From Mr Grant Lewis.

Sir, Martin Wolf argues (“Japan’s unfinished policy revolution”, April 10) that the Bank of Japan’s efforts to reflate the economy are doomed to fail without reforms to what he characterises as a dysfunctional corporate sector with a structural propensity to save rather than invest.

There is no doubt that the corporate sector’s saving rate in Japan has been abnormally high in recent years. But so have those in much of the rest of the developed world, as companies have slashed investment in the face of insipid demand, high levels of economic uncertainty and concerns over their ability to access finance through deleveraging banking systems. The question is whether there is something peculiarly structural about Japan’s high corporate savings rate.

The evidence suggests not. Before Japan’s bubble burst back in the late 1980s, the behaviour of Japanese corporations was exactly the opposite. Companies amassed huge debts and by 1990 Japanese non-financial corporations were running a deficit of around 10 per cent of gross domestic product. Post-crisis, that all (slowly) changed and by the late 1990s the sector had begun to run a financial surplus, something that it has done ever since. But the level of corporate savings has not been immune to the cycle – as the economy recovered through the mid-noughties the corporate savings rate fell as companies saw increased investment opportunities on the back of strengthening demand. Corporations only began to increase their savings rates once again as the global financial crisis hit and the Japanese economy went into a nosedive.

None of this suggests that the Japanese corporate sector is structurally predisposed to running large financial surpluses. Indeed, the evolution in the corporate savings rate in the mid-noughties suggests that, with a tailwind of stronger demand, a weaker yen and the prospect of inflation, lowering the incentive to hold cash, Japanese companies will boost their investment, raising both growth and productive capacity. They should also be more willing to raise wages, another key piece of the jigsaw in definitively ending deflation. Japan’s companies therefore represent a huge source of untapped demand, not a structural impediment to recovery.

Grant Lewis, Head of Research, Daiwa Capital Markets Europe, London EC4, UK

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