With the fanfare surrounding the arrival of economist Thomas Piketty in Tokyo earlier this month, it is perhaps timely to report the views of the outspoken economist from Doshisha University, Professor Noriko Hama. The two economists similarly suggest that with low “normal” growth rates and private wealth locked in the hands of the elderly, Japan’s problem is not so much a lack of growth as it is one of an uneven distribution of income. Both believe the government should rebalance the economy by adopting policies to redistribute wealth from those who can most afford it, to the needy and to potentially more productive segments of Japanese society.
Prof. Hama says Japan suffers from ‘poverty in affluence’. By this she refers to affluent Japan in which pockets of poverty are growing. They include an increasing number of underemployed youth, irregular workers and those living below the poverty line. Areas outside Tokyo are particularly affected by youth migration into the Capital, leaving the regions economically depressed. Japan’s relative poverty rate at 16% ranks it 29th lowest out of 34 OECD nations surveyed. Only the US, Chile, Turkey, Mexico and Israel were ranked worse.
Mostly, ‘poverty in affluence’ is caused by inter-generational imbalances in which too much wealth is owned by the elderly and not enough by other segments. Over two-thirds of household net financial assets in Japan are held by those over the age of 60 years, while those below the age of 40 hold only 2.5%. The elderly are in the voting majority too.
In fact wealth imbalances in Japan are not as great as in other countries. Credit Suisse Research Institute recently reported that the proportion of wealth in Japan held by the top 10% of society was second lowest out of 48 countries surveyed. Whereas the top 1% of wage earners in the US account for 20% of income, the top 1% in Japan account for about 5.6%. Still, Prof. Hama believes ‘poverty in affluence’ is the main reason Japan has experienced 15 years of deflation. “The reason I believe Japan remains locked in deflation is there are growing numbers of people who do not have the incomes that, if redistributed, could kick-start economy,” she says.
To reshape the economy in a socially inclusive way and stabilize government finances, Prof. Hama suggests the nation should adopt progressive consumption tax rates and cut social entitlements in ways that don’t hurt people on lower incomes. Under progressive consumption taxes, staple goods are taxed at lower rates or not at all, while luxury items might attract rates of 25% or higher. Before cutting entitlements that are core to the social security system, she advises that unproductive ones be cut first.
Instead of pursuing fiscal consolidation, Prof. Hama worries the current Administration aims to inflate government debt away. In November the Bank of Japan (BOJ) greatly expanded its monetary stimulus program while delaying a planned consumption tax rise. Through aggressive purchasing it is reducing the stock of government bonds held by the private sector, even after accounting for new Ministry of Finance issuances that go to pay Central Government expenses. “The BOJ is no longer a central bank, but a lender of first resort to the Japanese government,” she says adding, “Either the current government thinks they will be able to create enough inflation so the issue of fiscal consolidation will itself disappear, or they believe the BOJ can continue to buy up national debt forever.”
Outright monetization of government debt of course cannot go on indefinitely. Assuming it does not lead to the unthinkable – hyperinflation – Prof. Hama asks, “If we get 5%, 6% or 10% inflation, is that going to help the regions to kick-start their economies? Will it attract populations back into the regions from Tokyo? Will it give them back a sense of security of well-being to make the regional economies work on their own?”
The professor believes Japan needs a prime minister with a clearer vision about how to rebalance the nation’s wealth for the greater good of society and one that does not leave those who stand to lose it fearing for their own needs.
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