The new prime minister is worried about inequality—and it worries the market
It is easy to see why the market reacted strongly last week, indicating that Mr. Kishida may reverse some of the pro-growth policies of his predecessor, Shinzo Abe. Since Mr. Abe took office in 2012 with his three-pronged “Abenomics” program—fiscal stimulus, monetary easing and structural reforms—Japan’s stock market has been Asia’s best performer. Topix more than doubled, primarily driven by growth in earnings per share. Encouraged by improvements in corporate governance and a more investor-friendly regulatory environment, foreign ownership increased from 26.3% in 2012 to 30.2% this year.
While the change in governance is progressing slowly, the progress is real. The number of active investors has increased. Companies are spending more on buybacks and eliminating cross-shareholdings.
But wage growth has been weak, and Mr. Kishida has emphasized this. He is pushing for a “new capitalism” focused more on redistribution. Having abandoned the idea of taxing investments for now, Mr. Kishida is likely to offer companies a tax incentive to raise salaries.
Labor compensation as a share of GDP in 2019 was 56%, marginally above its nadir in the early 2000s, but down from about 60% in the late 1990s. Many other countries, including China and the US, have also seen this decline, but Japan’s Gini coefficient—a measure of income inequality—was significantly lower than countries like the US and UK at 0.334 in 2018. OECD.
While tracking rising inequality is important, Japan should really focus on boosting growth and productivity, given its growing population and decades of sluggish growth. Japan’s businesses are sitting on $2 trillion in cash – a pile that has grown more monstrous since the pandemic began.
Policies to improve competition and governance and encourage more productive investment will probably help workers more than companies consolidating to raise wages, or trying to directly redistribute wealth in a country where G- By 7 standards the distribution is already relatively flat.