Incomplete Recipe for Growth
Nov. 16, 2015
New government data on Japan’s economy shows it is continuing to lose steam. While personal spending is marginally up, companies are investing less and the the economy shrank between July and September. It is the second consecutive quarter of contraction.
Japan's GDP lost 0.2 percent during the third quarter, the equivalent of minus 0.8 percent in annual terms. Annualized growth during the second quarter was minus 0.7 percent.
Consumer spending, which accounts for more than 50 percent of GDP, rose 0.5 percent on the back of stronger employment figures. Housing investment also increased 1.9 percent. But corporate investment was down 1.3 percent, due to concerns over China and the global economy. Public investment dropped by 0.3 percent.
Government leaders say Japanese companies should do more to prop up the economy. “The biggest problem is the lack of strength in capital investment,” says Japan’s Economic Revitalization Minister Akira Amari. “Corporate leaders remain caught in a deflationary mindset."
Amari wants companies to increase both wages and investment to achieve sustainable growth and says he will continue to press corporate leaders to understand this.
NEWSROOM TOKYO's business anchor Yuko Fukushima joined presenters Sho Beppu and Aki Shibuya to offer more perspective on the Japanese economy. Fukushima also filed an in-depth report.
Beppu: Yuko, you've been reporting on the good earnings results of Japanese companies. What's stopping their positive performance from spreading to the rest of the economy?
Fukushima: Several companies announced their best earnings ever, and stock prices have soared since the launch of Abenomics three years ago. The problem is, many households are struggling while a small minority enjoys the benefits.
The Nikkei index has doubled over the past three years and some people are benefiting from Abenomics. But they are are few and far between. A Bank of Japan survey of 2,000 people found only five per cent who said they were better off. Almost half thought otherwise.
Inflation is hitting some families hard. Food producers are paying more for materials because of the weaker yen, so prices are going up. A Tokyo University Index that tracks supermarket data shows food prices climbed 1.5% over the past year. Wages rose just 0.4% in that period, not even half of the inflation rate.
The combination of rising prices and stagnant wages explains why household spending in Japan has been flat for two years. But as working families struggle, it is a different story for their employers. Many companies are thriving, especially big exporters. Average operating profits by Japanese companies have increased substantially in recent years, thanks largely to the weaker yen led by Abenomics.
Why aren’t people’s lives getting any better? Government officials are pointing to the board room. They say company bosses are ignoring their calls to raise wages.
“What are companies doing? Is retaining earnings their only goal? No! The government’s doing what it has to do now it’s the companies’ turn to do their part to prop up the economy,” says Japan’s Finance Minister Taro Aso.
Aso accuses companies of hoarding money, and the data supports him. Retained earnings at Japanese companies have increased along with their profits. In the business year 2014, they made a record 354 trillion yen, nearly three trillion dollars. That's a 75% increase in 10 years.
Prime Minister Shinzo Abe claims everyone can be a winner under his policies. He has set a GDP target of 600 trillion yen or 4.8 trillion dollars, meaning an economy that is 20% bigger. To make that happen, he took the unusual step of putting a direct request to corporate bosses: raise wages. But companies have been reluctant to comply.
One manufacturer sitting on a pile of cash is Thine Electronics, a developer of IC chips for cameras. Its retained earnings amount to three times its sales. The company did raise wages this year, but the CEO says it needs to save for a rainy day.
“There are good times and bad times. We need ample retained earnings to prepare for a crisis, or else we will be in serious trouble,” maintains Thine Electronics CEO Kazutaka Nogami. It is a cautious strategy that some analysts are warning could lead to trouble for the economy as a whole unless big companies start using their earnings more productively.
“The important thing is to deliberate over the best way to use the money the companies have earned,” explains Barclays equity strategist Hajime Kitano.
Shibuya: So Yuko, what does this analyst mean by "the best way" of using corporate earnings?
Fukushima: Let me elaborate a little. A growing number of foreign investors are buying Japanese stocks, and this is putting pressure on companies to distribute more of their profits to stockholders. That is one reason why employees are getting a smaller share of the pie, and there is data to back this.
Beppu: So it's no wonder many people say they're not feeling the benefits of Abenomics.
Fukushima: Exactly. So looking at the bigger picture, we can say Abenomics did succeed in putting more money into the hands of companies, especially large corporations. Now the government needs to find a way of spreading these benefits to consumers to get the real economy up and running.
Shibuya: So what can be done to redistribute the benefits of Abenomics more evenly?
Fukushima: Well, some members of the ruling party say the government should tax retained earnings in a move that would encourage companies to use that money, instead of sitting on it. That is already the case in South Korea, so there is a precedent. But it's too early to tell if this kind of policy is effective because the new tax was only launched this year. Here in Japan, ministers Aso and Amari are against this type of measure because they say it would amount to taxing corporations twice. So for now, it's really up to the CEOs to decide how they want to redistribute their earnings.