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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effect is about one third of the latest level, making it a little less effective than achieving the 

inflation target or addressing dual labor market duality. 

One important policy implication of our empirical analysis and of the scenarios presented 

here is that the best way for Abenomics reforms to foster inclusive growth, through both 

growth of average income and improvement in equity, is to fully implement structural 

reforms, i.e. fully launch the third arrow.  

 

Our scenario shows that if only the first arrow is launched (i.e. if only the BoJ inflation target 

is achieved), then the growth in income level is confined to a certain level and there is some 

deterioration in income equality. The scenario analysis also shows that, as long as inflation 

reaches and stays around 2 percent, our overall measure of inclusive growth improves, 

because the “growth” effect of inflation is stronger than its “inequality” effect. In the case in 

which inflation stays around 2 percent and third arrow reforms (higher female labor 

participation,  reducing duality, increasing labor input) are implemented, Abenomics 

increases average income growth while keeping inequality broadly unchanged (all household 

sample) or improving it (working-age household sample). Furthermore, our regression results 

and the technical discussion in Appendix C also suggest that, if monetary policy becomes 

overburdened because of lack of structural reforms, resulting in runaway inflation above the 

BOJ’s 2 percent target, overall inclusive growth (not only equality) will be reduced. Overall, 

the results of our empirical analysis and scenario analysis therefore support the argument that 

the best way for Abenomics to ensure gains in both growth and equity is to successfully 

launch the third arrow.   

 

VII.   C

ONCLUSIONS 

 

 

 

In this paper we argue that fully launching the “third arrow” of Abenomics, a complete 

package of structural reforms, is necessary to accomplish robust growth and inclusiveness. 

The Japanese authorities are implementing a series of policies to help Japan to permanently 

exit deflation, while also increasing potential growth. Our results show that, while achieving 

the 2 percent inflation target is expected to stimulate average income growth, it will also have 

a negative impact on income equality.   

On the other hand, our results also suggest that structural reforms will contribute to both 

more robust growth and improved income equality. In particular, reducing labor market 

duality is expected to increase productivity and foster growth, with a small adverse effect on 

equality.  The latter would be more than compensated by the effects of other reforms, such as 

increased female labor participation and overall labor supply growth, which are found to be 

effective in promoting both average income growth and income equality.  

Furthermore, our regressions suggests that, if monetary policy becomes overburdened 

because of lack of structural reforms, resulting in runaway inflation above the BOJ’s 2 

percent target, overall inclusive growth (not only equality) will be reduced. 

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Our analysis utilizes the prefectural variation in income distribution and other key variables 

over time. Therefore, one limitation of our empirical framework is that nation-wide shocks 

such as changes in consumption tax rates are not modeled explicitly, and alternative methods 

can benefit from using the inclusive growth measure in order to analyze the implications of 

nation-wide fiscal policies and provide complementary findings to our analysis. 

Based on our analytical findings, our assessment of the inclusiveness of Abenomics is that, if 

all the arrows are fully launched, this policy framework can be effective in promoting both 

growth and income equality, therefore fostering inclusive growth.  

 

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Appendix A. Data Sources and Definitions 

 

Variable 

Frequency 

Source 

Income Deciles 

Every 5 years, 10 thousands 

yen, 1975 price 

National survey of family income and 

expenditure, Ministry of Internal Affairs and 

Communications (MIC) 

Inflation rate 

5-year average, % 

CPI reports, MIC 

Ratio of new job openings 

for part-time to full-time 

labor at job security office 

5-year average, % 

Public Employment Security Office 

Female labor force 

participation ratio 

5-year average, % 

e-stat database, MIC 

Growth of labor input in 

man-hours (workers * 

annual workhours / 1000) 

5-year  average, % 

JIP Database, Research Institute of 

Economy, Trade and Industry 

Real GDP per capita of 

Prefectures 

Initial value at the 5 year 

periods, 1 thousand yen, 

1975 price 

Prefectural Statistics, Cabinet Office 

Elderly index 

5-year average, index 

e-stat database, MIC (Derived from the 

National population census) 

 

 

Appendix B. Definition of Inclusive Growth 

We define inclusive growth through a measure developed by Anand et al. (2013).  

Consider a distribution of income   for a population of the size

 , where individuals are 

indexed by the (ascending) order of income level as

1,2, … . Then, we can define a 

sequence income levels,

 , … , , … ,   , and a social welfare function as follows: 

, , … , , … ,

 

whose value is increasing with its arguments,  . Following Ali and Son (2007), we define an 

opportunity function that is analogous to the social welfare function with some opportunity 

measure

 : 

, , … , , … ,

 

whose values are increasing in its argument. In other words, the opportunity function 

increases when the opportunity of any person increases. 

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