'The Gap Society'.(Special Report)(Cover story)

Byline: Christian Caryl and Akiko Kashiwagi

Japan still prizes social harmony, but with a hint of nostalgia now that inequality is political issue No. 1.

Car sales in Japan these days have become an unlikely social barometer. Toyota and other manufacturers are struggling to unload their midrange vehicles. Yet high-priced luxury models like Maserati and Ferrari are selling at record levels. At the same time, ultracompact "minicars" are also meeting with unprecedented demand -- at prices that match their size. The point? Success at opposite ends of the car market reflects "the growing gap between rich and poor," says leading car analyst Koji Endo.

Japan may be the richest country in Asia, but it's not immune to the pressures of the "shrinking middle." In elections earlier this year, the opposition Democratic Party of Japan scored an upset victory that gave it control of the upper house of Parliament largely by harping on the ruling Liberal Democratic Party's perceived failure to deal with the growing "income gap."

The numbers do seem compelling. Japan's Gini coefficient -- a measure that compares the disparity between the top and bottom extremes of household incomes in an economy -- reached a new peak in 2005, putting it more on par with the United States than the superequitable Scandinavian nations that it once resembled. The number of Japanese applying for welfare payments has reached record highs -- just as members of Tokyo's business elite are preparing to receive their largest year-end bonuses in years. Among developed nations, Japan's poverty levels are now second only to America's. "Japan's economic structure and social system haven't kept pace with the dramatic pace of globalization and overwhelming technological advances," says LDP parliamentarian Tatsuya Ito. "People are getting worried because they don't see anyone giving an answer to the question of whether our social system is sustainable."

The LDP's half-century-long hold on power (up for renewal in the next general election) could well depend on its ability to convince voters that it cares about the issue. One recent poll showed 56 percent of respondents citing "inequality" as one of their primary political concerns. Best-selling books address the issue in near-apocalyptic terms. One particularly popular theme: the notion that the growing disparities are the result of former prime minister Junichiro Koizumi's structural-reform drive. Critics rail against Koizumi's "market fundamentalism," contending that his economic reforms eroded Japan's vaunted egalitarian ethic. In 2006, the phrase kakusa shakai ("the gap society") made a national list of the 10 trendiest expressions. In the same year, young Internet millionaire Takafumi Horie and other free-spending paragons of the New Economy paraded their wealth in ways traditionally frowned upon in Japan. The fawning coverage -- fawning, at least, until Horie was convicted for securities fraud -- exposed millions of Japanese to once unimaginable riches. Contrast that with the recent publicity surrounding the diary of an impoverished Japanese man who documented his own death from starvation.

There are two problems with all this. One involves the diagnosis. The truth is that the social divide in Japan is neither as drastic nor as recent as many reports suggest. Like many developed nations, Japan's Gini coefficient has been rising since the 1970s, making it impossible to pin on Koizumi alone. Likewise, Robert Alan Feldman, an economist at Morgan Stanley, points out that the most recently cited income-gap figures fail to take into account government transfer ...