Global Policy Forum

By Stephanie Strom

Tokyo - The Park Hyatt Hotel here is a favorite watering hole of the well-heeled and is known for its fantastic views of the city and the marbled, melt-in-the-mouth Maezawa beef cooked to order. Just across the street in Shinjuku Chuo Park, homeless people, more concentrated here than in most parts of the city, spend the day sipping from half-empty juice boxes and picking through the garbage discarded by children using the playground.

Contrasts like these are rare in Japan, which has long regarded itself as the world's most egalitarian industrialized nation. But the gap between rich and poor Japanese is widening, spurred by economic and social changes. People are living longer and accumulating more wealth. Increasingly, pay is being set by performance rather than seniority. Women, once relegated to the home, are trooping to office jobs. Tax laws have been changed to let the the rich keep more of their money, and loopholes once exploited by the middle class are closing.

Where once everyone seemed to be treated more or less the same, merchants and marketers are focusing on the affluent. And it is paying off even during Japan's prolonged recession. Mercedes-Benz luxury cars are selling at a brisk pace while overall car sales have slumped. Private banking services offered to the wealthy are also proliferating. "For years, everyone's pay increased as they got older," said Shoji Hiraide, general manager of Mitsukoshi's flagship department store branch in central Tokyo, which has begun a campaign to woo the wealthy. "It made everyone think that we are all in the middle class. "But lifetime employment is crumbling and salaries are based more on merit and performance," he said. "In seven or eight years, Japanese society will look much more like Western society, with gaps between rich and poor that can be clearly seen."

Increasing income stratification raises potentially troubling questions for Japan, where sameness, or the perception of it, greatly contributes to the social harmony that is so prized here. Government officials concede privately that greater income disparity is inevitable as the economy becomes more competitive. But they fear that differences between the rich and the poor will lead to more theft, petty crime in general and a host of other social problems. Already, job losses and other economic hardships have added to the ranks of the homeless.

Politicians fear that a wider income gap could threaten the power of the Liberal Democratic Party, which has governed Japan virtually unchallenged since World War II. "It's a really controversial issue in Japan," said Hiromitsu Ishi, president of Hitotsubashi University and a member of the prime minister's tax panel. "Company owners and big company presidents are complaining about the tiny gap between their salaries and the salaries of new employees, but most Japanese people like the notion of a not-so-uneven income distribution." Still, he said, "a less egalitarian attitude is spreading because the average level of income has continued to increase. In Japan, extremely poor people don't really exist much now -- although after the restructuring of the labor market, that may change, and with it tolerance." Thus he believes that the government's fears may be overblown, a sentiment shared by several economists and policymakers.

Japan's income distribution has always been wider than policymakers were willing to admit. Forbes magazine's annual list of the world's wealthiest people features a fair share of Japanese, who have become famous for spending large amounts of money on luxury goods, Impressionist paintings and beachfront property in Hawaii. But for the last 30 years, about 90 percent of the people responding to surveys on income have said that they regard themselves as middle class. Being rich, or even well-to-do, is rather unseemly here, and wealth is not flaunted.

"People thought that income and wealth distribution in Japan was equal, and maybe that was true 20 years ago," said Toshiaki Tachibanaki, an economics professor at Kyoto University. "But I say that kind of myth should be abandoned. Japan has become a normal country." The disparities that exist now are far less pronounced than they are in the United States and Britain. In the average big Japanese company, the chief executive made 35.7 million yen, or roughly $350,000, according to one estimate, while the Labor Ministry puts the average salaryman's pay at 5.5 million yen, or roughly $56,000. By comparison, total compensation in 1998 for chief executives at the 500 largest American companies averaged about $8 million, according to Graef Crystal, a compensation consultant.

And since World War II, the Japanese government has used one of the world's most progressive tax codes as a social leveler, so there was no point in striving to make more money. The higher the remuneration, the more the government took away. That, too, is changing, although the government is quick to point out that the leading factor behind Japan's widening income disparity is aging. Income and wealth differences are generally more pronounced among the elderly, as some have saved and invested better than others. Japan increasingly has more older people as a percentage of its population than other developed countries, and it faces the growing problem of providing social security benefits for all of them.

