Prime minister Shinzo Abe’s victory in the recent election in Japan opens up significant opportunities for political and economic change. But not in the case of one of the biggest structural problems facing the Japanese economy — the tendency of business to save vastly more than it invests, with deflationary consequences.
In an ageing society like Japan’s, deflation ought to be a dwindling threat. Rising numbers of elderly people could be expected to save less while consumption should increase with age thanks to relatively generous pensions and healthcare. At the same time, a shrinking workforce should enjoy increased labour market power and demand higher wages.
In the event Japanese households have reduced their savings close to zero. Yet this has been more than offset by the rise in corporate savings. At the same time wage growth has failed to materialise. Lifetime employees continue to value security of employment and feel a loyalty to the company, which keeps them docile. There has also been a big increase in the number of part time workers whose bargaining power is weak.
Too much income is trapped in a risk-averse corporate sector awash with record profits, while Japan suffers from a structural deficiency of consumer income. The country has only escaped a 1930s-style slump because the government has run huge deficits to sustain demand, at the cost of soaring public sector debt.
The Abe government’s response to cash hoarding has been to push for higher wages and try to make corporate governance more shareholder friendly. The companies act was amended in 2014 to promote better boards and a corporate governance code was introduced the following year. The aim was to enhance corporate performance and encourage co-operation with stakeholders while securing shareholder rights. A stewardship code was also brought in to prod institutional investors into engaging with company management.
While the reforms have encouraged a greater focus on returns on equity, there has been no radical change in business behaviour. As deputy prime minister Taro Aso acknowledged recently, there is an issue here of form versus substance. Akira Matsumoto, chairman of food group Calbee, declared at an OECD conference last month that his governance priorities were customers first, followed by employees, then the community, with shareholders trailing in fourth place. That view is widely shared by other business leaders. And Japan continues to have the lowest dividend payout ratio among the Group of Seven major developed countries.
The limited effectiveness of Japan’s governance reforms is, in one sense, unsurprising. Japanese company law in the postwar period made directors formally accountable to shareholders. But in a dispersed ownership system lacking dominant family shareholders, such accountability was meaningless. Companies were run in the interests of managers and workers. Indeed, the genius of the postwar Japanese model of capitalism was that it did away with capitalists. In place of the money motive as the motor for economic growth, it substituted the employees’ work ethic.
The Japanese economy is currently enjoying a cyclical upturn. Yet Japan remains stuck with its structural savings surplus and governance scandals endure. When I asked Tomoyuki Furusawa, deputy director-general of the supervisory bureau of Japan’s Financial Services Agency, how long it would take for genuine shareholder accountability to emerge, he suggested five years.
Responding to the same question, Mark Mobius of fund manager Franklin Templeton, opted for 20 years. He felt the stakeholder mindset was too entrenched to permit earlier change. Certainly governance reform alone seems unlikely to secure sweeping changes in business savings behaviour.
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