Japanese capitalism can teach U.S. lessons in income growth and equality

U.S. President-elect Joe Biden can learn a lot from Japan.

I say this not because Japan-style capitalism does not have its share of problems, but because the overall result generated by the Japanese economic system is extremely positive. Japan is the global best-in-class for balancing both income growth and income distribution. The result is not just extraordinary socioeconomic stability, but also strong resilience against the temptations of divisive populism — a la Donald Trump.

Creating and sustaining a stable society is one of the fundamental goals of economic policymaking. For this, an economy must both grow and distribute the spoils of wealth creation in a fair and equitable way. So what’s the score? 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 $104,000. In the United States, it was $62,000.

Clear-speak: The average Japanese is actually about 40% richer than the average American.

So Japan clearly beats America on the absolute amount of wealth owned by the average household. But what about the distribution? At the bottom end in Japan, approximately 5.5% own less than $10,000 worth of net financial assets. In America, that’s true for 28.4%. There is no denying that Japan does have an underbelly of poor people, but compared to America, relatively few are truly left behind financially.

If at all, it should be a national embarrassment that almost 1 in 3 Americans does not have $10,000 to their name, particularly since the U.S. stock market keeps surging to new historic highs.

In contrast, America does way better than Japan at the top end of the wealth pyramid: 7.1% of Americans own more than $1 million of net financial assets. In Japan, that’s true for only 2.7%. So in percentage terms, America has more than two times more very wealthy people than Japan, but it also has more than five times more poor people.

From an economist’s perspective, America has become disunited and a sociopolitical power keg precisely because of that heavy skew towards the poor and financially left-behind.

Make no mistake — for Joe Biden and his team of policymakers, the real challenge will be how to counter U.S. economic inequality, i.e., how can America become more like Japan?

Here it is important to recall something former British Prime Minister Margaret Thatcher said: Making the rich poorer does not make the poor richer.

Personally, I think this is an excellent guiding principle for any policymaker. The goal must be to create opportunity for success, not to constrain it. Importantly, Japan very much lives up to Thatcher’s principle. How so?

Analyzing household income data, i.e., the annual flow of median after-tax household earnings, reveals the following (I am using the OECD database here, rounded to the nearest thousand): In the past eight years, American median incomes rose by approximately $24,000, from $36,000 to $60,000. Japanese incomes rose from $27,000 to $51,000, i.e., a similar rise of $24,000.

So much for the myth that Japan has been stagnating. True, exports go up and down, and corporate America did very much outperform corporate Japan, but household median incomes grew by basically the same amount in dollar terms.

However, what’s true for the median is not true for the bottom 10%. Here, Japan strongly outperformed America: In the past eight years, the bottom 10% of income earners saw a $15,000 rise in earnings in Japan, from $17,000 to $32,0000. In contrast, their American counterparts got only $10,000 more income, from $18,000 to $28,000.

In other words, if you are in the bottom 10% of income earners, your pay increased 30% faster if you were Japanese rather than American; and, for the first time in history, you are now better off in Japan than 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 the combination of positive demographic dynamics and re-enforcing policy measures. Yes, positive demographics because the growing scarcity of labor is forcing steadfast improvement in the type of employment contracts offered, i.e., not just part-time, but full-time as well as solid pay increases at the bottom end of the employment attractiveness spectrum.

Construction workers, truck drivers, shipbuilders and teachers, for example, have seen double-digit pay rises almost every year for the past six or seven years. (Obviously the 2020 COVID-19 recession has put a cyclical stop to this, but the structural labor  and skills shortage is poised to persist).

More importantly, the policy focus on greater diversity and gender-equal employment opportunities has helped accelerate a surge in female participation in the labor force. As much as two-thirds of the rise in incomes for the bottom 10% may be accounted for by “Womenomics.”

To be sure, the fact that, in contrast, women accounted for barely 1% of the growth in the top 10% of Japan’s income pyramid clearly suggests that “Womenomics” has a long way to go in Japan. However, the fact that ex-Prime Minister Shinzo Abe did make inclusion and diversity a mainstay of his policy agenda points in the direction “Team Biden” will want to follow.

Personally, a key measure for success or failure of Joe Biden’s economic policy will be whether America’s bottom 10% will see accelerating income growth similar to Japan’s.

All said, American policymakers can learn a lot from Japan. Of course, there are many complications and complexities that make it impossible to import Japan-style capitalism and economic policy into America. However, the lesson from Japan is clearly that yes, it is possible to balance income growth and income distribution.

I, for one, am confident America’s new leadership team will study Japan closely and find an American way towards both better socioeconomic balance and greater national unity.

Jesper Koll is the senior adviser to Wisdomtree Investments and is consistently ranked as a top Japan strategist/economist. He publishes blogs at www.wisdomtree.com/blog.