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