FINANCIAL MARKET CONDITIONS AND INCOME DISTRIBUTION IN JAPAN

Abstract

In an economy with a developed financial system, wages and salaries are not the only source of income for households. Capital markets allow households to invest their saving and earn interest and return. An accumulation of wealth is greater for households with higher incomes, who then earn more interest and returns from their wealth, leading to more inequality of income among households. The recent financial crisis experienced in Japan, characterized by a substantial decrease in stock and real estate prices, should have had a reversing effect on the income distribution among Japanese households. Time-series data of quintile income shares and a measure of income inequality in Japan are used to analyze the effects of the financial bubble of the late 1980s and the financial crisis of the 1990s on the income distribution in Japan. The result reveals a significant de-equalizing effect of rising asset prices on income distribution in Japan. However, the equalizing effect of the falling prices of stocks and real estate was partially offset by the de-equalizing effect of rising unemployment in the late 1990s. Furthermore, taking into account the effect of the financial market condition, the income distribution fluctuates less pro-cyclically than previous studies indicated.