Japan has a form of capitalism that works

**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 .*

## Comments

* This comment was deleted.
	+ S.J. (at Guest): It' hard to fathom a statement like this from Jesper Koll, unless one were to attribute it to some type of Uncle Tomism. Japan is after all the original Trumpian country, a fact that was even confirmed by Steve Bannon on his recent trip to Japan a few months ago when he stated that Abe was "Trump before Trump".
	+ E.K. (at Guest): And the people want them there.

	Ware ware
		- A.J.S. (at E.K.): No, they don't. LDP + Komeito together have received only about 40% of the votes cast in each election since 2012. Most votes are against them. It's the election system (legal rules for translating votes into seats) that allows them to get 2/3 supermajorities despite being disliked.
* T.: Japan does not have free market capitalism. They have insane cronyism and corporatism that is destroying the country. They have protectionism and tons of regulations imposed by big corporations who bribe and lobby the politicians to stop the competition. Only an idiot who doesn't know anything about Japan and Capitalism can claim that Japan has a capitalism, and that it works.
	+ S.J. (at T.): Yes, Japan is one of the most indebted countries in the world, with a Debt to GDP ratio of 240 percent. A large part of this has to do with the government's infrastructure spending on never-used-highways and bridges-to-nowhere which have been built all over Japan with the sole purpose of providing employment, to funnel money to Japan's powerful construction industry, and to ensure LDP's stronghold on power.

	The other reason, as you rightly mention, is Japan's protectionism and famously closed markets. This ensures that foreign competition stays out and money stays in Japan in the pockets of corporate Japan.
		- T. (at S.J.): The development of Japan from the 50s to late 80s was like a mini version of what is happening in China today. The infrastructure in Japan was build by state-owned companies with borrowed money, the largest export companies were too state-owned, like the steel and shipbuilding industry. In the late 80s, some of those giant state-owned export companies were privatized, while others were only partly privatized while the State retained some share, such as NTT. In the early 2000s, the most free-market reformist prime minister Japan has ever had in its entire history - Koizumi privatized the state-owned highway companies and the sub-way, as well few other state-owned companies, later however LDP bought shares in the highway companies again. Those shares are a form of revolving door, which the State bureaucrats can use to levy power over the economy for their own benefit.

		Something similar is happening in China right now. Giant state-owned companies are either privatized or given to concession, but because China is a massive country, several economic and political models can be found. You can see the Japan-model, the Singapore model, the Hong-Kong model, even some parts have the US model.
* A.J.S.: This article's statistics do not accurately reflect Japanese government figures, and overstate both wealth and income. The government's net wealth calculation is based on four different survey indices with widely varying results. By one measure that excludes the value of house and land, the number of those surveyed with ZERO net wealth skyrockets. Median income measured in JPY was ¥5,060,000 in 2000, and ¥4,280,000 in 2016 (the last year for which there are official statistics) -- nowhere near US$51K. The bottom decile in 2016 earned somewhere under ¥1,500,000 -- in fact the bottom quintile (20%) earned no more than ¥2,000,000. Again, far below the quoted value of $32K. Nominal household income since the late Showa period has been flat, peaking around 1999 and gently declining or treading water since then.

A more detailed comment of mine with citations was deleted as spam by Disqus -- I have asked JT to reinstate it, so I hope it will reappear soon.
* sd: Mr. Koll does a good job of ignoring some basic facts in making his case for how great Japanese capitalism is. For example, more than 38 million people are employed in nonregular, contract jobs which pay significantly less than regular full time jobs. In 1984 only 6 million people were in these lower end jobs. Women are disproportionately in these jobs. Women make only 73% of what men do with much less hope of advancement to higher paid, permanent jobs as supervisors or executives. Any wonder why the age of marriage has risen and the birth rate has gone down?!? Single Moms are much poorer than the national average.

There is less populism in Japan because the government does not allow foreign immigrants to come live there in any significant numbers. Foreign interns are allowed to work there but with no hope of permanent residence. So, the native born Japanese feel no sense of threat from outsiders moving into the country. The native Japanese have managed to ignore the 3rd and 4th generation Koreans who are not allowed citizenship.

I wish the JT would publish op ed pieces that are not so clearly inaccurate or biased as this one is.
* C.G.: What. Japan has a per capita GDP adjusted for purchasing power, of $42,700,(2017 USD, adjusted for purchasing power parity) so can not possibly have a situation where their people are clearing 96,000 (USD). The USA has a per capita GDP of $59,500 adj for purchasing power parity. As for populous movements, that is called democracy, and there is no comparison between Trump and those who support him and the fascist in France. How insulting, and libelous. Those remarks could not be substantiated with any objective evidence.

Japan is the most homogeneous culture on earth; virtually all of it's voters are and have always been Japanese, by birth, genetics, and history. So, there is less room for a corrupt political party that has been put out of power at every level of government in 33 out of 50 states, and partly out in several more, to pit people against one another in attempt to claw their way back into power, having absolutely nothing else to offer people because they are devoid of ideas.

