Andrew Smithers & Pelham Smithers
Financial Times – Letters, 16th September 2019
Sir,
In an article in Tuesday’s Financial Times Richard Koo claims that Japan’s economy suffers from inadequate demand because business investment is being depressed as a result of Japanese companies seeking to improve their balance sheets. The evidence is strongly against both these claims.
Japanese business investment is not depressed. It is currently 2.8 percentage points of GDP above the US and has been persistently higher than that of the US despite the fact that the population of working age is falling in Japan and rising in the US. The current level of capex in Japan is 16.3% of GDP. Despite the change from a growing to falling working population this is above its 40-year average of 15.7%.
US business investment is depressed, in our view by the bonus culture from which Japan seems blissfully free, but the investment gap is far too large between the two countries to justify claims that it is anything but buoyant in Japan.
It is equally clear that Japanese companies are not seeking to improve their balance sheets. If they did, they would be net issuers of new equity rather than persistent buyers. The data for equity issuance and equity repurchase are available for 2,113 companies listed on the TSE out of a total of 2,143 going back five years. They have been persistent net buyers by at least ¥ 3 trn. each year and last year by ¥4.8 trn.
Japan needs a large fiscal deficit to offset the net savings’ surplus of its business sector but this is the result of excessive savings not inadequate investment. The excess savings are due in our view to the overstatement of depreciation, which seems to result from the requirements of the tax code, and the dividend pay-out ratio, which is low even in relation to published profits and would be even lower if these were not depressed by excessive depreciation.
Japan needs to reduce its fiscal deficit and therefore to reduce the excess savings of the business sector. Reducing the rate of corporate tax and depreciation allowances are one way to do this, another is changing the tax code so that, as in the US, the charge for depreciation in published profits can be much lower than the amount allowed for tax.
Andrew Smithers
London W8
Pelham Smithers
London EC3