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Japan’s downward spiral

One in six Japanese are now poor. The new government has vowed to tackle the problem, but how?

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A man receives a food handout in Nagoya. (Photo by Issei Kato/Reuters.)


TOKYO – For at least a quarter century Japan has taken great pride that its post-war economic miracle created a nation of middle-class people. Polls typically found that 80 to 90 percent of Japanese identified themselves as middle-income.


But in recent years, despite intermittent government assurances to the contrary, Japanese citizens have grown to suspect their country’s capitalist egalitarianism was a relic of the past. In fact, rising concerns about poverty, coupled with a deep discontent about the status quo represented by the entrenched Liberal Democratic Party, helped Prime Minister Yukio Hatoyama’s party win a resounding victory in August.


It's now clear that the suspicions of widespread destitution were well founded. In October the Ministry of Health, Labour and Welfare released income figures for the first time. The numbers show that 15.7 percent of the population is living in poverty, as defined by the Organization for Economic Cooperation and Development, or OECD. But the survey was based on data from 2006, and the situation has likely grown worse. Unemployment has risen sharply during the economic crisis, and welfare budgets have been squeezed.


The working poor, or “warking pua” as they are called in Japanese, now number 10 million out of a population of 127 million. Add their dependents, single-parent households, the unemployed and elderly people ill-served by the creaking pension system and one in six people in the world’s second richest nation is struggling.


OECD data corroborates the crisis: The wealth gap in Japan is now the fourth largest among the OECD’s 30 member countries behind Mexico, Turkey and the U.S. That’s a dramatic turnaround for the previously-egalitarian country.


The new Democratic Party of Japan (DPJ) government has vowed to tackle the problem, making it a central issue in the August election campaign. At a minimum, the fact that the new administration has chosen to release the poverty data signals a willingness to acknowledge the scope of the problem, a willingness that was lacking during the long rule of the Liberal Democratic Party. But addressing the issue will be no easy task given Japan’s economic and fiscal troubles.


To understand how Japan got itself into the current situation, it’s necessary to look back to the post-war reconstruction period and subsequent high-growth years. As Japan rebuilt itself in the aftermath of World War II, the populace experienced grinding poverty and malnourishment. But as the nation focused its efforts on catching up economically with the West, it averaged annual growth rates of more than 10 percent by the 1960s.


For much of this era Japan probably achieved as close to full employment as is possible in a capitalist economy (though some would argue Japan has never truly been a “free market.”) In 1964, the year of the Tokyo Olympics, the unemployment rate was 1.2 percent, versus 5.2 percent in the U.S. Although the ranks of the jobless grew in the post-oil shock of the 1970s, many companies still operated under a creed that they would provide lifetime employment to everyone they hired. Mass layoffs remained a rarity. In the 1980s, as the country’s real estate bubble expanded, there seemed to be more money than anyone knew what to do with.


This heady economic expansion — coupled with high personal savings rates, close family support networks, and a strong social stigma attached to receiving state handouts — rendered the idea of a comprehensive welfare system superfluous. So one was never created.


“Before Japanese companies began behaving like those in the rest of the globalized jungle, the private sector essentially functioned as the welfare system,” says Professor Noriko Hama of Doshisha University’s Business School in Kyoto.


But nearly everything has changed in Japan. One-third of workers are on temporary contracts with few benefits and little job security. Unemployment, at 5.4 percent, is still lower than many Western countries, yet it has hit post-war highs. Personal saving rates have plunged from 15 percent to 2 percent, below the current levels in the U.S. That's not because consumers are spending more (as the economy desperately needs), but because incomes have fallen.


“It’s pretty clear what’s happened: when the growth pie kept on getting bigger, it was easy to have a relatively egalitarian society. But now that’s come to an end, and the slices are getting smaller,” Professor Hama says.


The effect is severe hardship. Before applicants are eligible for welfare they must exhaust every means of supporting themselves, including selling all but the most essential possessions and throwing themselves at the mercy of family members. Those laid off from regular jobs qualify for unemployment insurance benefits that last up to a year. For most contract workers, not even that temporary respite exists, and applying for welfare is usually the only option.


“Unemployment insurance is the default protection for regular workers and the new government’s proposals to include more non-regular workers in the system is something I strongly support,” says Naohiro Yashiro, Professor of Labor Economics at the International Christian University in Tokyo, and former president of the Japan Center for Economic Research.


