‘The Gap Society’

Car sales in Japan these days have become an unlikely social barometer. Toyota and other manufacturers are struggling to unload their midrange vehicles. Yet high-priced luxury models like Maserati and Ferrari are selling at record levels. At the same time, ultracompact "minicars" are also meeting with unprecedented demand—at prices that match their size. The point? Success at opposite ends of the car market reflects "the growing gap between rich and poor," says leading car analyst Koji Endo.

Japan may be the richest country in Asia, but it's not immune to the pressures of the "shrinking middle." In elections earlier this year, the opposition Democratic Party of Japan scored an upset victory that gave it control of the upper house of Parliament largely by harping on the ruling Liberal Democratic Party's perceived failure to deal with the growing "income gap."

The numbers do seem compelling. Japan's Gini coefficient—a measure that compares the disparity between the top and bottom extremes of household incomes in an economy—reached a new peak in 2005, putting it more on par with the United States than the superequitable Scandinavian nations that it once resembled. The number of Japanese applying for welfare payments has reached record highs—just as members of Tokyo's business elite are preparing to receive their largest year-end bonuses in years. Among developed nations, Japan's poverty levels are now second only to America's. "Japan's economic structure and social system haven't kept pace with the dramatic pace of globalization and overwhelming technological advances," says LDP parliamentarian Tatsuya Ito. "People are getting worried because they don't see anyone giving an answer to the question of whether our social system is sustainable."

The LDP's half-century-long hold on power (up for renewal in the next general election) could well depend on its ability to convince voters that it cares about the issue. One recent poll showed 56 percent of respondents citing "inequality" as one of their primary political concerns. Best-selling books address the issue in near-apocalyptic terms. One particularly popular theme: the notion that the growing disparities are the result of former prime minister Junichiro Koizumi's structural-reform drive. Critics rail against Koizumi's "market fundamentalism," contending that his economic reforms eroded Japan's vaunted egalitarian ethic. In 2006, the phrase kakusa shakai ("the gap society") made a national list of the 10 trendiest expressions. In the same year, young Internet millionaire Takafumi Horie and other free-spending paragons of the New Economy paraded their wealth in ways traditionally frowned upon in Japan. The fawning coverage—fawning, at least, until Horie was convicted for securities fraud—exposed millions of Japanese to once unimaginable riches. Contrast that with the recent publicity surrounding the diary of an impoverished Japanese man who documented his own death from starvation.

There are two problems with all this. One involves the diagnosis. The truth is that the social divide in Japan is neither as drastic nor as recent as many reports suggest. Like many developed nations, Japan's Gini coefficient has been rising since the 1970s, making it impossible to pin on Koizumi alone. Likewise, Robert Alan Feldman, an economist at Morgan Stanley, points out that the most recently cited income-gap figures fail to take into account government transfer payments (like welfare and pension benefits) that tend to soften the disparities. When such payments are factored in, Japan's Gini coefficient moves down to a much more manageable 3.38, closer to Western Europe's.

Of course, there's no doubt that globalization has shifted the social and economic landscape in Japan, as it has everywhere else. Not that long ago, corporate Japan still functioned as a kind of ersatz welfare state, with companies offering their workers so-called lifetime employment with ample benefits. But the 1990s recession put an end to that system. Today fully one third of Japan's workers are part-timers, mostly young, who usually work on temporary contracts that offer few benefits. Even when they do well, employers are often loath to give them full-time status, because inflexible labor laws make it difficult to lay them off later.

The role of Japanese families has changed as well. A generation ago, notes economist Machiko Osawa of Japan Women's University, families could be counted on to take care of elders and the disadvantaged. Thanks to growing individualism and the erosion of traditional respect for the elderly, that's no longer the case. It's no coincidence that so many older Japanese are among the new poor. At the same time, a rise in divorce has brought a parallel surge in the number of single-parent families who struggle to make ends meet.

There's no shortage of solutions on offer. While the "second chance" proposals might help, the precise measures the government has in mind are notably vague and might prove politically unfeasible given their potential cost. Cutting taxes, meanwhile, might well spur business activity but would also have the effect of increasing disparities. The DPJ, for its part, has promised cash subsidies to farmers—a costly measure it says it can pay for by trimming government waste and inefficiency. Perhaps more realistically, the DPJ has also been arguing for a major hike in the minimum wage, an idea that some members of the LDP (including former prime minister Shinzo Abe) also support. But critics say politicians would do better to avoid populist measures like subsidies, and stick to fixing core issues—education, child care and, most important, labor flexibility. Under the current system, part-time workers who decide they want to enter the full-time labor force face countless barriers to entry, while regular workers keep their jobs regardless of performance. That's precisely the sort of thing that will have to change if Japan is to have any hope of improving its sagging productivity in response to the rapid graying of society.

It's a problem being faced in many other developed nations, like France, which has begun to implement some important labor reforms that could influence the Japanese debate. Likewise, Japan could learn from Denmark's so-called flexible-security market reforms, which have helped the economy to boom even while keeping income disparities at a minimum. Yet there's little to no conversation about new economic models. The bottom line is that the profound changes in Japanese society demand creative solutions—not something that Japanese politicians are famous for. "There are certainly ways to combine market reforms that increase efficiency with tax, spending and other measures that provide a social safety net and shore up equality," writes Yoshisuke Iinuma, a commentator at The Oriental Economist newsletter. "But so far, that is not the trend in Japan." As politicians continue to grasp for easy solutions to complex problems, midmarket carmakers and middle-class consumers alike will continue to be pinched.