How Inclusive Is Abenomics?; by Chie Aoyagi, Giovanni Ganelli, and Kentaro Murayama; imf working Paper No. 15/54; March 1, 2015

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1979-84

1984-89

1989-94

1994-99

1999-2004

Break-even 

(dy=-dw)

Equity Index 

Growth

Average Income Growth

Distribtuion of Average Income and 

Equity Index Growths of Prefectures (%, 1979-2004)

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Average Income and Equity Index Growths, Prefecture Averages (%)

Avg. Income  Growth

Iquity Index Growth

Inclusive Growth

By definition, the break-even points 

(i.e. the ones in which inclusive 

growth is zero), lie on the red dotted 

line, on which growth in average 

income is equal to growth in the 

equity index. The majority of 

episodes shown in the chart point to 

prefectures experiencing 

deteriorating equality (i.e. negative 

equity index growth), but achieving 

“inclusive growth” by having 

sufficiently high average income 

growth (top-left panel, above the 

red line). Cases in which both 

average income and equality increases (top-right panel) are relatively rare. The1994-1999 

and 1999-2004 periods are characterized by both low average income growth and increasing 

inequality.  

This finding is confirmed by examining 

yearly averages across all prefectures 

(text chart). Moreover, the chart reveals 

that, on average, high growth in the late-

80s and the early-90s compensated for 

increasing inequality (i.e. the negative 

change in equity index), while the 

negative growth in the late-1990s and the 

early 2000s failed to keep inclusive 

growth positive. 

Another chart below shows prefectural 

averages of growth rates 

over time. The chart 

confirms a relatively 

small impact of the 

equity index compared to 

average income growth, 

with a few exceptions. 

For Wakayama, 

Okayama, and Okinawa 

prefectures, average 

income growth is too low 

to compensate for the 

relatively high negative growth of the equity index, leading to near-zero inclusive growth. 

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

3

1979-1984

1984-1989

1989-1994

1994-1999

1999-2004

Average Income and Equity Index Growths, 

5-year Averages (%)

Avg. Income  Growth

Iquity Index Growth Inclusive Growth

Inclusive Growth

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Furthermore, there is no obvious “spill-over” effects to neighboring prefectures, despite the 

fact that our income measures do not exclude households who resides in neighboring 

prefectures.  

In summary, from the decomposition of the inclusive growth measure presented in the 

figures above, it is evident that the major driver on average of inclusive growth is the growth 

in average income. One exception is the period between 1994 through 1999, where the 

income growth was so weak that the negative growth in equality outweighed it. For the 1980s 

through the early 1990s, the average income growth was at least four times stronger than the 

deteriorating equity index growth. For the years between 1999 and 2004, the negative growth 

was worsened by the negative growth in the equity index. 

We now move to the econometric estimation. Our empirical specification follows a standard 

panel model: 

∗

where 

∗

 is the log-difference of our inclusive growth proxy or of its two subcomponents 

(average income growth and change in the equity index);   the common intercept; 

 is a K-

column matrix with explanatory variables; and the error term 

 has an individual (i.e. 

prefecture) specific effect and the remaining disturbance, 

. 

Note that we use log difference (i.e. approximate percentage change, or growth) of 5-year 

panel between the years 1979-2004. Hence, each of time index of length 5 represents a 5 year 

period. Moreover, log differences are standardized to be an (average) annual rate by taking 

the geometric mean. For instance, the first observation 

∗

,

represents the average 

growth rate over 1979-1984. 

The explanatory variables are presented in the text table. The variables of main interest in our 

study are the policy variables, which proxy some of the key policy objectives of a “complete” 

Abenomics package. i.e.:  i) achieving positive inflation in a stable manner; ii) increasing 

flexibility in the labor market and reducing duality; iii) increasing the female labor 

participation rate; and iv) increasing overall labor input. We also include control variables to 

account for the size of the prefectural economy (initial GDP per capita) and the degree of 

“aging” of each prefecture (elderly index, defined as the size of population 65 years old or 

older divided by the size of working-age population). The frequency of these explanatory 

variables is in general annual, with the exception of female labor participation rates. Since 

the frequency of the dependent variable is every 5 year, all the explanatory variables are 

converted to 5-year panel by taking averages. Due to data limitation at the prefectural level, 

we use female labor participation rates for the entire work force (15 years and older), while 

female labor participation rates for working age (15-64 years old) are often used in the 

literature which uses national level data. 

 

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