Linkage between macroeconomic conditions andinequality in Japan (Preliminary)
Nao Sudoy
Bank of Japan
Michio Suzukiz
Graduate School of Economics, University of Tokyo
Tomoaki Yamadax
School of Commerce, Meiji University
November 3, 2014
Abstract
A growing attention has been paid to the linkage between …nancial crisis andinequality after the Great Recession. In the current paper, we ask if …nancial crisis
causes inequality or alternatively if change in inequality causes …nancial crisis basedon time-series analysis. We construct monthly series of income and consumption
inequality in Japan using micro data set on Japanese households from the Family
Income and Expenditure Survey (FIES). We then formulate time series analysis on
the interaction between macroeconomic variables and inequality during the 1980s
to 2010s, a period that covers asset price boom, bubble burst, and following lost
decades. We …nd that changes in macroeconomic variables are transmitted tochanges in inequality. For instance, a rise in stock price leads to an increase ininequality. By contrast, we …nd no clear evidence that changes in inequality leadto changes in macroeconomic variables.
Keywords: Income Inequality, Consumption Inequality
JEL Classi…cation: E41

Keywords: Income and Consumption Inequality; Time-series Analysis
We acknowledge the Statistics Bureau, the Ministry of Internal A¤airs and Communications inJapan to use the Family Income and Expenditure Survey for this project. A part of this researchis …nancially supported by the Ministry of Education, Science, Sports, and Culture, Grant-in-Aid forYoung Scientists (B) 24730173. The views expressed in this paper are those of the authors and do notnecessarily re‡ect the o¢ cial views of the Bank of Japan.
yE-mail: nao.sudou@boj.or.jp.
zE-mail: msuzuki@e.u-tokyo.ac.jp.
xE-mail: tyamada@meiji.ac.jp.

11Introduction

A growing attention has been paid to the linkage between …nancial crisis and inequality
after the credit boom followed by Great Recession during the 2000s. Ostry et al. (2014)
based on a cross-country analysis argue that lower net inequality is robustly correlatedwith faster and more durable growth, for a given level of redistribution. By contrast,
Bordo and Meissner (2012) based on cross-country analysis argue that inequalities are
not the determinants of credit boom and …nancial crisis.
In this paper, we explore if increase in inequality causes …nancial crisis, or alternatively if bubble economy increases inequality with reference to Japan’s episodes. That
is, Japan’s economy witnesses a large and rapid asset price rise since the late 1980s,
asset price plummet during the early 1990s, and following long-lasting recession. Figure
1 displays key macroeconomic variables and inequality series. To see the linkage between macroeconomic variables and inequality series, we …rst construct a set of monthly
series of income and consumption inequality using the micro data survey on Japanesehouseholds, the Family Income and Expenditure Survey. We then formulate Vector Autoregression model that consists of the inequality series as well as key macroeconomic
variables.
From the time-series analysis, we …nd three classes of notable observations: (i) there
is statistically signi…cant transmission channel from aggregate macroeconomic variables
to inequality variables. In particular, asset price movements are important driver ofvariations in both income and consumption inequality, (ii) there is almost no feedback
mechanism from inequality variables to macroeconomic variables. That is, shocks toinequality variables do not a¤ect dynamics of aggregate macroeconomic variables, and(iii) transmission from shocks to income inequality to consumption inequality is limited.
In order to see how aggregate macroeconomic variables a¤ect inequality variables indetails, we divide sampled households into subgroups according to their income leveland formulate a VAR that consists of mean income and mean consumption of eachsubgroup household as well as aggregate macroeconomic variables. We …nd that shocks
to aggregate macroeconomic variables bring about heterogenous impacts on householdswith di¤erent income groups. For instance, shock to stock price has a disproportionately
positive impact on income of high-income households compared with income of lowincome households.
It is also important to note that our study only focuses on the short-run relationshipbetween macroeconomic activities and inequality. Our data sample covers about thirty
years. By contrast, studies that concentrate on the causality from the inequality to themacroeconomic dynamics such as growth rate, including Bordo and Meissner (2012) andOstrty et al. (2014), make use of longer annual time series over more than forty years.
This paper is related to three strands of literature. The …rst strand of literature examines the linkage between macroeconomic environment, in particular, business cycles
and developments in inequality. For instance, Krueger et al. (2011) summarize com2

