April 27, 2015 1:00 pm JST
Abenomics' next phase

Policies must boost corporations' power to earn

SHIGERU SENO, Nikkei senior staff writer

TOKYO -- Prime Minister Shinzo Abe in early April called on small businesses to raise wages.

     "The government is going to do everything in its power," Akira Amari, Japan's economic and fiscal policy minister, said in a TV program aired by national broadcaster NHK on April 19. The remark came after Abe made the request to small businesses at a meeting among representatives from the government, business community and labor unions on April 2.

     According to Amari, the government has repeatedly intervened in private-sector talks between labor and management, an unusual move for a developed nation, because it wants "to artificially create a virtuous circle [of higher wages leading to increased consumption, which will in turn improve corporate earnings] until such a cycle happens without interventions."

Time limit     

"The government will likely press companies to raise pays for two more years, before hiking the sales tax to 10% in April 2017," a private-sector economist said.

    Since Abe came to power two years ago, his administration has helped heighten inflation expectations with aggressive monetary easing and supported the economy with massive fiscal stimulus.

     Under the so-called third arrow of his economic revitalization program, the Abe government has also loosened some rigid regulations. Wage hikes are the government's final gambit for achieving its stated goal of breaking out of deflation.

     If companies pass on money to households by increasing wages, a virtuous circle in which expanded consumption leads to expanded earnings, which trigger wage hikes for further consumption, is more likely to be achieved.

     Since Japan's bubble economy collapsed nearly a quarter of a century ago, the country has lost more than 400 trillion yen ($3.3 trillion) in national wealth. 

     Companies fraught with massive debts, bloated workforces and excess capacity were desperate to shrink their balance sheets. After a financial crisis in the 1990s, asset deflation in stock and land prices deeply hurt the real economy.

     Now, with the Nikkei Stock Average closing above 20,000, Japan faces a test: Can it escape the "lost quarter-century?"

In the vanguard

Corporate Japan will be the central player in the nation's battle to beat deflation and increase national wealth. One focal point is capital spending. "Can companies become a little more willing [to invest]?  That's the key," said Hajime Takata, chief economist at Mizuho Research Institute.

     The other focal point is how to respond to globalization. Japan's gross domestic product 15 years ago accounted for 14% of global GDP. Its recent share is around 6%. Japanese companies cannot enhance profitability without tapping overseas demand.

     The weakening yen has prompted some Japanese manufacturers to shift work back home, but the overall trend of raising overseas production ratios is unlikely to change.

     The Bank of Japan says "new Japanese global companies are those that expand overseas while maintaining their domestic businesses." They can secure high profitability by managing to balance the two businesses, according to the central bank.

     Companies need to pursue both domestic and overseas demands, not one or the other. Rather than providing excessive monetary and fiscal stimulus, there are many things the government can do to help drive up stock prices.

    To capitalize on Asia's booming growth, an early conclusion of negotiations on the Trans-Pacific Partnership trade agreement is vital. There is also much room for attracting foreign investment by further reducing corporate tax rates.

     There is no time to waste in regulatory reforms to create higher productivity and make the social security system more sustainable. It is imperative for the government to support corporate Japan's earnings power with thoughtful policies.

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