Do deflation and loose monetary policy affect wealth inequality in Japan?
Delon Qiu – Explore Econ Conference
Topic:
Background Information:
The recent introduction of negative interest rates
marks a new attempt by the Bank of Japan and
the Japanese government to fight deflation and
Japan‘s economic downturn. However, is this
course of action in the interest of the country‘s
most important stakeholder – its people?
Apart from economic growth, wealth and income
inequality are often regarded as indicators for a
country development.
Japan exhibits one of the lowest GINI coefficients
for wealth inequality among OECD member states
(figure 2). In the following I will explore whether
deflation in the last two decades has had an effect
on the distribution of wealth in Japan and what
role accommodating monetary policies might
play.
Figure 1:
Deflation:
Japan: Annual % Change in CPI (all items)
4
3
2
(Source: CORE ECON, Unit 19)
1
Population:
Figure 3:
0
Japan: Population Pyramid (left: 2010 - right: 2060)
100 and over
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5- 9
0- 4
(Statistics Bureau Japan)
-2
“Cash is King”:
Falling prices are associated with an
increase in the real value of cash. Likewise,
by the Fisher equation, even under low
interest rates savers with a large amount of
cash deposits will receive a higher real
interest rate and benefit through an
increase in wealth.
In Japan, cash deposits comprise the
majority of household wealth. Poorer,
working class households hold as much as
72.4% of their net wealth in cash deposits.
Surprisingly, for wealthier households this
figures is not much lower with around
56.4%. Among all households, pensioners
benefit the most as their stagnant pension
payment and savings increase over time.
Wealth Inequality Worsening
Falling Liabilities:
With deflation the cost of debt increases. Naturally, as
Japan entered deflation in the early 2000s, nominal
liabilities decreased on household balance sheets. While
it depends on the distribution of liabilities among
population groups, in general deflation will negatively
affect households holding a large amount of debt.
-8
-6
-4
-2
Old and Older:
Do you think you can cover your future expenses in retirement
solely with pension benefits?
The share of people older than 65 years is estimated to rise above 40% of the
"Pension" includes public pensions and employees' pensions and excludes personal
overall Japanese population within the next 50 years. (figure 3) The rise of
pensions.
Yes, 12%
Don't know, 9%
pensioners will have a significant impact on the Japanese economy and the
government as it will have to consider the interests of this growing population
group. According to survey results in figure 7, there already exists rising concern
about among the public about their future pension income. As we will see
below, aggressive monetary policy stance is likely to worsen the situation.
No, 78%
Cash holdings - losing return:
(Source: Central Council for Financial
Services Information; Bank of Japan.)
Pensioner’s income comes from public pension and their own private savings which
consist of mainly cash deposits or secure saving schemes. Deflation allows for a real wealth gain without higher risk by
investing in other assets. However, when accommodating monetary policies come into play, the equation changes. Loose
monetary policy decreases the nominal interest and, thus, the real rate of interest. Pensioners are left with a lower return on
their wealth.
Inflation – a certain loss:
Furthermore, if inflation is successfully induced, real purchasing power of wealth will fall as well. With a steadily decreasing
working age population to shoulder the pension payments for a growing number of elderly people, Japan’s overall pension bill
needs to decrease. This has been implemented with the ‘macroeconomic slide’ policy which ensures that in case of inflation,
pension payments can only increase by inflation less 1%. For pensioners in Japan, therefore deflation is much more preferable
to inflation.
-1
Effects of deflation:
Wealth Inequality Balancing
Figure 7:
Inequality:
Figure 2:
Risk taking and investing:
A survey of older financial decision makers (aged 60 or higher) in the US indicated that more than half of them reported having
made a bad investment, and one in five of those respondents felt they had been defrauded but failed to report the situation. [5]
The missing financial literacy and support can act as a strong deterrent to pensioners to invest in financial products. However,
leaving savings in the bank under near-zero interest rates and low inflation would lead to a reduction in wealth instead of a
much needed rise in wealth for pensioners.
