How Inclusive is Abenomics?

We assess the ongoing reform efforts in Japan in terms of inclusive growth. We use prefectural level panel data to regress a measure of inclusive growth, and its components of both average income growth and income inequality, on macroeconomic and policy variables. Our analysis suggests that achieving the Bank of Japan’s 2% inflation target has a positive effect on average income growth, but an adverse effect on income equality. In contrast, achieving higher female labor participation, lower duality, and larger labor input — which are included in the package of structural reforms planned under Abenomics — is found to be effective in fostering inclusive growth. While implementation of those policies can improve higher average income growth, only the female labor participation is found to improve the equality as well. The main policy implication of our analysis is that full implementation of structural reforms — especially labor market reforms — is necessary to both foster growth and increase equality.