Unconventional monetary policy and income disparity in an aging society

ABSTRACT

The main objective of the Bank of Japan’s monetary policy is inflation targeting; however, it may be associated with the recently increased income disparity in Japan. Using the autoregressive distributed lag (ARDL) estimation model, this study conducted in the context of an aging society revealed that the bank’s monetary policy increased income inequality through increased financial asset prices, resulting in a widening of the income gap. We also find that in the long run, the aging population will increase income disparity in Japan; however, tax policy will partially mitigate the adverse effect on income inequality. Unconventional monetary policy will not bring a desirable result for the Japanese economy and the nation as a whole. In addition, the government needs to revise the incremental tax system so that wealthier groups pay more tax than before. In addition, expanding the tax system by adopting the carbon taxation scheme would be beneficial. The government with this kind of tax can pursue two major goals: reducing poverty and environmental pollution, which are ongoing challenges in Japan.

KEYWORDS:

• Income disparity
• unconventional monetary policy
• quantitative easing
• tax policy
• aging population
• Japanese economy

Acknowledgements

Farhad Taghizadeh-Hesary acknowledges the financial supports of the JSPS Kakenhi (2019–2020) Grant-in-Aid for Young Scientists No. 19K13742, and Grant-in-Aid for Excellent Young Researcher of the Ministry of Education of Japan (MEXT). Authors are grateful to Prof Salvador Pérez-Moreno and the anonymous reviewers of the Journal of Economic Policy Reform for providing precious comments on the first version of this paper that helped a lot to revise and prepare this version.

Disclosure statement

The authors report no conflict of interest.

Notes

¹ For more information on Abenomics’ three arrows, see Yoshino and Taghizadeh-Hesary (2015 and 2017)

² The survey unit is the household in the entire area of Japan. The sample households are selected based on the three-stage stratified sampling method. About 9000 households were randomly selected. The sampling units at three stages are namely, primarily the municipality (i.e., city, town and village), secondly the survey unit area and thirdly the household. (Statistics Bureau of Japan, 2020b)

Additional information

Funding

Farhad Taghizadeh-Hesary acknowledges the financial support of the Japan Society for the Promotion of Science KAKENHI Grant-in-Aid for Young Scientists No. 19K13742 and Grant-in-Aid for Excellent Young Researcher of the Ministry of Education of Japan (MEXT)..