Japan also does not have a corporate media that is stacked not with journalists, but with former activist, office holders, and losers of the losing party (or their relatives) who turn their press into propaganda outlets for their political party. But all has failed. Trump defied them all. Moreover, he is doing a better job with the economy, foreign policy, national security etc than either of the two Presidents before him, which CAN be proven with OBJECTIVE EVIDENCE. Trump remains the most popular national politician in America, and when it comes to job performance, he is shaping up to be one of the greatest American Presidents since Eisenhower.

Trump may be a nationalist in the tradition of virtually every President America has ever had before Obama; meaning proud of his own country, but he is NOT an isolationist. Indeed, he is taking on the most difficult problems in the world that the past 2-4 administrations feared to do. As for Trump's brand of nationalism, every nation should be proud of their nation. That is what Americans mean by nationalism. Europeans associate nationalism with fascism, and have a different definition based on their history. In the USA, nationalist has always meant being proud of your own heritage and nation, as is the right of people in every nation unless they have a mental disorder.
	+ R.W. (at C.G.): "he is doing a better job with the economy, foreign policy, national security etc than either of the two Presidents before him, which CAN be proven with OBJECTIVE EVIDENCE" The economy has been rising for the past 8 years. We could have a potato as president and the economy would still be where it is. National Security? You mean the right wing terrorism/mass shootings in 2017/18 that has broken records? His foreign policy is the same as Obama's. Still in Afghanistan, still in Syria. The ONLY different thing is North Korea and thats because South Korea elected a pacifist left wing president who wants peace.

	"Trump remains the most popular national politician in America"
	Popular? Yes, no shit. He is the president. But popular does not equate to approval which is one of the lowest at 40%.

	"comes to job performance, he is shaping up to be one of the greatest American Presidents since Eisenhower" this is too funny
* A.J.S.: The statistics in this article are wildly misleading.

The Japanese government hasn't yet released median income statistics for 2017. Their figure for 2016 (H28) is ¥4,280,000 -- a far cry from US$51,000. See Fig. 11 in 平成28年 国民生活基礎調査の概況」at p. 13. For 2000 (H12) the figure was ¥5,060,000. See 「平成12年 国民生活基礎調査の概況」webpage, item II.2. The same diagram in the H28 report shows that the income for the bottom decile is well under ¥2,000,000 -- in fact, 19.6% of those households surveyed had incomes under ¥2,000,000. That is a truly shocking and depressing fact. Finally, look at Fig. 10 in the H28 report (p.10) for historical trends in household income going back to Showa 60 (1985): what you see is FLATNESS, or a slight decline since around 1999.

As for the net wealth figure, this statistic is based on four microsurveys conducted with differing frequency. Two surveys include house and land values, two do not. There is very wide variation in the distributions of wealth among the four surveys, with one of the surveys that doesn't include real estate values showing the largest number of respondents having ZERO financial assets. For a detailed discussion of the statistical problems, see Maeda Saeko (2015) "The Financial Asset and Liability in Japanese Household Statistics," Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.11, No.4, 599-621 -- available on the MoF website.

A supposed Japan expert shouldn't be relying on dollar-value OECD statistics computed by some opaque method. Japanese households don't get paid in dollars, and their economic struggles don't have anything to do with the relative status of people in other countries. But then, equity investment firms and their economists are interested in stock prices, not household incomes; and paying workers more doesn't usually make stock prices go up.
* P.: All it takes is a look around to see that Japan's capitalism too works only for a few.
* RF29: Who’s to consume this news?
* a.j.: um.. this article provides no explanation of what "successful capitalism" Japan has employed. In fact it acknowledges the rise in pay is due to "positive demographic dynamics". This effectively is a nice way of saying Japan is an ageing society and hence labor pool is shrinking and clearly those who remain will demand (and get) higher and higher incomes.

what is for america to emulate ? shutting down borders and reducing immigration ? making less babies ? yes creating labor shortage automatically makes that labor pricey (aka higher salaries). its simple demand-supply. but at what cost ? corporate profits will stagnate; so will government taxes.. and the overstretched military will be even more stretched
	+ j. (at a.j.): Yes. Japanese news is too much about Japan promotion. After hearing such news endlessly, one gets the impression that Japanese cannot take criticism and that news is heavily biased. As if its some kind of freakin chindonya show. Not that Japan is the only Asian country with this trait.
		- a.j. (at j.): The Japanese prolly write more balanced articles about themselves. The author is an expat settled in Japan. I understand his love for his adopted country and in many ways Japan is worthy of emulation. The culture of respect for others which leads to the worlds lowest crime rates for example.
		But writing an article about this supposedly amazing form of capitalism without actually explaining what it is reflects really poorly on the author.

## Source

* https://www.japantimes.co.jp/opinion/2018/05/04/commentary/japan-commentary/japan-form-capitalism-works/#.Xd65a4FyahA