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Rich companies, poor country

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Japan’s government has the world record for public debt.  Household incomes have declined over the past 10 years.  Japan’s citizens are now saving less and less as the population ages, and personal savings will turn negative later this decade.  Japan’s level of poverty is the fourth highest among the OECD group of rich countries.  And income from work and savings has become 30 per cent more unequal since the mid-1980s.

And yet, Japan’s corporations are sitting on more and more cash.  Will there be a corporate takeover of this beautiful country? 

Japanese corporations are now investing too much in Japanese and US government bonds, and other investment securities, and not enough in productive activities.

As the OECD analyzed a few years back, rising net corporate savings has been a strong trend in all advanced countries since 2002.  In arithmetic terms, this reflects falling corporate investment and rising corporate saving.  An important long term influence is that corporations are getting a larger share of the national pie.  This is due to what is known as “wage moderation” (that is, screwing down on workers’ wages) with the help of pressures from technological change and globalization as investment is increasingly taking place overseas.  Japan, Germany and the UK (along with China) have seen the biggest increases in corporate savings.     

Just last year, the IMF looked into this issue for Asia.  It said, “Although high corporate profits and savings have been seen across the globe, the rise in Asia has been particularly striking, especially given anemic investment demand”.  Rising corporate savings has occurred in Japan, Korea, China and India, but also in the ASEAN region.  And as households have not reduced their savings commensurately, total private savings have gone up dramatically. 

Are there any Asian specific reasons for this rise in corporate savings?  A number of factors have been put forward, like energy and land subsidies, cheap credit, low dividend payout rations, and robust economic growth.

What to do?  If financial markets were better developed, corporations would not need to hang onto retained earnings for their internal financing.  And with better corporate governance, corporations might also have better access to financial markets.  In addition, better corporate governance might push managers to look after shareholders by paying dividends from any profits which are not required to finance investment projects.  The IMF estimates that if Asia can converge to the average level of financial development and corporate governance of the G7, then corporate savings could be lowered by as much as 7 per cent of GDP! 

Japanese corporations have continued to pay out only a small share of their profits as dividends, despite strong earnings and record low interest rates.  Japanese companies have also not engaged much in equity buyouts, which have become a popular means of distributing profits to shareholders among Anglo-Saxon corporations.  The fact that Japan's sleepy management sits on so much savings contributes to delaftionary pressures and reduces the impact of monetary expansion by the Bank of Japan. 

Brookings' Naoki Abe argues that when Japanese corporations eventually got through the lost decade, they stilled played tight even though they had worked off excessive debt.  They had been seduced by the culture of stinginess!  In the long period of slow growth between February 2002 and October 2007 companies abated risk assets and cut back on nonessential expenditures and employment costs, just as they had during the lost decade.  The number of part-time workers increased, debt-equity ratios declined, and the corporate sector developed a savings-to-investment surplus.  According to Takuji Aida, about 50 per cent of Japan's listed companies are now virtually debt free.  They are even more financially conservative than my grandmother! 

The corporate sector remained reluctant to expand its activities.  They are not very active in acquiring new productivity-enhancing technologies, expanding into new markets, developing new products or growing through mergers and acquisitions.  In short, they are unwilling to take on new risks to develop their businesses or lack the creativity to do that.  If they are not willing to invest their savings in productive activities, this savings should be returned to shareholders who could either spend it or invest it elsewhere.  But Japanese business elites are a law unto themselves, and shareholder activism barely exists. 

“No more excess” appears to be a mantra for the Japanese business sector.  This may sound wise, but ultimately it is making the Japanese economy weaker and despairingly vulnerable to external shocks, as Japan has nothing to cling to but the other countries’ demand for its economic growth.

To stimulate investment what is needed among many other things is a massive deregulation of the economy, to open up new areas of business, and a dramatic opening to foreign direct investment so that new competitive pressures make Japanese business fight for their life.

Most regrettably, this is not likely to happen any time soon  

Bring back the samurai!




Growing Unequal? Income Distribution and Poverty in OECD Countries, OECD, 2008


OECD Economic Outlook No. 82 (December 2007)


World Economic and Financial Surveys.  Regional Economic Outlook. 

Asia and Pacific.  Building a Sustained Recovery.  October 2009


Japan’s Shrinking Economy.  Naoki Abe, Guest Scholar, Foreign Policy, Center for Northeast Asian Policy Studies, Brookings Institute


Saving Japan from Corporate Savings, Takuji Aida, UBS Securities Japan Ltd


Public savings, household savings and corporate savings: Where are the anomalies, what would international coordination of economic policies entail?

Flash Economics, Economic Research.  Natixis, 21 July 2010


A Detailed Look at Savings in Japan