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DE RUEHKO #5962/01 2860312
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P 130312Z OCT 06
FM AMEMBASSY TOKYO
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UNCLAS SECTION 01 OF 03 TOKYO 005962 
 
SIPDIS 
 
SIPDIS 
 
DEPARTMENT PLEASE PASS TO USTR (BEEMAN) 
TREASURY PLEASE PASS TO FEDERAL RESERVE BOARD (JKOHLI) AND 
SAN FRANCISCO FEDERAL RESERVE (RNAYLOR) 
 
E.O. 12958: N/A 
TAGS: ECON EFIN JA PGOV
SUBJECT: JAPAN'S INCOME DISPARITY: WIDENING TREND PREDATES 
KOIZUMI REFORMS 
 
REF: TOKYO 5903 
 
TOKYO 00005962  001.2 OF 003 
 
 
¶1. (U) Summary: The perception of an expanding income gap 
between the "haves" and the "have-nots" in Japan has become a 
significant political issue over the past year, with some 
charging that former Prime Minister Koizumi,s reforms have 
undermined Japan's egalitarian society.  Prime Minister Abe 
made his strategy to address the income gap a centerpiece of 
his campaign, and has named a Minister in charge of "second 
chance" programs to oversee this agenda.  However, an 
examination of the available economic data shows that the 
growing income gap in Japan clearly predates the Koizumi 
administration, and has been widening since at least the 
early 1980s.  The July 2006 OECD report on Japan that 
highlighted rising income inequality as an area of concern, 
and that helped fuel political criticism of the Koizumi 
reforms, only examined data up to 2000. In fact, the OECD 
report specifically states, "...The trends in inequality and 
poverty...should not be attributed to the policies of the 
current (Koizumi) government."  Further, while the increasing 
share of part time workers - a major focus of Abe's "second 
chance" agenda - is contributing to the growth in income 
inequality, much of the increase is a natural result of 
Japan's aging population.  End summary. 
 
¶2. (U) Rising Inequality Pre-dates Koizumi Reforms: 
Statistics on income inequality are notoriously problematic, 
and often suffer from significant time lags.  However, the 
data that are available show that disparity in Japanese 
household income has risen at a consistent pace since the 
early 1980s, as measured by the Gini coefficient.  The Gini 
coefficient measures income inequality on a scale of zero to 
one, where zero corresponds to perfect equality and one 
corresponds with perfect inequality.  The Survey on the 
Redistribution of Income, conducted every three years by the 
Ministry of 
Health, Labor and Welfare (MHLW) and most recently released 
in 2004, provides the Gini coefficient for both the initial 
income of households, and their "redistributed income," 
reflecting household income levels after taking account of 
taxes and social security payments/receipts. 
 
Table 1: MHLW "Survey on Redistribution of Income" Gini 
Coefficient 
 
               1967  72  75  78  81  84  87  90  93  96 99  02 
 
--------------------------------------------- --- 
Initial Income  .37 .35 .37 .37 .35 .40 .40 .43 .44 .44 .47 
.50 
 
Redistributed   .33 .31 .35 .34 .31 .34 .34 .36 .36 .36 .38 
.38 
 
The survey found that Gini coefficient on initial income rose 
to 0.50 in 2002, marking the seventh increase in a row and a 
43% increase from 1981.  The survey also showed that 
inequality after income redistribution has been rising 
generally since the early 1980s, albeit at slower rates, as 
the Gini coefficient on "redistributed income" in 2002 had 
risen 21% since 1981.  As a consequence of the consistent 
upward trend, the July 2006 OECD study found that Japan's 
income inequality has risen to above the OECD average. (Note: 
The GOJ conducts a total of three surveys on income 
distribution, all of which show inequality rising, but at 
slightly different rates, due to differing methodologies and 
coverage.  The Survey on the Redistribution of Income has the 
broadest coverage of the full population, and provides the 
longest data history.) 
 
¶3. (U) Overall Income Inequality Slightly Greater than OECD 
Average:  The July 2006 OECD report on Japan - by feeding 
data from a different MHLW income survey into its own 
database, which attempts to standardize income distribution 
data across countries - concluded that Japan's income 
inequality was slightly above the OECD average, but below the 
level of the United States.  Breaking out data for only the 
working age population yielded a similar result.  While the 
magnitude of Japan's income gap in the OECD data was less 
than that shown by the Survey on the Redistribution of Income 
due to differing survey methodologies, the underlying trends 
 
TOKYO 00005962  002 OF 003 
 
 
illuminated in the OECD report were the same as those 
mentioned above. 
 