"As long as the major contribution to the rising income differential comes from the population aging, it is a function of aging, not a real rise in inequality resulting from government policy," said Hiroko Tada, an official at the Economic Planning Agency who wrote a study confirming the widening income gap. Miss Tada and her colleagues note, however, that research by private economists and academics suggests the phenomenon is driven by government policy as well as changes in the private sector. They also insist that the changes are necessary if Japan is ever to recover economic momentum. "It's difficult for a government official to advocate income inequality," said Kenji Umetani, director of the social policy research division at the planning agency. "But when we are designing the future structure of the Japanese economy, we have to make some adjustments to the existing structure that will necessitate an acceptance among Japanese people of greater income dispersion."

That is already happening. Seiko Takahashi's family in Sendai, a city about 185 miles north of Tokyo, can afford computers, cars and a private school education that would have been out of their reach if she was not working as a stockbroker at a firm where her pay is increasingly reliant on her performance. "I don't feel any embarrassment about it," Mrs. Takahashi said, when asked whether her relative affluence bothered her. She said most of her friends and neighbors work, too, albeit mostly part-time, which has helped mitigate any resentment that might arise over her good fortune.

"When I was a kid, there were some kids who were obviously poor because they didn't have money for their school lunch," said Mrs. Takahashi, who is 39. "We never hear of such things now." Nonetheless, her daughters' friends tell them they are rich, in part because her oldest daughter, Naoko, 17, goes to an expensive private school and her other daughter, Maiko, 16, has particularly nice clothing and all of the accouterments that teenagers consider vital. "It seems kids feel this kind of difference in a very straightforward way," Mrs. Takahashi said. "She just tells them it's because her parents both work."

Some industries are also beginning to tie pay to performance. When the Sony Corporation set up Sony Computer Entertainment, the subsidiary that created the phenomenally successful Play Station video game, employees of the new unit were paid for performance, and the pay scale more closely resembled that of American companies. There are none of the traditional noncash allowances for housing and transportation that are common in Japan.

The software developers who create games have revenue-sharing agreements, a system Sony Computer adopted because the competition for talented game creators is so intense. "It's dictated by the market," said Yasuhiro Ito, a manager in the human resources department at Sony Computer. Initially, Sony Computer's unorthodox pay structure caused some grumbling at Sony Corporation, where pay is more closely linked to tenure and seniority, although to a lesser extent than at other Japanese companies. But Sony is now in the process of carving the corporation into discrete units, which will pay their employees based on formulas related to performance.

Tadashi Nakamae, a prominent economist here, thinks that as long as the rising tide lifts all boats, greater income disparity will be acceptable. "Look at what happened in England," he said. "Income disparity increased, but mostly people's incomes rose and everyone felt they were better off." That is what the government hopes to accomplish with changes to tax policy that benefit the wealthy and push less affluent citizens to pay more. The highest income tax rate has been cut to 50 percent from 65 percent and will be further reduced. At the same time, the government would like to begin taxing people of lower income levels, who were previously exempted. And it is seeking to eliminate some of the special tax breaks used by one-third of Japanese wage earners to avoid income taxes.

The government is also considering reducing Japan's exorbitant inheritance taxes, which have been the prime mechanism for leveling incomes. "Among every one hundred people who die, only five or six of them would be subject to the inheritance tax," said Mr. Ishi, the prime minister's adviser. "So the inheritance tax is not so important in terms of revenue but very important in terms of redistributing wealth." Not surprisingly, wealthy Japanese welcome the changes.

"The burden of taxes falls much too heavily on wealthy people here," said Yoshiro Okada, president of a construction company in Fukuyama, a city in southwestern Japan. He considers himself affluent but not vastly more so than his neighbors and friends. He does, however, see an increase in wealth discrepancies, and he welcomes it. "I don't think Japan is an egalitarian society," he said. "I sometimes think that the gap is expanding, and I think the environment in which one can accomplish one's dreams by striving to reach ever higher is growing in Japan."

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