Companies must focus on aggressive investment and wage increases

Business sentiment among large manufacturers is deteriorating due to the increasing burden from the cost of resources and raw materials. However, now can be said to be the time when companies need to invest aggressively. It is hoped that they will focus on capital investment and wage increases.

In the Bank of Japan’s Tankan quarterly economic survey for September, the diffusion index for large manufacturing companies, a major indicator of business sentiment, declined one point from the June survey to eight. This was the third consecutive quarterly drop.

Japan relies on imports for many of its resources. In addition to the impact of Russia’s invasion of Ukraine, the weak yen and strong dollar have caused import prices to rise. This has spilled over into areas such as transportation costs and material prices, putting pressure on corporate profits.

By industry sector, the indexes for “nonferrous metals” and “pulp and paper” showed a notable deterioration in business sentiment. The Tankan index for “motor vehicles,” a key Japanese industry, improved by four points as the shortage of semiconductors eased, but still remained severe at minus 15.

Large manufacturers have been expected to be a driving force for economic recovery, given their strong business performance. It is worrisome that business sentiment among them continues to be sluggish.

In addition, the diffusion index for the large nonmanufacturing sector, despite the tailwind from the resumption of economic activities, was up only one point to 14. The index for “accommodations and eating and drinking services” improved, but that for “retailing,” which is suffering from higher purchase prices, declined.

Under such circumstances, a strong appetite for capital investment can be said to be a positive factor. Companies, both manufacturers and nonmanufacturers and irrespective of their size, are planning to step up capital investment in fiscal 2022 by 16.4% from a year earlier, the largest on record in a September survey.

The environment surrounding corporations is at a major turning point, as there is an urgent need for them to make efforts toward decarbonization and also to deal with digitization. If they fail to invest at this time, they will not be able to regain their international competitiveness. It is hoped that management will continue to make aggressive investments.

More important is to raise wages. Household budgets, especially those for low-income earners, are becoming increasingly strained due to high prices for energy, food and other products. It is essential for companies to raise wages above the increase in commodity prices, in order to boost consumption and restore the virtuous cycle of the economy.

Large manufacturers, especially those that export heavily, will see their overseas sales in yen terms increase due to the weaker yen. Companies that benefit from the yen’s depreciation have a social responsibility to take the initiative in returning profits to their employees through such measures as increasing their winter bonuses. They also must make efforts to improve the treatment of non-regular employees.

Corporate internal reserves, which are the accumulation of past profits, continue to increase, surpassing ¥500 trillion for the first time at the end of fiscal 2021. Companies surely must have enough surplus to allow wage increases and capital investment.

(From The Yomiuri Shimbun, Oct. 4, 2022)