Japan has a form of capitalism that works

by Jesper Koll

Japan deserves the Nobel Prize for applied economics. I say this not because Japan’s capitalism has no flaws, but because the overall outcome produced by the Japanese economic system is extremely positive. Japan manages to balance income growth and income distribution so well that, unlike many other advanced economies, Japan’s society is resilient against the rise of popular nationalism a-la Donald Trump in America, Jean-Marie Le Pen in France or Xi Jinping in China.

The goal of an economy is to create and sustain a stable society. To do so, an economy must produce growth and must distribute the spoils of that growth in a fair and equitable way. So let’s look at the scorecard — how wealthy are the people and how is that wealth distributed? At the end of last year, the median net financial wealth — all financial assets minus liabilities — for households in Japan stood at $96,000. In the United States, the same number was a mere $50,000. In other words, the average Japanese is de facto twice as wealthy as the average American.

What about the distribution of wealth? At the bottom end in Japan, approximately 9 percent of households own less than $10,000 worth of net financial assets. In America, that’s true for 28 percent of all households. Make no mistake — Japan certainly does have an underbelly of poor, but in my view the data speaks for itself: In Japan’s economy, only relatively few are truly left behind financially.

Meanwhile, America does better at the top end of the wealth pyramid: Approximately 7 percent of American households own net assets worth more than $1 million. In Japan, that’s true for only 2 percent of households. So, in percentage terms, America has three times more very wealthy people than Japan, but America also has three times more poor people. From a social and political perspective, America has become a political powder keg precisely because of that heavy skew toward the poor and financially left-behinds. This is where poor economic management meets real-world democracy: When U.S. presidential candidate Hillary Clinton talked about “deplorables” during the 2016 campaign she missed the point: What is truly deplorable is the fact that the U.S. ruling elite, of which Clinton is a leading member, allowed for this gravely destabilizing financial inequality to happen in the first place.

Former British Prime Minister Margaret Thatcher once said: Making the rich poorer does not make the poor richer. Personally, I completely agree with this statement and do think any policymaker should take it as a guiding principle. And in Japan, Thatcher’s principle is very much observed. How so?

Let’s look at the income data, i.e. the annual flow of median after-tax earnings of households (I am using the OECD database here, numbers rounded to the nearest thousand): between 2000 and 2017, American median incomes rose by approximately $24,000, from $36,000 to $60,000. Over the same period, Japanese median incomes rose from $27,000 to $51,000, i.e. a similar increase of $24,000. So much for the myth that Japan has been stagnating. True, exports go up and down, and so do corporate fortunes, and corporate America certainly did outperform corporate Japan in GDP terms, but household incomes in both countries grew by basically the same amount in dollar terms.

However, while median household incomes between Japan and the U.S. prospered at about the same pace, the bottom 10 percent of income earners in Japan strongly outperformed their American counterparts: Between 2000 and 2017, the bottom 10 percent of income earners saw a $15,000 rise in earnings in Japan, from $17,000 to $32,000. Their U.S. counterparts got only $10,000 more income, from $18,000 to $28,000. Clear speak: If you are among the bottom 10 percent of income earners, you are now better off in Japan than in America ($32,000 versus $28,000) — despite the fact that median incomes in America are higher than in Japan.

How did Japan successfully bring up the poor? Not by taxing the rich, but by very positive demographic dynamics in Japan: The growing scarcity of labor is forcing steadfast improvement in employment offered — not part time or contracts, but full time — as well as steadfast pay increases for particular jobs at the bottom end of the employment attractiveness spectrum. Sure, general white collar sales or management jobs have seen relatively pedestrian pay increases, but truck drivers, construction workers and shipbuilders have seen their pay almost double in recent years.

But the real power has been the sharp increase in female participation. “Womenomics” accounts for almost two-thirds of the strong rise in median incomes for Japan’s bottom 10 percent. Here, the government deserves some credit for embracing the underlying trend and actively encouraging positive changes in employers attitudes. In addition, this year’s tax code changes should make it easier for spouses to seek higher incomes — not by taxing the rich but by removing a tax ceiling for the poor.

Of course, it will be desirable to see rising female participation more broadly spread toward the higher end of the income pyramid, but the overall impact is already very positive in general for society as a whole, for closing the gap between the rich and the poor in particular.

All said, Japan’s economy is working well and deserves more attention as a model for “capitalism that works.” Most importantly, the system is very good at bringing up the bottom of the income pyramid and generating exceptional inclusion for all in financial wealth creation. This is why there will not be a nationalist-populist movement in Japan — the system is working. Yes, Japan does deserve the Nobel Prize for applied economics.

Based in Tokyo, Jesper Koll is WisdomTree’s head of Japan. Researching and investing in Japan since 1986, he is consistently ranked as a top Japan strategist/economist. He publishes blogs at www.wisdomtree.com/blog .