Unconventional Monetary Policy and Inequality – Is Japan Unique?

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For over a decade, but especially since the start of Abenomics in 2013, the Bank of Japan (BoJ) has been increasing the monetary base rapidly by implementing an unconventional monetary policy (UMP). In a 2014 study, we found that Japan’s UMP had increased income inequality. Yet emerging literature suggests that this impact of UMP on inequality is not universal and depends on structural factors, especially in the labor market. UMP influences inequality through two channels that work in opposite directions – a labor market channel (more employment, higher wages) and a financial market channel (higher asset returns). With data for Q4 2008 through Q2 2018, we build a new structural vector autoregression (SVAR) model to take these channels into account to explain how Japanese UMP’s impact on inequality differs from other countries. We argue that Japanese structural problems, especially labor market rigidity, may explain the absence of wage growth. This means that the financial market channel (higher returns for financial assets, which are typically held by higher income households) overwhelms the labor market channel.