Encourage firms, households to use cash reserves to spur economic growth

To achieve economic recovery led by domestic demand amid various concerns, such as inflation and slowdowns in economies abroad, it is necessary to implement measures to encourage companies and households to use their cash reserves for investment and consumption.

Japan’s gross domestic product in July-September declined an annualized 1.2% from the previous quarter, moving into negative territory for the first time in four quarters, according to a preliminary report. The economy can be said to have stalled, despite showing a moderate recovery as business activities resumed.

Private consumption, which accounts for more than half of GDP, showed slow growth, rising only 0.3% from the previous quarter. Corporate capital investment grew 1.5%, also showing a smaller increase than the previous quarter. It is worrisome that these two pillars of domestic demand showed sluggish increases.

Moreover, the July-September period saw a significant increase in imports, which have a negative effect on GDP. In addition to increases in imports of items such as coal and oil, a temporary surge was observed in the number of payments from domestic companies to overseas advertising-related agencies, according to the government.

In the West, interest rates are being raised in an attempt to bring inflation under control, raising concerns about economic downturns. China, which adheres to its zero-COVID policy, has seen clear signs of a slowing economy. All these factors could adversely affect Japan’s exports in the immediate future. It is important to achieve a self-sustaining recovery that does not rely on external demand.

Private consumption in the July-September period saw a smaller increase due to a slowdown in spending on services such as accommodations amid the seventh wave of novel coronavirus infections. Inflation also played a role, as rising prices caused a slowdown in sales of items such as home appliances and smartphones.

Wage increases are essential to prevent a slowdown in consumption. In the economic stimulus package compiled in October, the government made “investment in human resources” a key focus, stressing that it will expand support to encourage companies to increase wages. However, there are still no specific measures available.

Some argue that the current tax incentive program for wage hikes only benefits a limited number of enterprises with high profitability. The hope is that the government will implement measures that can be used by a wider range of companies, including small and midsize ones that are in the red.

At the same time, there are many challenges that companies have to tackle, such as decarbonization and digitization. It is important for companies to achieve growth by developing new businesses through aggressive investment, thus continuing to increase wages.

Companies’ retained earnings, which are cumulative profits, topped ¥500 trillion at the end of March. Why haven’t these funds been sufficiently spent for wage increases and capital investment?

Also, households have more than ¥2 quadrillion in personal financial assets. Most of the past coronavirus relief and other benefits provided have been simply parked in savings, it has been noted, therefore being ineffective in stimulating consumption.

The government should scrutinize why retained earnings and household savings have simply been left to accumulate. It is hoped that based on these analyses, the government will take efficient measures so that these cash reserves will be used effectively.

(From The Yomiuri Shimbun, Nov. 17, 2022)