mon features of developments in inequality in nine large countries and document thatearnings inequality appears to be strongly counter-cyclical. Storesletten et al. (2004)
conduct GMM using annual panel data of Panel Study on Income Dynamics (PSID) to
extract cyclicality of idiosyncratic labor market risk. They document that the risk isstrongly countercyclical. Related to the …rst strand of literature, the second strand ofliterature studies the linkage between …nancial crisis and inequality. Meyer and Sullivan(2013) focus on the impact of the current Great Recession on income and consumption
inequality in the U.S. Meyer and Sullivan (2013) …nd very distinct patters on income andconsumption inequality during the Great Recession (after the Lehman shock): consumption inequality during the Great Recession rather falls, although the income inequality
and unemployment rate rises during the same period. Iacoviello (2008) and Coibon et al.
(2014) discuss the linkage between households debt accumulation and increase in income
inequality. The third strand of literature examines di¤erences across households in termsof households’responses to changes in aggregate macroeconomic variables. Parker andVissing-Jogensen (2009) based on the Consumer Expenditure Survey document that theconsumption growth of high-consumption households is signi…cantly more exposed toaggregate ‡uctuations than that of the typical household.
The structure of this paper is as follows. Section 2 explains our micro data set
and construction methodology of time series used in our analysis. Section 3 empiricallyinvestigates how macroeconomic variables, including asset price, and inequality variables
are interrelated from each other. Section 4 discusses the reason behind our empiricalobservations. Section 5 concludes.

2

Inequalities and Macroeconomy

In this section, we empirically explore how macroeconomic variables a¤ect inequality
variables by employing time series analysis, such as Vector Autoregression (VAR) andhistorical decomposition, that is commonly used in macroeconomics. In particular, we
are interested in analyzing how asset price rises in the late 1990s and asset price falls
during the early 1990s have a¤ected the developments of inequality variables. In addition,
we explore how income and consumption inequality interrelated from each other.

2.1

Data

To conduct the time-series analysis on economic inequalities, we construct a monthly timeseries of variance of logarithm of earnings and consumption as well as mean of income
and consumption of households that are categorized by their characteristics. The timeseries is constructed from the micro data survey, the Family Income and Expenditures
Survey (hereafter FIES), that is compiled and released by the Statistics Bureau, Ministry3

of Internal A¤airs and Communications in Japan.1
The FIES is a monthly diary survey that collects earnings, income and expenditures ofJapanese households and reports characteristics of sampled households including household members’ ages, gender, occupation, industry of employment, marital status, andregion of residence. The survey reports monthly labor income of household head, spouseand the sum of other household members Unfortunately, the FIES does not collect information about education, which prohibits us to estimate college premium directly fromthe FIES. The consumption expenditures include food, services, nondurable, semidurable
and durable expenditures. The survey was …rst conducted in 1953. However, we haveaccess only to data for the period from January 1981 to December 2008 for the purposeof the current research. We use data of multi-person households only because the data of
single-person households is available only after 2002. The survey contains approximately
8,000 households per month. Surveyed households reports monthly earnings and expenditures for a maximum of six consecutive months. The sampled households overlap, andone-sixth of the total sample is generally replaced by new households each month.
We closely follow Lise, et al. (2014), in which they study the evolution of economic
inequality of Japanese economy from the boom time including the bubble period oflate 1980s to the lost decades, in constructing the time series of inequality measures andmeans. The key di¤erence between Lise, et al. (2014) and our study is that we employ themonthly series instead of annual series. The monthly inequality series exhibit seasonalityre‡ecting seasonal variations in households’income and consumption at the micro level.
In particular, the bonus payment, which is typically paid twice in a year, in June (orJuly) and December, makes strong seasonality for labor income. To obtain the seasonallyadjusted series, we …rst construct the seasonally unadjusted monthly series and apply
X12 ARIMA to these series.
We focus on the monthly series of before-tax equivalized household labor income
yL and nondurable expenditure cN D .2 The household labor income is calculated as
the sum of labor earnings of household head, spouse and other household members,
and it is equivalized using the OECD equivalent scale. We restrict the usage of data
set to households with employed household head aged 25–59, because it is di¢ cult tomeasure monthly income of self-employed workers. Both rising unemployment rates andincreasing number of non-standard workers such as contingent workers and part-timeworkers undoubtedly contribute recent trend of rising inequality of Japanese economy.
In regard to this point, our estimates may underestimate the true whole inequality.
However, even if we focus on the employed household, the trend in economic inequality
appears positive. We use nondurable expenditures as consumption to be consistent with
1

FIES is a source data of the households’ expenditures weighting used to construct Consumption
Price Index. FIES is also a primary source data of Private Consumption series in GDP that is compiled
and published from the Cabinet O¢ ce.
2
We have also conducted the time series analysis on disposable income, and we con…rmed that our
main results do not change even if we use disposable income.

