TOKYO -- The perception that paying employees more has broad social benefits, including for corporate profits, can help in narrowing the income gaps that have fueled protectionism around the world, Osaka University Professor Fumio Ohtake argues.

The expert on labor and behavioral economics shared his outlook for 2017 with The Nikkei. Excerpts from the interview follow:

Q: What do you make of the rising wave of antiglobalization?

A: The British vote to leave the European Union and Donald Trump winning the presidential election in the U.S. occurred against a backdrop of income polarization. People at the top remain rich while income keeps dropping for the middle class and below. In the past, the American dream promised opportunities to succeed, but now such chances are limited.

Statistics show that income inequality in the U.S. has been growing since the 1980s. But people came to recognize it only after the Lehman Brothers collapse. If steps had been taken to address the problem earlier, the protectionism threatening economic contraction would not have gained momentum.

Q: Has capitalism become dysfunctional?

A: No. The spread of capitalism has helped enrich the world. As emerging economies grew richer, the portion enjoyed by advanced countries have decreased. Capitalist nations responded to the rise of socialism by enhancing welfare and expanding the public sector to try to narrow income gaps. But such efforts are not enough now.

Q: What specific steps need to be taken?

A: One is to supplement pay for low earners via taxes and social security. Another is to invest in youth and older people through education. Convincing companies to raise wages is no easy task. It would help to have a widely shared understanding that we must raise labor's share of income to maintain the social system, and that higher wages boost profits.

Q: Wage growth in Japan remains low.

A: Actually, we should see it as rising. The U.S. and advanced nations in Europe face tough competition from a deeper pool of human capital in China, India and other emerging markets. This creates latent downward pressure on wages.

But in Japan, there is upward pressure on wages owing in part to a declining population. Overall, wages are slightly rising.

There are concerns about secular stagnation in Japan and other advanced economies. Fiscal policy may generate temporary demand but cannot realize sustainable growth. Only steady efforts to change corporate management and how people work can lift growth.

With its long working hours and low productivity, Japan has room for improvement when it comes to inefficiencies.

Q: Why are consumer prices not rising as the Bank of Japan envisioned?

A: No matter how many times the BOJ says that prices will go up in the future, people's expectations are formed by how things have been. The BOJ had hoped that people's sense of what things cost would shift along with expectations. But this was just wishful thinking.

Quantitative easing can be expanded only so much, so changing the focus of policy to interest rates was a appropriate move.

Q: Righting Japan's public finances is another challenge.

A: It was not good to postpone the increase in the consumption tax. Budget resources that should arguably go to other areas, such as research and development aimed at raising productivity, are being eaten up by social security, nipping green shoots of growth.

The opposition has criticized legislation to curb of pension benefits on lower wages, calling the measures the "pension cut law." But I commend the substance of this law as a way to overcome "silver democracy" [in which seniors wield greater influence over the public debate owing to their large share within the population.]

If seniors would understand that pension benefits will not rise unless the economy is revitalized, then they would be more willing to support policies that support younger generations.

Interviewed by Nikkei staff writer Mamoru Fujikawa