Japan Inflation, Growth Set to Falter as Corporations Spend on M&A’s, Not Wages

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Japanese corporations are looking to reinvest in expanding their overseas operations, rather than into higher worker compensation at home, due to their low confidence in the domestic consumer market.

Kristian Rouz – Japan’s largest corporations say they are more inclined to invest their cash reserves into mergers and acquisitions (M&A) rather than higher worker compensation, as they are struggling for international competitiveness in the competitive global market for manufactured goods. 

Having a larger enterprise allows companies to withstand overseas headwinds more efficiently, however, the ongoing wage stagnation means both GDP growth and inflation will remain subdued, stirring concerns of the health of the Japanese economy, with its debt-to-GDP ratio of roughly 400 percent. 

Prime Minister Shinzo Abe and his cabinet have been pressuring Japan’s corporations to hike salaries and wages for years in their effort to eliminate the threat of disinflation, which has plagued the Japanese economy for decades. Higher wages would allow consumer spending to accelerate, resulting in a more sustainable economic growth that is less reliant on exports and the yen’s exchange rate. 

Nonetheless, Japanese enterprises have been actively investing in corporate growth and expansion projects, including overseas expansion and branching-out – partially, in order to avoid some domestic regulations.

Japan’s GDP rose 0.6 percent quarter-on-quarter, or 2.5 percent annualized, in Q2, whilst inflation has remained tame and well below the Bank of Japan’s (BOJ) 2-percent target at 0.7 percent in September. 

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During his visit to Japan last week, President Trump noted the Japanese economy is not doing as well as that of the US – even though the latter is still mired in the abundant and complex structural issues that hamper economic expansion.

“The Japanese people are thriving, your cities are vibrant and you’ve built one of the world’s most powerful economies. I don’t know if it’s as good as ours, I think not,” President Trump said.” And we’re going to try and keep it that way but you’ll be second.”

A Reuters poll released Monday showed that the Japanese corporate sector is seeking profitable opportunities overseas, including by expanding into the US, whilst few companies are ready to take on the risk of relying solely on the domestic market. Japan’s population is ageing, meaning its consumer market will contract in the long-term – unless wages pick up substantially.

Ironically, as the offshoring effort in the corporate sector prevents wages from growing, companies are less likely to expand in the domestic market because of the stagnant wages, in a vicious circle of deflationary economics PM Abe faces.

On their part, Japanese consumers are abstaining from spending due to the anemic wage growth. 

“It’s very difficult to change the mindset of households,” Marcel Thielient of Capital Economics says. 

Meanwhile, Japan’s corporate sector has also faced several high-profile scandals recently, the largest of which is Kobe Steel’s forgery of quality control data, entailing years of production of substandard materials.

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Another major setback was Toshiba’s failed nuclear projects in the US, resulting in the sale of its strategically important semiconductor division in order to make up for the losses. Plus, Mitsubishi Motors’ inaccurate fuel economy data, Olympus’ corruption and embezzlement scandals, and Takata’s lethal airbags have all added to the mounting concerns of the quality of Japanese products. 

“The worry might be that the competitiveness and standards of Japanese corporations is slipping,” Prof. Thomas Clarke of Sydney’s UTS Business School says.

According to the Reuters poll, 23 percent of Japanese companies say they are planning to invest in M&A, while only 4 percent are allocating capital into wage increases. However, only 5 percent of companies have actually put their money into M&A, whilst 3 percent set funds aside for wage increases. 

Japan’s corporate sector is also calling for a fiscal stimulus, as the BOJ’s ultra-loose monetary conditions have failed to spur inflation and domestic demand. 

“Abenomics should focus on a growth strategy to revive the economy, preferably with support from fiscal policy,” a Reuters poll respondent in electronic furnace production industry said. “Easing monetary policy to the extent of adopting a negative interest rate policy produces side effects, and it is time to consider tapering.”

Only 21 percent of respondents say they would prefer another economic policy to Abenomics. 

All this means after years of Abenomics, the Japanese economy is still sluggish, but there’s little demand for substantial tweaks to the current policies. Whilst the Japanese enterprises and consumers aren’t feeling most confident, a sustainable status-quo is preferred to risky economic experiments.

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