JAPANESE PERSPECTIVES

How money changes hands in deflationary Japan

by Noriko Hama

An old Japanese saying has it that money is a roving commodity. It will forever keep changing hands, so that yesterday’s borrowers are today’s lenders, and today’s impoverished will be tomorrow’s affluent.

How very true. For it is a fact that in 1990, Japanese households recorded a net savings surplus of 36.2 trillion yen. By contrast the corporate sector suffered a savings shortage of some 26 trillion yen. Companies were spending beyond their means, and households were providing the necessary financing to make up the difference. And the government was sitting pretty with a net savings surplus position of 12.2 trillion yen.

Households provided the cash, the companies borrowed and spent it, and the resulting profits they generated provided the government with enough tax revenue to keep going without having to resort to debt issuance. That is how money roved around the Japanese economy just over a decade ago.

Not any longer. By 2001, the latest year for which such statistics are available, money was changing hands in a considerably different fashion.

Households did still manage to record a net savings surplus, but the size of the net savings for that year amounted to just 10.8 trillion yen — barely one-third the level recorded in 1990. Meanwhile, from its net debtor position in 1990, the corporate sector had actually swung into a net saver position of 18.6 trillion yen. As for the government, it now found itself with a very large net savings shortfall of 42 trillion yen.

Because of deflation, household incomes are not growing. Yet people have a standard of living to maintain and are reluctant to cut spending in line with the decline in incomes. So they have less and less to set aside as savings. On the other hand, companies are generating more cash flow because they are cutting more and more costs and spending less and less on investments. The resulting scarcity of economic activity is creating a revenue shortage and ever-larger borrowing requirements for the government sector.

Given this change in how money circulates in the Japanese economy, it is no wonder that the banking sector here has mired itself in so much difficulty over the years. The postwar function of Japan’s banking sector was to collect household savings in the form of deposits and feed those savings into the large manufacturing industries through lending. Now people have less and less money to deposit with the banks, and companies have more and more surplus cash they are wary of spending on investments. Deprived of their traditional role as financial intermediaries between the household sector and corporate Japan, banks have been reduced to holding ever-growing amounts of government debt that is becoming riskier to hold by the day.

This state of economic affairs is as inefficient as it is unhealthy. The only other equally if not more unhealthy flow-of-funds situation is to be witnessed in the United States, where all three sectors of the domestic economy — households, companies, and the government — are collectively in a net savings short position. But at least the U.S. still has the rest of the world to finance that overall shortfall. For now, at least.

Meanwhile, Japan needs to find a way to get companies to spend, households able to save again, and the government off its borrowing binge. If that proves too difficult, a Plan B must be devised that can prevent the existing unhealthy flow of funds from putting persistent downward pressure on overall economic activity. Either way, anyone with a manifesto that provides a solution deserves to win the upcoming general election.