Japan’s newest bubble is in poverty. This may sound odd to anyone who’s watched the Nikkei index go gangbusters for three years. But the stock market’s rally to levels not seen since 1996 masks a not-so-unrelated surge in inequality.

Call it the underbelly of Abenomics, Prime Minister Shinzo Abe’s economic revival program. The problem: structural reforms to raise incomes and competitiveness haven’t panned out, while the central bank’s historic liquidity injections are boosting stocks. The upshot: those owning lots of financial assets (Japan’s “1 percent”) are thriving under Abenomics at the expense of everyone else.

Recently, former Federal Reserve Chairman Ben Bernanke denied that quantitative easing increases inequality. Maybe not in the United States, but QE surely does in Japan, where even central bank concedes the rich-poor divide is widening. A Bank of Japan survey found that in 2015, single-member households with no financial assets hit 48 percent, the highest since 2007 (the last time Abe was prime minister). That’s up from 39 percent in 2014. By contrast, households owning stocks, bonds and other assets saw their paper wealth surge on average to an all-time high of about $150,000.

And some say Thomas Piketty is nuts. Japan stands as living, and still-evolving, proof of the French economist’s contention that capitalism is being increasingly rigged in favor of the haves at the expense of the have-nots.

In April, the second anniversary of the BOJ’s QE, Akio Doteuchi of the NLI Research Institute warned that Japan’s hard-won reputation for egalitarianism hangs in the balance. “It’s like walking in a mine field,” Doteuchi told The Japan Times. “Many risks lie ahead of you. Even if you are in the middle class, if something unexpected happens, you could slip into poverty.”

So what are we to make of all this as 2016 approaches? Three things.

One: Haruhiko Kuroda is right to hold his fire. Traders have been disappointed by the BOJ governor’s reluctance to launch a QE3 onslaught. Since the first two — in April 2013 and October 2014 — Japan fell into yet another recession [although revised GDP figures released Dec. 8 say otherwise] deflation persists and stingy CEOs aren’t sharing profits from a weaker yen with workers. Hence the pressure on Kuroda to further open the monetary spigot.

Yet as the BOJ’s own research suggests, all Kuroda’s team is doing is creating two bubbles — one in the Nikkei, one in inequality. This latest Nikkei boom pales in comparison to the 1980s (38,916 then, under 20,000 today). The market’s disconnect with economic reality, though, is easy to recognize. Shares in Honda, Sony and other Japan Inc. icons are rising not because executives brought great new products to market or thanks to restructuring. They’re rising because the yen’s 30 percent depreciation is pumping up profits. In fact, one can argue the weak yen is bad for Tokyo-listed companies in the long run, as it reduces the urgency to become more innovative.

Two: Abe’s reforms must shift aim. To be charitable, Abenomics can claim a few modest successes: greater access to credit, tighter corporate governance and prodding the Government Pension Investment Fund to increase equity holdings. But each can best be seen as market-related gambits that do little to encourage companies to fatten paychecks or households to spend more. The related wealth effect makes these steps little more than welfare for the wealthy.

Abe’s pledge to empower women is weak and, in some ways, counterproductive. His Liberal Democratic Party has simultaneously made it easier for companies to make more jobs informal — part-time work that pays less and offers few benefits or security. These unenviable gigs are disproportionately going to women. Already, as Jake Adelstein and Nathalie Kyoko-Stucky of the Japan Subculture Research Center point out in a recent Los Angeles Times piece, 54.6 percent of single-parent households — mostly headed by women — live in poverty. That puts wealthy Japan among the highest in the ranks of Organization for Economic Cooperation and Development members. Expect this underclass to grow as QE plays the lead Abenomics role.

Three: The BOJ may be fanning deflation, not ending it. One of the key reforms Abe hasn’t gotten around to yet is loosening labor markets. In the fantasies of many economists, it means an end to lifetime employment and productivity-killing seniority-based promotions and greater innovation. Along with the informalization of labor, what it really means is Japan Inc. is free to fire millions of workers. Where, exactly, will these unemployed masses find jobs and comparable salaries to boost consumption and inflation, as per Abe’s strategy?

It’d be fine if Tokyo were cutting bureaucratic barriers to starting new companies, creating spaces for new industries, importing waves of foreign entrepreneurs or building giant social safety nets to catch the newly jobless. The lack of nets to catch the unemployed explains why Toshiba and Fujitsu may merge loss-making personal computer units rather than just shut them. In Japan, companies are the safety net.

None of these policies are forthcoming, even as sub-zero interest rates undermine the middle class. Meanwhile, the exporting industries that once formed Japan’s core face increasing competition from China, South Korea and Southeast Asia.

Japan’s deflation, remember, is more of a secular phenomenon than a cyclical one. An aging, high-cost nation sitting in a cheap, young and vibrant neighborhood must continually retool growth models to protect living standards. Unfortunately, Abe left the central bank with a task zero rates can’t accomplish. It’s great the wealthy have Kuroda to protect them from losing. If only the other 99 percent were so lucky.

William Pesek, executive editor of Barron’s Asia, is based in Tokyo and writes on Asian economics, markets and politics. www.barronsasia.com

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