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Cablegate: Japan's Income Disparity: Widening Trend Predates

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PP RUEHKSO
DE RUEHKO #5962/01 2860312
ZNR UUUUU ZZH
P 130312Z OCT 06
FM AMEMBASSY TOKYO
TO RUEATRS/TREASURY DEPT WASHDC PRIORITY
RUEHC/SECSTATE WASHDC PRIORITY 7408
INFO RUEHFK/AMCONSUL FUKUOKA PRIORITY 8454
RUEHNAG/AMCONSUL NAGOYA PRIORITY 8149
RUEHNH/AMCONSUL NAHA PRIORITY 0993
RUEHOK/AMCONSUL OSAKA KOBE PRIORITY 1829
RUEHKSO/AMCONSUL SAPPORO PRIORITY 9528
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 03 TOKYO 005962

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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

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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

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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

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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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