0
2
Fiscal stimulus
Supply-side reforms
Pensioners
None, 30%
Working
class
households
Deposits &
insurance
52%
Yes, 70%
Wealthy
households
Nikkei 225 Index
21000.00
19000.00
17000.00
15000.00
107%
13000.00
11000.00
9000.00
7000.00
Comparing the return on capital by investing in stocks to
the near-zero interest rates that banks offer on deposits
reflects the difference in the rate of growth of wealth
between the wealthiest and the majority of households
holding ordinary cash savings accounts.
Get rich and richer:
According to the Nomura Research Institute, the number
of wealthy households jumped 24.3 percent, with the
amount of their total financial assets rising 28.2 percent
in 2013, compared with 2011 figures.
Credit Suisse’s latest Global Wealth Report predicts a
69% rise in the number of millionaires until 2020 in
Japan. Through the effects explained here, this can in
parts be accounted for by accommodating monetary
policies. It is clear that the direct benefit of the latter are
enjoyed by the wealthiest in Japan.
Unless the government introduces “Robin Hood”-styled
redistribution policies, wealth will be easier to be passed
along to the next generation. A rise in the number of
wealthy households along with a continuous increase in
wealth will undoubtedly worsen wealth inequality in
Japan.
4
6
8
(Source: National Institute of Population
and Social Security Research)
Wealth Imbalance
Primary goal:
revive Japan‘s
economy
Monetary
policy
Figure 4:
Does your household own financial assets? If yes,
which ones?
Figure 8:
(Source: Bank of Japan; Nikkei Inc.)
Abenomics – 3 Arrows
Wealth Balance?
Soaring asset prices:
Through various channels of stimuli the Nikkei 225 Index
(composite index for Japanese stock market) more than
doubled from the first introduction of the Bank of
Japan‘s quantitative easing programme. (figure 8) While
the governer is hoping for a wealth effect of asset
appreciation and increased investment by corporations
to occur, rising asset prices have more directly benefitted
Japan‘s wealthy.
Accomodating monetary policies
Figure 9:
SDR Currency Basket per Japanese Yen
0.0065
0.0064
Other, 18%
0.0063
(Source: Central Council for Financial
Services Information; Bank of Japan.)
Figure 5:
Figure 6:
Financial assets (exluding cash
deposits, properties) held by
households
12%
37%
.
Real Wages (2010=100; seasonally adjusted)
115
110
105
51%
100
95
Top 30%
Middle 40%
Bottom 30%
(Source: Ministry of Internal Affairs and Communications)
1991/01
1991/10
1992/07
1993/04
1994/01
1994/10
1995/07
1996/04
1997/01
1997/10
1998/07
1999/04
2000/01
2000/10
2001/07
2002/04
2003/01
2003/10
2004/07
2005/04
2006/01
2006/10
2007/07
2008/04
2009/01
2009/10
2010/07
2011/04
2012/01
2012/10
2013/07
2014/04
2015/01
2015/10
90
(Source: Ministry of Health, Labour and Welfare)
Summary:
 Higher returns on cash and lower returns on capital are likely to benefit the average household while
falling wages and debt deflation do the opposite.
 Missing data on household wealth composition for different population groups does not allow for
precise analysis of deflation relationship with wealth inequality.
 However, accommodating monetary policies introduced to specifically target deflation and to revive
Japan’s economy can have implications for household wealth.
[1] Kimball and Shumway (2006): “Investor Sophistication and the Participation, Home Bias, Diversification, and Employer Stock Puzzles.”
[2] Lusardi and Mitchell: “The Economic Importance of Financial Literacy”
[3] Unknown: “Before shinkansen self-immolation, suicidal man phoned Suginami Ward to relate money woes” (http://www.japantimes.co.jp/news/2015/07/08/national/man-phoned-suginami-ward-torching-death-shinkansen-relate-money-woes/#.VtjBI5zJzIW)
[4] Alexandra Sims: “Japanese pensioners are committing more crimes than teenagers”(http://www.independent.co.uk/news/world/asia/japanese-pensioners-are-committing-more-crimes-than-teenagers-10399475.html)
[5] FINRA Investor Education Foundation (2006)
0.0061
0.006
0.0059
Conclusion:
For a long time wealth inequality in Japan has been relatively low. However,
looking at recent growth-inducing policies, this might not stay true in the
future.