4

consumption smoothing.3 That is, housing, purchasing cars and durable expenses suchas furniture are excluded. Every variables are de‡ated to the 2005 price using the CPI.

2.2

Inequality and Macroeconomic Variables

2.2.1

VAR

Since the pioneering work by Sims (1980) and Christiano et al. (1999), a good numberof works in macroeconomic make use of identi…ed vector autoregression (hereafter VAR)
to measure the response of aggregate macroeconomic variables to an interested structual
shock, such as monetary policy shock. In this section, we make use of VARs so as toestimate how aggregate macroecoomic variables and income and consumption inequality
are interrelated. We formulate a VARs using …ve variables. The variables include stock
price (Nikkei 225), unemployment rate, index of industrial production (hereafter IIP),
variance of log income, and variance of log consumption. The data covers from January
1981 to December 2008. All series are seasonally adjusted and …rst di¤erenced. The
number of lag is chosen according to AIC criteria. Using a Cholesky decomposition withordering of variables as listed above, we compute response of macroeconomic variables
and inequality variables to an two-standard deviation innovation to each of the variable.
Figure 2 displays cumulative impulse response function of inequality variables to …ve
identi…ed shocks. Shock to stock price increases inequality of both income and consumption in a statistically signi…cant manner. Shock to IIP and to unemployment rate only
increases consumption inequality and they do not have a statistically signi…cant impact
on income inequality. In other word, consumption inequality is more reactive to shocks
to macroeconomic variables than income inequality. It is also important to note that
inequality increases in response to both adverse and favorable aggregate macroeconomic
shocks. While positive shock to IIP and stock price increase industrial production andconsumption inequality, a positive shock to unemployment rate decreases industrial production and increases consumption inequality. Regarding the linkage between income andconsumption inequlty, it is noted that while shocks to income inequality are translated
to consumption inequality in a statistically signi…cant manner, shocks to consumption
inequality are barely translated to income inequality.
Figure 3 displays cumulative impulse response function of macroeconomic variables
to …ve identi…ed shocks. It shows that feedback from shocks to inequality variables tomacroeconomic variables is small. In response to shocks to both inequality variables, themacroeconomic variables barely change in the wake of shocks to inequality variables.
2.2.2

Historical Decomposition

Using the estimated results of the VARs, we decompose time-series variations in income
and consumption inequality into shocks to stock price, IIP, unemployment rate, income
3

For the detailed de…nition on nondurable expenditure, see Lise, et al. (2014).

5inequality, and consumption inequality. By doing this, we intend to capture the role ofeach shock in accouting for variations in equality variables over the sample period, inparticular, during the boom and during the bubble burst. Figure 4 displays the historical decomposition of income inequality variations and Figure 5 displays the historicaldecomposition of consumption inequality variations. For both inequality variables, thebulk of variations are accounted for by own shocks. For both variables, what comes tothe second largest shock is shocks to stock price. Shocks to stock price has played an
important role in driving income and consumption inequality in particular from the late1980s to the early 1990s. Their in‡uence have gradually faded away in the subsequent
periods. In recent years prior to the Lehman crisis, shocks to stock price has started tocontribute to driving up ineuality.

2.3

Source of Inequality

To see how aggregate macroeconomic variables a¤ect inequality, we formulate two VAR
each using eight variables. The …rst VAR includes the same three macroeconomic variables used above, stock price (Nikkei 225), unemployment rate, IIP, and mean of households’s income with …ve di¤erent income quantiles: from 0th to 20th quantile, 20th to40th quantile, 40th to 60th quantile, 60th to 80th quantile, and 80th to 100th quantile.
The data covers from January 1981 to December 2008.
Figure 6 displays cumulative impulse response of mean income of each subgroups toshocks to macroeconomic variables. Stock price shock results in the largest and signigicant increase in the mean income of the highest-income subgroup. Though it results
in increase in the mean income of other subgroups, the impacts are minor comparedwith that on the highest-income subgroup. The similar patter is observed regarding theimpact of shock to IIP. Shocks to unemployment bring about only minor impacts on allof the subgroups.
Figure 6 displays cumulative impulse response of mean consumption of each subgroups to shocks to macroeconomic variables. Stock price shock results in the largest
and signigicant increase in the mean income of the highest-income subgroup. Though
it results in increase in the mean income of other subgroups, the impacts are minor
compared with that on the highest-income subgroup. The similar patter is observed
regarding the impact of shock to IIP. A positive shock to unemployment bring about aasymmetric impacts on households.

