications, Report on Internal School Basic Survey (1954-2012) Migration in Japan (2014)

24 5 (6) Enhancing Economic Growth and Expanding the Pie #1 – Long-term stagnation affecting Japanese economy

○ Japan’s economic growth rate has declined since the collapse of the bubble economy, a period also referred to as “The Lost Two Decades.” ・ Inequality debates tend to be spurred during the economic upturn (partly due to the increase in assets and temporary employment with rising stock prices). ・ Without improving the environment where the wave of economic recovery sweeps the entire country, inequality and anxiety can precede economic growth, leading to a further widening of the gap. ○ The widening gap can be narrowed during the economic slowdown, but other problems can also rise, such as the decline or fall of the middle class to a lower class, or all class declining to lower levels. ・ In addition to addressing inequality issues, policies stimulating economic revitalization are important to increase the overall income. [ Inequality debates with real economic growth and stock prices ] [ Changes in three classes during the economic slowdown ] (Compared with last year: %) (Stock price: yen) Heated inequality debate during the economic bubble 8 35,000 High-income class Rise of debate High-income class under Abenomics 6 30,000

Revived debate during structural reforms Middle class Middle class Ⓐ Widening gap 4 under the Koizumi administration 25,000

Low-income class 2 20,000 Possibility of Low-income class Ⓐ, Ⓑ, and Ⓒ occurring 0 15,000 at the same time High-income class High-income class -2 10,000 Ⓑ Middle class declining and Ⓒ All classes falling into shifting to -4 5,000 Middle class lower levels Real economic growth(left scale) lower class Middle class Stock price (term end: right scale) -6 0 1980 85 90 95 2000 05 10 14 (Year) Low-income class Low-income class

Source: Made by MHRI based upon Cabinet Office, System of National Accounts and others Source: Made by MHRI

25 5 (6) Enhancing Economic Growth and Expanding the Pie #2 – Trickle-down boosting economic growth

○ In the phase of an economic upturn, the pace of recovery tends to differ by region and by corporate size and type. ・ Promoting programs to revitalize local economies and support small businesses is the key to spreading the effects of Abenomics from metropolitan to rural areas and from large to small businesses. ○ “Expanding the pie,” that is, expanding the economy as a whole, is effective way of improving income levels and fighting poverty. ・ Increasing wages and employment through improved business performance can create a positive economic cycle and enhance the trickle-down effect, which will help resolve inequality issues. ⇒ Revitalizing the economy by sustaining and enhancing Abenomics while maximizing its effects nationwide is a desirable course of action.

[ Creation and expansion of a positive economic [ Policies on inequality issues ] cycle to local areas and small businesses ]

Improving income and social securities to the unemployed, raising the Poverty minimum wage, providing tax credit to low-income workers (e.g., earned countermeasures Creating income tax credit), and extending the coverage of employees’ pension a positive cycle Expanding to local areas

Large companies Avoiding the Reviewing income and inheritance taxes, improving education and job poverty trap training, creating employment, and enhancing the child care environment Revitalizing local economies Supporting small businesses Improving performance Promoting women’s workforce participation, improving benefits for Equal opportunities temporary workers, and facilitating the conversion to full-time employment

Small businesses Expanding Boosting Increasing wages & jobs investment Consumption Enhancing the environment to create a positive economic cycle Trickle-down effects (increasing wages and employment), revitalizing local economies and supporting small businesses

Growing household income

Revitalizing local economies Developing a strategy to boost economic growth, raising overall income Expanding the pie levels, and implementing effective fiscal and monetary policies Expanding to local areas Improving income levels and reducing poverty Source: Made by MHRI Source: Made by MHRI

26 This publication is compiled solely for the purpose of providing readers with information and is in no way intended to encourage readers to buy or sell financial instruments. Although this publication is based on sources considered reliable and correct, the Mizuho Research Institute does not guarantee its accuracy and validity. Readers are requested to exercise their own judgment and discretion when making use of this publication.