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Japan's corporate savings
Wednesday, 12 January 2011 12:00

Japan’s government has world record public debt.  Japanese household incomes have declined in 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.  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 not enough in productive activities.

As the OECD analyzed a few years back, rising corporate savings had been a strong trend in all advanced countries since 2002.  In arithmetic terms, this reflected falling corporate investment and rising corporate saving shares.  An important long term influence is that corporations are getting a larger share of the national pie.  This rise in corporate gross operating surplus is similar to the rise in corporate savings.  This is due to what is known as “wage moderation” (that is, screwing down on workers’ wages) with the help of technological change and globalization as investment is increasingly taking place overseas.  
Japan, Germany and the UK (along with China) are the big leaders for increased corporate savings.  For Japan, it is argued that the increase represents “a continuation of a trend which has underpinned a sustained recovery in corporate balance sheets from the financial crisis of the early 1990s and which has been further boosted by gains in competitiveness since 2000”.   
Just last year, the IMF looked into this issue for Asia.  As they 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. 
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 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.
Brookings Naoki Abe argues that when Japanese corporations eventually got through the lost decade, they stilled played tight.  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. 
In short, the corporate sector remained reluctant to expand its activities.  “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.
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

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