6

3Conclusion

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9

Accum ulated Respons e to Cholesky One S.D. Innovations ± 2 S.E.
Accumulated Response of VARLOGY 1 to STOCKPRICE

Accumulated Response of VARLOGY 1 to UNEMPLOY MENT

Accumulated Response of VARLOGY 1 to IIP

.06

.06

.06

.04

.04

.04

.02

.02

.02

.00

.00

.00

-.02

-.02
5

10

15

20

25

30

35

40

Accumulated Response of VARLOGY 1 to VARLOGY 1

-.02
5

10

15

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Accumulated Response of VARLOGY 1 to VARLOGC

.06

.06

.04

.04

.02

.02

.00

.00

5

10

15

20

25

30

35

40

Accumulated Response of VARLOGC to STOCKPRICE
.04
.03
.02
.01
.00
-.01

-.02

-.02
5

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40

-.02
5

Accumulated Response of VARLOGC to UNEMPLOY MENT

10

15

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40

Accumulated Response of VARLOGC to IIP

5

.04

.04

.03

.03

.03

.02

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.01

.01

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.00

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-.01

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-.02
5

10

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Accumulated Response of VARLOGC to VARLOGY 1

.04

-.02

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-.02
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5

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Accumulated Response of VARLOGC to VARLOGC
.04
.03
.02
.01
.00
-.01
-.02
5

10

15

20

25

30

35

40

Figure 2: Cumulative impulse response functions of income and consumption inequality to shock to stock price, IIP, unemployment rate, and themselves.

10

Accumulated Response to Cholesky One S.D. Innovations ± 2 S.E.
Accumulated Response of STOCKPRICE to STOCKPRICE

Accumulated Response of STOCKPRICE to UNEMPLOYMENTAccumulated Response of STOCKPRICE to IIP

.4

.4

.4

.2

.2

.2

.0

.0

.0

-.2

-.2

-.2

-.4

-.4
5

10

15

20

25

30

35

40

-.4
5

10

15

20

25

30

35

40

Accumulated Response of STOCKPRICE to VARLOGY1

Accumulated Response of STOCKPRICE to VARLOGC

.4

.4

.2

.2

.0

.0

-.2

-.2

-.4

-.4

5

10

15

20

25

30

35

40

Accumulated Response of UNEMPLOYMENT to STOCKPRICE
.10
.05
.00
-.05
-.10
-.15

5

10

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35

40

-.20
5

Accumulated Response of UNEMPLOYMENT to UNEMPLOYMENT

10

15

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Accumulated Response of UNEMPLOYMENT to IIP

5

.10

.10

.10

.05

.05

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.00

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-.05

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-.20
5

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Accumulated Response of UNEMPLOYMENT to VARLOGC.10

10Accumulated Response of UNEMPLOYMENT to VARLOGY1

10

15

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30

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40

5

Accumulated Response of IIP to STOCKPRICE

10

15

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Accumulated Response of IIP to UNEMPLOYMENT

.2

.2

.1

.1

.0

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.00
-.05
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Accumulated Response of IIP to IIP

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Accumulated Response of IIP to VARLOGY1

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-.1

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Figure 3: Cumulative impulse response functions of stock price, IIP, unemployment
rate to shock to themselves, income inequality, and consumption inequality.

11

Figure 4: Historical decomposition of income inequality ito shock to stock price, IIP,
unemployment rate, income inequality, and consumption inequality.

12Figure 5: Historical decomposition of consumption inequality ito shock to stock price,
IIP, unemployment rate, income inequality, and consumption inequality.

