Sustainable Path to Inclusive Growth in Japan: How to Tackle Income Inequality?

Selected Issues Papers, July 1, 2024

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Market income inequality in Japan has been on a steady rise since the 1980s and is now close to the OECD average.
Gross and disposable income inequality have risen much less than market income inequality but remain higher relative to several comparator countries.
An analysis using inequality index decompositions by income source with household panel survey data from 2010-19 identifies drivers of income inequality in Japan.
Increase in the employment of females and the elderly in the last decade has helped lower income inequality.
The equalizing effect of higher female and elderly employment has been offset because they are mostly employed in low-paid part-time nonregular jobs.
Rapid aging of the population has exacerbated income inequality over time.
Fiscal redistributive effects of social transfers are somewhat equalizing, but their impact on inequality is relatively weaker.

Policies that increase labor market access for females and the elderly can help reduce inequality, but addressing the quality and pay of their employment is crucial to realize equalizing effects.
Additional or reoriented social transfers could strengthen fiscal redistributive impacts, given current transfers have only a relatively weaker effect on inequality.
Demographic trends—specifically rapid population aging—need to be accounted for in strategies to contain rising income inequality.