TOKYO -- "Retained earnings" has become a headline phrase in Japan as the newly formed opposition Party of Hope has begun calling for taxing the funds in the lead-up to Sunday's lower house election. That idea, though, is not new, and debate is often rooted in misunderstandings of what these funds really are.
Listed Japanese companies amassed about 251.6 trillion yen ($2.21 trillion) in retained earnings at the end of fiscal 2016, an all-time high.
Retained earnings are often confused with cash on hand, but they are not one and the same. Of the balance sheet's three segments -- assets on the left side and liabilities and shareholders' equity on the right side -- retained earnings are counted as part of the third, and the sum tends to build up over the years. Cash, on the other hand, is part of assets.
Retained earnings are often used for capital investment. If companies that have already done so for production facilities see retained earnings taxed, they may have to sell off assets to pay the bill. Some critics say the levy would amount to double taxation.
Still, many Japanese companies have ample cash on hand as well. Aggregate cash and deposits held at listed corporations topped 100 trillion yen for the first time in history at the end of fiscal 2016, up 6 trillion yen from the previous year and an increase of more than 43 trillion yen since fiscal 2007.
Retained earnings have time and again attracted attention, perhaps due to their sheer scale, notably in the wake of the 2008 global financial crisis. Automakers laid off nonpermanent workers, prompting the Japanese Communist Party to demand that retained earnings be used to keep workers on.
Kaoru Yosano, then minister of economic and fiscal policy under the Liberal Democratic Party, questioned whether companies with "trillions of yen" in retained earnings should "take jobs away from people who earn less than 1,000 yen an hour."
During his brief reign as prime minister, Yukio Hatoyama considered a tax on retained earnings at blue chips. The current administration under Prime Minister Shinzo Abe has appealed to the business community to reinvest those accruals.
The Party of Hope argues for taxing retained earnings and using the revenue as a tool to spur employment and capital investment. The Financial Services Agency is also considering drawing up guidelines to encourage companies to use these funds for growth investment.
(Nikkei)
