The Pasinetti Index and the Rise of Inequality in the Age of Unconventional Monetary Policy in Japan

There is rising concern in Japan that unconventional monetary policy (UMP) accelerates inequality through the asset price mechanism, allowing the higher-income group to gain additional capital income. UMP has limited effectiveness in creating real wage growth and restoring demand and growth, as the overall economy has been stagnant. We revisit the issue of income inequality in Japan by using Pasinetti’s approach to measure personal income distribution and examine its effect on effective demand and functional income distribution. We implement workers’ debt-augmented Pasinetti Index (PI) as a proxy of personal income distribution, shifting from workers towards rentiers in their interpersonal lending and borrowing relations. Our empirical result with the VAR model for Japan shows that a higher PI restrains effective demand. Furthermore, higher rentier income negatively affects the wage share through decreased capacity utilization.