The origins of income equality with a small government in Japan: An analysis of the formation of Japanese-style income policy in 1975

Japan was one of the most equal societies from the 1970s to the 1990s, in terms of income among the OECD countries, despite its small government. This study sheds light on the income policy formation process in 1975 as a critical juncture, when labour unions were demanding wage increases in response to rising prices after the 1973 oil crisis. A common theory holds that the formation of this income policy is explained by labour-management relations; however, this study emphasises an intervention by the Ministry of Finance (MOF). The sharp wage increases resulting from the spring offensive (Shunto) resulted in higher salaries for civil servants through the National Personnel Authority. Consequently, the MOF attempted to intervene in the spring offensive to maintain fiscal discipline. Specifically, the MOF suppressed the wage increase rate by directly persuading labour union representatives and adopting policies to curb aggregate demand. Consequently, the unions refrained from demanding a sharp wage increase. In return, companies maintained employment, and the government – having succeeded in suppressing wages – generated jobs by expanding public work projects. Thus, this relationship between labour, companies, and the government became the basis for the “equal” and small government of the 1990s.