Demographic Transition and the Dynamics of Income Distribution in Japan: A Bayesian State-Space Approach

2026-05-18

AI Summary

This study investigates how demographic shifts—specifically population aging and shrinking household size—drive the evolving dynamics of income distribution in Japan. To this end, it introduces a novel approach that integrates a Bayesian state-space model with the Generalized Beta distribution of the second kind (GB2), enabling the reconstruction of the full income distribution over time using only grouped income data. The framework incorporates time-varying latent variables to capture the heterogeneous effects of demographic factors and facilitates counterfactual analysis across different segments of the income distribution, making it particularly suitable for contexts lacking micro-level data. Empirical results reveal that aging predominantly exacerbates inequality in the lower tail of the income distribution, whereas declining household size significantly affects the upper tail; together, these demographic trends constitute key drivers behind rising income inequality in Japan.

Abstract

We develop a Bayesian state-space model for analyzing the dynamic evolution of income distributions using grouped income data. The model combines the generalized beta distribution of the second kind (GB2) with latent time-varying parameters to capture changes in the entire income distribution over time. Using Japanese household income data, we examine how demographic factors, particularly population aging and declining household size, affect inequality dynamics. The results show that demographic changes have heterogeneous effects across different parts of the income distribution and contribute substantially to the evolution of inequality. Counterfactual analyses indicate that aging and household size changes affect the lower and upper tails of the distribution differently. Because the proposed framework requires only grouped income data, it can be applied to countries where micro-level income data are unavailable.

Problem

• Demographic Transition
• Income Distribution
• Population Aging
• Household Size
• Income Inequality

Innovation

• Bayesian state-space model
• generalized beta distribution of the second kind (GB2)
• grouped income data
• income distribution dynamics
• demographic transition