While the effect of deflation itself on wealth inequality is ambiguous, we
find that accommodating monetary policies can act as additional weight on
the wealth inequality scale and tilt the scale towards the wealthy. The
wealth effect – increasing consumption and investment by boosting the
wealth of the wealthy and businesses – that policy makers are hoping for
has not been visible. Instead, it is likely that these policies left both
pensioners and working class households even worse off than during the
deflationary periods in the past.
The current government prioritises economic growth above anything else,
and it is certainly true that growth is essential for a country and its future.
Having said that, the costs of accomplishing this target might be higher than
the benefit.
For a country that has grown accustomed to equality, rising wealth
inequality can pose as a danger for its social stability. Especially in Japan’s
case, the aging population has already shown silent signs of protest. Be it a
pensioner committing suicide in public due to the inability to make a
living[3] or a reportedly rising crime rate by elderly people[4] , in the future
the government will need to take the interests of this large and growing
population share into consideration.
Opportunities missed:
The majority of Japan’s approximately
1500 trillion yen in household assets is
held in cash and savings. One reason
for that is that “(…) decisions, such as
saving for retirement and making
investment choices, do require rather
sophisticated
knowledge]
(…)”.[2]
However, it is often the wealthy who
possess higher financial literacy or
have the resources to professional
financial advice. And it tends to be “the
more numerate and financially literate
are also more likely to participate in
financial markets and invest in stocks.”
[1]
Further studies show that it is likely
that greater financial knowledge will
lead to savvier investment decisions
and higher participation in the stock
market, ultimately leading to greater
wealth accumulation. Thus, under the
current low interest environment,
average households will be left long
behind by the wealthy as the former
struggle to earn a significant return on
their savings.
References:
Cochrane, J. (2015). The Grumpy Economist: Inflation Drumbeat. [online] Johnhcochrane.blogspot.co.uk. Available at: http://johnhcochrane.blogspot.co.uk/2015/11/inflation-drumbeat.html#more [Accessed 2 Mar. 2016].
Financial Times. (2016). Japan’s economic strains laid bare by poor pensioners - FT.com. [online] Available at: http://www.ft.com/cms/s/0/a9564a6a-5dd4-11e5-a28b-50226830d644.html#axzz41r3xUy7S [Accessed 14 Feb. 2016].
George T. Hogan, C. (2015). Japan's Strategy To Fix Its Deflation Problem | Investopedia. [online] Investopedia. Available at: http://www.investopedia.com/articles/investing/040715/japans-strategy-fix-its-deflation-problem.asp [Accessed 27 Feb. 2016].
Hayashi, Y. (2016). Piketty on Japan: Wealth Gap Likely to Rise. [online] WSJ. Available at: http://blogs.wsj.com/japanrealtime/2014/05/13/piketty-on-japan-wealth-gap-likely-to-rise/ [Accessed 1 Mar. 2016].
Schlesinger, J. (2016). Japan May Be Exception to Piketty’s Thesis. [online] WSJ. Available at: http://www.wsj.com/articles/japan-may-be-exception-to-pikettys-thesis-1423451451 [Accessed 14 Mar. 2016].
Falling wages and capital outflow:
From figure 6, we can observe a more drastic fall in real wages since 2013. This
coincides with the introduction of the Bank of Japan’s quantitative easing
programme. The combination of cheap credit and uncertainty of Japan’s economic
prospects, will likely have sparked further outbound foreign investments. In 2013,
the year the QE was introduced, we observe a large jump in capital outflow via the
net capital account and rise in net foreign assets, which supports this thesis.
(figure 10, 11)
This capital outflow could be exacerbated through a strong Yen. Despite the recent
introduction of negative interest rates, Yen’s status as safe haven currency and the
large uncertainty surrounding the global markets has lead to a sharp appreciation.
