Macroeconomics
THE EXCESS INVESTMENT PROBLEM
Japan’s Abenomics proposes to boost investment back to
the JPY70
trillion level seen prior to the financial crisis in 2008, through mostly lower taxes and supply side reforms. Yet Japanese capital ex p e nd it u r es have been largely stagnant despite low interest rates and the availability of funds. Interviews and other press accounts suggest little need to expand domestic capacity.
Over the past
decade, gross fixed income in the US averaged 10.5% of GDP, while in Japan it averaged 13%. Abe’s growth strategy is likely to aggravate the excess investment problem. That in turn seems to be at the heart of the persistent low returns on capital (profits), low interest rates and deflationary pressures.
The famed Japanese excess savings is Japan’s Abenomics proposes to boost
investment back to the JPY70 trillion level seen prior to the financial crisis in 2008, through mostly lower taxes and supply side reforms
conditions. In contrast, Japan’s corporate
sector has accumulated savings of 7.5% of GDP.
Work by Lombard Street Research shows that the combination of depreciation and retaining earnings amount to almost 30% of Japan’s
not, or no longer, in the household sector. The household savings has fallen below 2% of GDP, being drawn by the adverse demographic
FX
2011 GDP. In the US, where corporations also enjoy a financial surplus, the comparable ratio is about half as large as Japan’s.
The link between productivity and inflation on one hand, and wages on the other, have been decoupled. This allows the decoupling of wages from profits in the US and globally, as
illustrated by
Chart 1 (posted by Bruce Bartlett, former advisor to Reagan and Bush, on the New York Times Economix blog). Labor’s share of the social product is near record lows, while profit margins are near record highs.
more out of labor.
Profits margins are high, but not only from s q u e e z ing Some equity
analysts suggest that 2/3 of the improvement in US profit margins, are being driven by changes below the operating line: taxes and interest rate expenses.
This is helping disguise the FX TRADER MAGAZINE October - December 2013 63
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