Many have blamed the free-market reforms of the Koizumi government (2001-2006) for the increase in temporary workers and the accompanying rise in poverty, though Professor Yashiro maintains this is misleading. “Income disparity has been rising since the early 90s, along with the deceleration in economic growth in Japan,” he says. “Deregulation of the labor market has also been going on since the early 90s.”


This deregulation has focused almost entirely on allowing companies to use temporary workers who can be hired and fired easily, and do not require company contributions to the costly pension and employment insurance systems. Meanwhile, full-time regular workers – “Seishain” – remain very difficult to layoff, even in a recession.


It's the gap between the over-protected regular employees and the unprotected temporary workers that has grown too large, Professor Yashiro says. The lack of deregulation for regular employment may hurt everyone as companies move operations to countries with less stringent regulations for full-time workers.


“Most of the big companies don’t protest, they just exit silently," Yashiro says.  "This will happen not just for lower-paid jobs, but also for more sophisticated service jobs and value-added production, if there is not a better-regulated labor market.”


Japan has also been hit by growing regional income disparity, as Tokyo remains relatively prosperous while other areas bear the brunt of the prolonged tougher times. These regions have been heavily dependent on public works spending that the previous government had already begun to rein in for fiscal reasons, a process being accelerated by Prime Minister Hatoyama.


Even in Tokyo though, the streets are hardly paved with gold. Earning 90,000 yen a month, Yasu, who asked that his family name not be used in a story about poverty, is one of Japan’s growing band of working poor. Although this amounts to around $1,000 at current exchange rates, the weak dollar/strong yen makes it sound better than it is. And 90,000 yen doesn’t go far in one of the world’s most expensive cities, where the 23-year-old ekes out a living as a day laborer.


“It’s not possible for me to economize any more than I do. It’s sad, but I was really happy when I heard 7-Elevens were going to be allowed to sell off food cheaper that was nearly out of date,” Yasu says. “I spend nearly half my wages on rent. Then there’s food and basic utility bills, and nothing much left after that. It’s not much of a life.”


The poverty of people like Yasu is likely contributing to the huge problem of Japan’s shrinking population. It is also taking a major toll on single-parent families, almost entirely led by single mothers. In 2004, the most recent OECD data available on poverty among single-parent households, Japan had the worst rate in the industrialized world, at 58.7 percent. That was far above that of second-worst Luxembourg, at 38 percent.


The plight of single-parent families has worsened since 2005, when then-Prime Minister Koizumi began to cut welfare. The situation attracted much attention when the government axed a monthly single-parent allowance of ¥23,000 ($255) in April, just months before its defeat in the election.


The new Hatoyama administration says it will reinstate the payments in December, as promised in its pre-election manifesto. The prime minister was forced to step in following a budget fight between the Ministry of Health, Labour and Welfare, and the powerful Ministry of Finance, which had tried to reintroduce the allowance at half its previous level.


"I believe the subsidies must be revived by the full amount, and will instruct the ministry to do so,” Hatoyama told journalists in Tokyo in October.


The DPJ manifesto also contains a pledge to introduce child allowances for all families of ¥26,000 ($288) per child per month, and to scrap tuition fees for public high school students. However, it’s widely accepted that it will be impossible for the DPJ to fund all its pre-election promises with the recession-devastated tax revenues it will collect this year.


How much can the new government, which has promised to build a society based on humanity rather than competition, do to prevent an entrenched underclass from becoming a permanent part of modern Japan?


“In terms of the noises they are making about people being more important than concrete, I think the new government has the right idea,” Professor Hama says, “but as for actually solving the problem of poverty, it’s a ferociously difficult task, and becoming increasingly so.”


To fund its welfare programs, while attempting to stop Japan’s enormous public debt from ballooning further, the administration is looking to slash public spending projects. In the short-term, it's likely to cause more unemployment and hardship in regions already feeling the pain.


“The DPJ’s policies are not consistent," Professor Yashiro says. "There are people in the party from the left all the way across to the right.”


Given the state of the nation’s finances, if the DPJ is unable to alleviate the poverty now affecting millions, Japan’s famous social cohesion will be tested to its limits.