(figure 9)
As businesses expand their operations abroad, the domestic workforce comprise a
smaller part of the overall business. As firms become less dependent on their
domestic operations, rising profit margin following the foreign investment is less
likely to lead to higher wages for domestic workers. Especially in recent years,
domestic worker’s bargaining power has fallen steadily with a rise of workers on
short-term contracts. Overall domestic labour share would stay stagnant and
result in a continued fall in real wages for working class households. The only
share of domestic employees to benefit from the rising profitability from overseas
business operations, will likely be the executive management through
performance-related bonuses.
(Source: IMF)
Figure 10:
Millions
Wages:
Falling prices are often a symptom of an economic
downturn. Lacking demand leads to lower output and
prices, which adds pressure to firm’s profit margins and
subsequently results in lower wages. Looking at figure 6,
real wages have been falling steadily since 1996. The
reduction in disposable income will in the long-run
negatively affect household wealth. However, whether
this effect will result in a increasing wealth gap depends
on the degree of income inequality. Since for poorer,
working class households wages are their main source of
income, it is likely that wealth inequality will increase.
Japan: Net Capital Account (BoP, current US$)
1000
0
2008
2009
2010
2011
2012
2013
2014
-1000
-2000
-3000
-4000
-5000
-6000
-7000
-8000
Figure 11:
Billions
Investments losing:
While cash-holders benefit from falling
prices, wealthier households holding the
majority of non-cash financial assets earn
lower return on capital (Figure 5). During
the deflationary period 99’ to 03’, the
Japanese Nikkei 225 Index fell along with
property prices. Combining the effect of
lower returns on investments and
relatively higher cash savings rate by
poorer households, a wealth balancing
effect could have taken place.
8%
0.0062
(Source: Worldbank)
Japan: Net foreign assets (current JPY)
140000
120000
100000
80000
60000
40000
Lower wage – lower future wealth:
While in the short-term lower real disposable income will affect income inequality,
in the long-run this will also affect the wealth accumulation process by
households. Working class households struggle to increase their savings and as
they retire, future pensioners will be less wealthy.
Steinmo, S. (2006). Tachibanaki, T.: Confronting Income Inequality in Japan. A Comparative Analysis of Causes, Consequences, and Reform. J Econ, 89(1), pp.83-85.
The Economist. (2013). What's moving Japanese markets?. [online] Available at: http://www.economist.com/blogs/freeexchange/2013/01/monetary-policy [Accessed 18 Feb. 2016].
The Economist. (2015). The secure v the poor. [online] Available at: http://www.economist.com/news/finance-and-economics/21643202-problem-not-super-rich-secure-v-poor [Accessed 5 Mar. 2016].
Tokyo Business Today. (2015). The Real Reason Behind the Widening Wealth Gap in Japan | Tokyo Business Today. [online] Available at: http://toyokeizai.net/articles/-/97176 [Accessed 14 Mar. 2016]
BOOTH, PHILIP. (2015) Deflating the over-inflated anti-deflation balloon. Institute for Economic Affairs [Online] 10th January. Available from: http://www.iea.org.uk/blog/deflating-the-over-inflated-anti-deflation-balloon
[Accessed: 2.06.15]
20000
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(Source: Worldbank)
BORDO, MICHAEL and FILARDO, ANDREW. (2005) Deflation in a historical perspective. Bank for International Settlements Working Papers No 186. [Online] Available from:
http://www.bis.org/publ/work186.pdf [Accessed: 01.06.15]
DADUSH, URI (2014) The Truth about Japan’s Economic Decline. Carnegie Endowment for International Peace [Online] 25th April. Available from:
http://carnegieendowment.org/2014/04/25/truth-about-japan-s-economic-decline) [Accessed: 2.06.15]
FARUQEE, HAMID and MÜHLEISEN, MARTIN (2001) Population Aging in Japan: Demographic Shock and Fiscal Sustainability. IMF Working Paper [Online] Available from:
https://www.imf.org/external/pubs/cat/longres.cfm?sk=4037.0 [Accessed: 2.06.15]