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Monday, Sept. 24, 2007


Incoming prime minister's guide to closing 'winners-losers' gap

Yasuo Fukuda was elected president of the Liberal Democratic Party on Sunday and is certain to become Japan's next prime minister this week to replace Shinzo Abe, who surprised the nation Sept. 12 by suddenly announcing his intention to step down.

The basic direction of the new government's domestic and diplomatic policies isn't likely to change much from those of the Abe administration, but the new prime minister is expected to make some adjustments. One key area where an adjustment is expected is on the issue of the widening gap between "winners and losers" in Japan — which is believed to be one of the main reasons why the LDP lost the House of Councilors election in July.

On Sept. 7, the Health, Labor and Welfare Ministry released a report on revising minimum wages in the 47 prefectures. Let's take a look at this issue as one aspect of the rich-poor gap.

The minimum wage is the lowest legal hourly wage that can be paid in Japan, irrespective of type of employment contract. This year, the minimum wage was raised ¥14 on average — compared with ¥5 last year — to a nationwide average of ¥687. The margin of increase ranged from ¥7 to ¥20, which is indicative of the gap among prefectures.

The highest wage is to be found in Tokyo at ¥739, while the lowest are in Akita and Okinawa, both at ¥618. Many media reports have described this gap as the one forming between the rich and poor regions of the country. But I should point out a few differences.

First, the nominal wage is different from the real wage, which is determined by purchasing power in real terms. There is a huge inverse gap between urban and rural areas in terms of prices in the flow economy — which affects people's daily necessities — and purchasing power in the stock economy, which applies to things like land and housing.

If workers in urban and rural areas were paid exactly the same wages, the rural residents would enjoy greater purchasing power in real terms.

As the aging of Japan's population accelerates, the availability of low-cost housing in rural areas, as well as a safe and clean living environment, must be taken into account.

Second, the subsidies distributed by the central government are higher per capita in rural areas than urban. Amid the push to decentralize administrative powers, tax grants to local governments have been reduced while prefectures and municipalities received greater powers of taxation. To make a correct comparison of income between urban and rural Japan, subsidies from the central government must be taken into account.

A recently floated idea called "furusato-nozei" (hometown tax payment) would allow urban dwellers to divert their residential tax payments to their hometowns in the country. What is needed here is a comparison of disposable income levels for urban and rural residents in real terms. This will reflect not only their income level, but their local tax burden.

The third factor is the wage gap between the public and private sectors. The salaries of private-sector workers, including bonuses, have declined since the collapse of the bubble economy in 1991 because Japanese firms face greater international competition. but wages for central and local government officials, including lawmakers and assemblymen, were barely affected by these changes. In addition, public officials remain protected by employment guarantees until they retire.

Behind the government's sloppy management of public pension records is the deeply rooted belief among public servants that they need more manpower if they are given additional tasks. In the private sector, an employee will have his or her employment contract reviewed and start seeing their wages cut once they enter their 50s, but public workers continue to get seniority-based pay until they retire.

The public has watched scandals over irregular accounting hit one politician after another in recent months. This is because politicians must make their revenues and expenditures as transparent as private-sector companies and workers do. There cannot be any justifiable political activity conducted for which they are unable to disclose their expenditures.

But politicians and bureaucrats apparently think they can act differently from private-sector employees, and this attitude must change.

A fourth factor is limits on overtime hours. Many corporate workers are being forced to engage in "service" overtime work for which they do not get extra pay. This trend appears to be stronger among companies attempting to carry over Old Japan's legacy of lifetime employment.

Company managers are looking more to part-time workers as they try to cut back on their share of the social security burden. That corporate executives will try to cut back on wages and overtime pay — which constitutes a substantial portion of their operating costs — is inevitable as they attempt to stay internationally competitive. But it is also their duty to pay what they are legally obligated to first — before trying to maximize the profits of their companies.

The last point I would like to make is that Japan's rich-poor gap is still small by international standards. A survey released by the Organization for Economic Cooperation and Development on income gaps in 20 countries between 1995 and 2005 shows that Japan's is smaller than those of the United States, South Korea, Canada, Spain and Britain. China's gap, of course, is much bigger because of the huge discrepancy that has emerged between the rich and the poor, despite its communist regime.

It is the duty of the new prime minister to have a correct understanding of where the gap exists in Japan — and to take relevant action — based on these international comparisons as well as multifaceted analyses that involve other economic indicators.

Teruhiko Mano is a professor at Seigakuin University Graduate School.

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