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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on equity is negative, but small and not significant. The overall effect on inclusive growth of 

moving towards the 2 percent target is therefore positive. Various measures of the 

contribution of regressors to explaining the variability of dependent variables also suggest 

that inflation is the most important regressors in explaining variation of equity (see Appendix 

E).  

One concern is the direction of causality between growth and inflation. To address this 

potential endogeneity issue, we also carried out a causality test and instrumental variable 

estimation, using lagged inflation as an instrument. The results, presented in Appendix D, are 

broadly in line with the ones in our benchmark model, confirming that inflation affects 

growth.  

Labor market duality – measured by the ratio between the numbers of new offers for part-

time and regular employment – has a negative and significant impact on inclusive growth, 

through its negative impact on average income growth. As the scale of labor input is 

accounted for by the growth in man-hour labor input, the composition of the labor force as 

proxied by the duality variable captures the utilization of input and the efficiency. The 

duality measure has a negative marginal effect on the rate of income growth at a similar 

magnitude for the all sample and working-age sub-sample. A negative effect of labor market 

duality on average income growth is consistent with the idea, discussed in Aoyagi and 

Ganelli (2013), that Japan’s excessive duality reduces productivity through a “training 

channel”,  because non-regular workers receive less training than regular ones, and an “effort 

channel”, because non-regular workers tend to be less motivated and therefore less 

productive than regular ones. Aoyagi and Ganelli (2013) underscore the importance of 

reforming Japan’s labor market through contract reform to increase productivity by reducing 

labor market duality. While no concrete measure has been taken in terms of contract reform 

so far, the idea has been discussed at the technical level in various working group and 

committees, and the government has expressed its intention to improve working conditions 

of non-regular workers. In this paper, we therefore assume that a “complete” Abenomics 

package will, at some point, include measures to reduce labor market duality. Our results 

show that this will have a positive effect on inclusive growth. Moreover, as expected, such an 

effect is stronger when we include in the regression only working-age households.  

Our results also suggest that a higher female participation rate has a positive effect on 

inclusive growth by increasing average income growth. Furthermore, this variable has 

positive and sizable effects both on average income and equity index growth, when using the 

working-age household sample. Considering that female labor participation is a form of 

inclusiveness (in process), it is not surprising that the working-age population is affected 

more strongly. In other words, the results for the estimation with all households are mitigated 

by the inclusion of the retirement-age female population. Increasing female labor 

participation is one of the key objectives of Abenomics, on which measures (e.g. increasing 

availability of child care) have already started to be implemented. Our results suggest that, in 

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addition to its positive impact on potential growth (as estimated for example by Steinberg 

and Nakane 2012), this policy is also good for inclusiveness.   

Another important objective of Abenomics is that of countering the aging of the population 

by increasing labor supply not only of women, but of the overall population. While male 

labor participation is already high in Japan, there is some scope for increasing overall labor 

supply, for example by increasing participation of foreigners and older workers. Some of the 

initiatives which have been announced in Special Economic Zones seem to go in this 

direction. Our results show that increasing labor input would boost inclusive growth by 

increasing both average income and equity (although only the effect on the former is 

significant).    

Our control variables for the size of the prefectural economy and demographic characteristics 

show expected signs and reasonable magnitudes of estimated coefficients. Initial GDP per 

capita — accounting for the level of income of each prefecture — is a negative and 

significant determinant of inclusive growth (and its components) for the all household sample 

and the working-age sub-sample, largely due to increasing inequality. The negative signs are 

consistent with classic theories on growth and inequality: the rate of growth falls as the 

(average) income level rises (Solow, 1956); and income tends to be unequal at a higher 

average income level (Kuznets, 1955).  

The elderly index — accounting for the aging of the society — has an insignificant effect on 

inclusive growth when using the all-household sample, and a significant and positive effect 

when using only the working-age household sample. Since the elderly index is actually a 

dependency ratio, measured by the ratio of elderly population to the working-age population, 

we can say that a higher dependency ratio affects the income distribution through the overall 

productivity of the prefectural economy, rather than through distributional changes. The 

marginally positive effect of aging on inclusive growth is rather surprising, but can be 

explained by wealth distribution. In particular, while our income measure is before tax and 

redistribution (and thus retired households have less or no income flows), it also accounts for 

interest and rent payments (i.e. returns on assets).  

Overall, policy variables affect inclusive growth mostly through growth in average income. 

Our result suggests that the potential impact of a complete Abenomics package on income 

equality is relatively small. We also carried out some robustness checks using alternatives 

weights on the equity index and different assumptions on income distribution.

6

 These checks, 

not reported here but available upon request, confirm the robustness of our results. 

                                                 

6

 Data of income distribution, disaggregated to the prefectural level, are limited to values at first and ninth 

deciles and the mean. In order to construct our dependent variable, we therefore needed to make some 

assumptions to estimate an income distribution, given all the available information. In the benchmark estimated 

income distribution, we assume that: the lowest income is zero; the income distribution between observed 

(continued…) 

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