13

Accumulated Response to Cholesky One S.D. Innovations ± 2 S.E.
Accumulated Response of INCOME02 to STOCKPRICE

Accumulated Response of INCOME02 to IIP

Accumulated Response of INCOME02 to UNEMPLOYMENT

.012

.012

.012

.008

.008

.008

.004

.004

.004

.000

.000

.000

-.004

-.004

-.004

-.008

-.008

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-.012

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5

Accumulated Response of INCOME04 to STOCKPRICE

10

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Accumulated Response of INCOME04 to IIP

5

.015

.015

.010

.010

.010

.005

.005

.005

.000

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-.005

-.005

-.010
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10

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Accumulated Response of INCOME06 to IIP

5

.012

.012

.008

.008

.008

.004

.004

.004

.000

.000

.000

-.004

-.004

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-.008
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Accumulated Response of INCOME08 to IIP

5

.015

.015

.010

.010

.010

.005

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.005

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.000

-.005

-.005

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Accumulated Response of INCOME10 to IIP

5

.03

.03

.02

.02

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.01

.01

.01

.00

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-.01
5

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Accumulated Response of INCOME10 to UNEMPLOYMENT

.03

-.01

40

-.010
5

Accumulated Response of INCOME10 to STOCKPRICE

35

Accumulated Response of INCOME08 to UNEMPLOYMENT

.015

-.010

30

-.008
5

Accumulated Response of INCOME08 to STOCKPRICE

25

Accumulated Response of INCOME06 to UNEMPLOYMENT

.012

-.008

20

-.010
5

Accumulated Response of INCOME06 to STOCKPRICE

15

Accumulated Response of INCOME04 to UNEMPLOYMENT

.015

-.010

10

-.01
5

10

15

20

25

30

35

40

5

10

15

20

25

30

35

40

Figure 6: Cumulative impulse response functions of mean income of households withdi¤erent income quantiles to shock to stock price, IIP, and unemployment rate.

14

Accumulated Response to Cholesky One S.D. Innovations ± 2 S.E.
Accumulated Response of CONSUMPTION02 to STOCKPRICE

Accumulated Response of CONSUMPTION02 to IIP

Accumulated Response of CONSUMPTION02 to UNEMPLOYMENT

.015

.015

.015

.010

.010

.010

.005

.005

.005

.000

.000

.000

-.005

-.005

-.005

-.010

-.010

-.010

-.015

-.015
5

10

15

20

25

30

35

40

-.015
5

Accumulated Response of CONSUMPTION04 to STOCKPRICE

10

15

20

25

30

35

40

Accumulated Response of CONSUMPTION04 to IIP

5

.015

.015

.015

.010

.010

.010

.005

.005

.005

.000

.000

.000

-.005

-.005

-.005

-.010

-.010
5

10

15

20

25

30

35

40

10

15

20

25

30

35

40

Accumulated Response of CONSUMPTION06 to IIP

5

.015

.015

.010

.010

.010

.005

.005

.005

.000

.000

.000

-.005

-.005

-.005

-.010
5

10

15

20

25

30

35

40

10

15

20

25

30

35

40

Accumulated Response of CONSUMPTION08 to IIP

5

.015

.015

.010

.010

.010

.005

.005

.005

.000

.000

.000

-.005

-.005

-.005

-.010
5

10

15

20

25

30

35

40

10

15

20

25

30

35

40

Accumulated Response of CONSUMPTION10 to IIP

5

.020

.020

.015

.015

.015

.010

.010

.010

.005

.005

.005

.000

.000

.000

-.005

-.005

-.005

-.010
5

10

15

20

25

30

35

40

40

10

15

20

25

30

35

40

10

15

20

25

30

35

40

10

15

20

25

30

35

40

Accumulated Response of CONSUMPTION10 to UNEMPLOYMENT

.020

-.010

35

-.010
5

Accumulated Response of CONSUMPTION10 to STOCKPRICE

30

Accumulated Response of CONSUMPTION08 to UNEMPLOYMENT

.015

-.010

25

-.010
5

Accumulated Response of CONSUMPTION08 to STOCKPRICE

20

Accumulated Response of CONSUMPTION06 to UNEMPLOYMENT

.015

-.010

15

-.010
5

Accumulated Response of CONSUMPTION06 to STOCKPRICE

10

Accumulated Response of CONSUMPTION04 to UNEMPLOYMENT

-.010
5

10

15

20

25

30

35

40

5

10

15

20

25

30

35

40

Figure 7: Cumulative impulse response functions of mean consumption of householdswith di¤erent income quantiles to shock to stock price, IIP, and unemployment rate.

15