Table 2: OECD Total Population Gini Coefficient 
                   Mid-1980s       Mid 1990s       2000 
Japan              .28               .30           .31 
United States      .34               .36           .36 
OECD Average       .29               .30           .31 
 
 
Table 3: OECD Working-age Population Gini Coefficient 
                   Mid-1980s       Mid 1990s       2000 
Japan              .28               .29           .31 
United States      .33               .35           .35 
OECD Average       .26               .28           .29 
 
¶4. (U) Factors Responsible for Growing Income Inequality: 
Based on the results of their survey, MHLW concluded that 
nearly 65% of the increase in the total disparity in initial 
household income from 1999 to 2002 was due to the 
accelerating aging of the population.  A decrease in the 
number of household members because of growing single-person 
households contributed about 25% of the total income 
disparity, while the remaining 10% of the disparity could be 
attributable to other factors, presumably mainly the increase 
in non-regular workers. 
 
¶5. (U) Aging Population Feeds Income Disparity:  Japan's 
demographic challenges, namely the rapid aging of its 
population, contributes substantially to growing income 
disparity, as only a small percentage of elderly are part of 
the work force.  Therefore, as in most countries, income 
levels amongst the elderly are low compared to other age 
groups.  Further, because some elderly are not earning any 
income, the income disparity within the elderly age cohort 
tends to be larger than in other age groups.  Indeed, MHLW 
data showing that the Gini coefficient for the over 65-age 
cohort was 0.42 in 2002, compared to 0.40 for the overall 
population.  As the elderly age cohort grows - the share of 
those over 65 in Japan's total population doubled in the past 
two decades, increasing from 10% in 1985 to 21% in 2005 - 
their income inequality data have a larger and larger effect 
on the data for Japan's entire population. 
 
¶6.  (U) Income Redistribution Helps Elderly at Expense of the 
Young?  As Table 1 shows, GOJ policies to redistribute 
income, through pension, insurance, and 
healthcare payments, along with unemployment insurance and 
other means, helps to reduce income disparity, bring the Gini 
coeffienct from 0.50 to 0.38. Much of this income 
redistribution benefits the elderly.  While MHLW's survey 
data show initial income levels of groups aged over 65 are at 
the bottom of the income distribution table, their 
"redistributed income" levels after receiving pension and 
other social security benefits rise substantially, and are 
roughly equivalent to that of the age cohort of 30-34.  An 
increase in total pension payments as the population ages is 
unavoidable.  However, the OECD concluded that Japan's social 
welfare and insurance spending disproportionately favors the 
elderly over the working-age population, as shown by the very 
low levels of spending on unemployment insurance in Japan. 
This contributes to the increasing income gap in the working 
age population, as those not able to pursue a traditional 
career path are left with little government support, and must 
rely on low-paying part-time or non-regular jobs. 
 
¶7. (U) Growing Share of "Non-Regular" Workers Creates Wage 
Gap:  Reflecting corporate efforts to reduce personnel costs 
and enhance employment flexibility by replacing regular 
workers with "non-regular" workers (i.e. part-time and 
contract workers who earn lower wages and receive fewer 
benefits), the share of non-regular workers in employment 
jumped from 13% in 1990 to 22% in 2002, and even further to 
25% in 2005.  In particular, according to MHLW's Labor White 
Paper, non-regular workers in the age cohort of 20-24 surged 
from 8% in 1982 to 32% in 2002.  Non-regular workers were 
paid only about 60% as much as regular workers in 2005 on an 
hourly basis. This growing share of low-wage non-regular 
workers has been the main driver of the growing income 
disparity in the working age population, as wage differences 
amongst fulltime employees actually have narrowed in recent 
 
TOKYO 00005962  003 OF 003 
 
 
years.  Much of Prime Minister Abe's "Second Chance" program 
appears aimed at introducing job counseling, 
employer-employee matching and other assistance programs, 
aimed at enabling the many "freeters" (freelance part-time 
workers) and "NEETs" (those Not in Education, Employment, or 
Training) to compete for full-time positions. 
 
¶8. (U) Conclusion: Income Gap Likely to Continue to Grow: 
With Japan's population continuing to age, with social 
spending heavily tilted towards the elderly, and with few 
incentives in place to encourage companies to hire more 
full-time workers, the income disparity, among both Japan's 
working-age and elderly populations, is likely to continue to 
widen.  Thus, the public perception of a newly expanding 
income gap is unlikely to dissipate, despite the trend 
actually being a long-term one rather than a development 
caused or even worsened by reforms during the Koizumi era. 
Further, with MHLW scheduled to announce the results of its 
2005 "Survey on the Redistribution of Income" next summer, 
around the time of the Upper House election, income 
disparities are likely to remain a major political issue 
throughout the next year. 
 
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