How Inclusive Is Abenomics?; by Chie Aoyagi, Giovanni Ganelli, and Kentaro Murayama; imf working Paper No. 15/54; March 1, 2015

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How Inclusive Is Abenomics? 

Chie Aoyagi, Giovanni Ganelli, and Kentaro Murayama 

© 2015 International Monetary Fund 



IMF Working Paper 

Regional Office for Asia and the Pacific  

How Inclusive Is Abenomics?  

Prepared by Chie Aoyagi, Giovanni Ganelli, and Kentaro Murayama*  

Authorized for distribution by Odd Per Brekk and Stephan Danninger   

March 2015 


We assess the ongoing reform efforts in Japan in terms of inclusive growth. We use 

prefectural level panel data to regress a measure of inclusive growth, which incorporates 

both average income growth and income inequality, on macroeconomic and policy 

variables. Our analysis suggests that achieving the Bank of Japan’s 2 percent inflation 

target has a positive effect on average income growth, but an adverse effect on  income 

equality. The package of structural reforms planned under Abenomics is found to be 

effective in increasing both average income growth and income equality. The main policy 

implication of our analysis is that full implementation of structural reforms– especially 

labor market reforms–is necessary to both foster growth and increase equality. 

JEL Classification Numbers:F43; D63; H23; O11 

Keywords: Japan; Inclusive growth; Economic growth 

Author’s E-Mail Address:caoyagi@imf.og;; 

*We are grateful for comments to Dennis Botman, Odd Per Brekk, Stephan Danninger, and

Galen Sher. 

This Working Paper should not be reported as representing the views of the IMF. 

The views expressed in this Working Paper are those of the author(s) and do not necessarily 

represent those of the IMF or IMF policy. Working Papers describe research in progress by the 

author(s) and are published to elicit comments and to further debate. 


I.   I



In the last two years, policy makers in Japan have embarked in an ambitious effort to 

decisively get the economy out of deflation and revive growth. This policy approach, which 

has been dubbed “Abenomics” after Prime Minister Shinzo Abe, comprises three so called 

“arrows”, namely monetary policy, fiscal policy, and growth enhancing structural reform. 

The new framework seems to be bearing its fruits so far. Boosted by monetary and fiscal 

stimulus, the Japanese economy has made an initial escape from deflation. Looking ahead, 

forceful implementation of “third arrow” reforms, which would allow growth to become 

private-sector led, is key. 

In this paper we seek to evaluate the effects of Abenomics’ reforms in terms of inclusiveness, 

with reference to the recent surge of interest in the literature in issues related to inequality 

and inclusive growth. While much of the academic and policy debate around Abenomics has 

focused on whether, and by how much, the reforms will succeed in raising potential growth, 

our paper is, to the best of our knowledge, the first attempt to study in a systematic way how 

inclusive Abenomics is.  

We believe that this is a relevant exercise, given evidence showing that inequality has been 

increasing in Japan in the last three decades. Furthermore, more recent developments, such as 

the depreciation of the yen and the stock market boom, may not have benefitted the whole 

population equally (Baba and Tanaka 2014). Anecdotal evidence also suggests that, among 

the Japanese population, concerns over income and wealth inequality have grown, and the 

previously widely held notion that “All Japanese are middle class” has become something 

belonging to the past. In our view, concerns over inequality and inclusiveness of growth are 

not driven only by social and moral considerations, but are also directly relevant to 

macroeconomic outcomes and to the ultimate success of the reforms, for at least two reasons.  

The first reason is that if the perception that economic growth is not being shared fairly 

within the Japanese society becomes prevalent, this could erode support for some much 

needed reforms, such as deregulation and further international trade integration, which are 

crucial to boost long-term potential growth, but which might imply some short-term costs for 

some segments of the population. 

The second reason is that in recent times, a growing international consensus has emerged that 

economic inequality is bad for both growth and social cohesion, and that policies should play 

an important role to facilitate inclusive growth. For instance, a study coordinated by various 

UN agencies (UN System Task Team, 2012) found that reduction of unemployment and 

underemployment is  key to improving fiscal policy options, by reducing governments’ 

burdens for social security and contributing to both domestic and external equilibrium.  Other 

examples of this new conventional wisdom can also been found in the work of Berg and 

Ostry (2011), who document, using a multi-decade and multi-country analysis, how greater 

equality can help sustain growth. The relationship between inequality and growth also has 


implications for poverty reduction. Gramy and Assane (2006), for example, carry out an 

empirical analysis using data for over sixty developing countries, finding that growth 

accompanied by improved distribution works better than either growth or distribution alone 

in reducing poverty. In this context, the International Monetary Fund’s managing director 

Christine Lagarde said that “Excessive inequality is corrosive to growth” (Speech at Davos, 

Switzerland, January 23, 2013)


 and the Fund has called, in its Global Policy Agenda (IMF, 

2013) for growth to be inclusive. 


Evaluating the equity implications of Abenomics is not a straightforward task. Reforms 

planned under the third arrow include increasing the supply of labor and female labor 

participation, introducing more flexibility in the labor market and reducing excessive labor 

market duality. While all these reforms are expected to increase potential growth (Aoyagi 

and Ganelli, 2013; Steinberg and Nakane, 2012) and some might also reduce inequalities, the 

overall impact on equity is not clear ex ante. This is also true of the overarching objective of 

Abenomics, that of permanently getting the Japanese economy out of deflation. For instance, 

while reflation is very likely to foster economic growth, it might not necessarily benefit the 

poor and vulnerable, such as those who have no or little assets, and whose income (e.g. 

minimum wage, pension) is low and slow to adjust to inflation.  

To study the degree of inclusiveness of the Japanese economy, we use both a descriptive 

analysis of trends in equity and poverty, and an econometric analysis of how implementation 

of Abenomics is expected to affect inclusive growth. For our empirical analysis, we use sub-

national (prefectural) data for the past three decades. This empirical strategy allows us to 

exploit the variability in prefectural data and, compared to the alternative of using a cross-

country panel, also has the advantage of capturing specific characteristics of the Japanese 

economy. Our dependent variable is the proxy of inclusive growth developed by Anand et al. 

(2013), which is essentially average income growth corrected for its equity impact. Using 

this metric allows us to take into account average real income growth in the inclusive growth 

debate, whose focus often falls into inequality alone. We find that, throughout 1979-2004, 

income inequality increased in Japan, but average income displayed positive growth. More 

recent developments in common perceptions – that inequality is growing – are probably due 

to the fact that the average income growth was negative or too small to compensate for 

increasing inequality.  


We estimate a model to investigate the impact of key Abenomics policies on changes in 

average income and in income equality. The explanatory variables, which are proxies of a 

full implementation of Abenomics, include inflation, labor supply, labor market duality, and 

female labor participation. We find that expansionary policies which can help move inflation 

towards the two percent goal (such as monetary expansion under the first arrow) tend to 

improve average income growth by up to 1.9 percentage points, but have a negative impact 

on equality. Full implementation of structural reforms (the third arrow) is necessary to both 




A New Global Economy for a New Generation” speech by Christine Lagarde, Managing Director, 

International Monetary Fund, Davos, Switzerland, January 23, 2013. Available online at


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