Japan’s corporate sector is said to be awash in money. Many companies, having improved their balance sheets dramatically in recent years, now hold a large amount of surplus funds. For many of them, the crushing debt burden that was once a heavy drag on business development is said to be a thing of the past.
By contrast, the public sector remains deep in the red, with debt owed by the central and local governments approaching a level that analysts say is unsustainable. Meanwhile, life is getting more difficult for an increasing number of workers because of pay cuts and low wages.
The money glut in the corporate sector is disquieting for a number of reasons, a major one being that the surplus is not necessarily being put to effective use. Companies are holding extra funds mostly in the form of security assets, which means that they are not marked for the most productive investment.
Caution may be a virtue, particularly in light of the spending spree of the 1980s, which was the undoing of many businesses in the 1990s. But well-off companies should be doing more to use their huge surpluses for the benefit of workers. The improved balance sheet is partly the result of layoffs, which have significantly reduced payroll costs while creating a large army of job-hopping part-timers in the process. Workers deserve a share of the fruits of the recovery in profits.
It is also worrisome that some surplus funds flowing into financial markets are being used for speculative buyouts. This is happening at a time when the Bank of Japan’s ultra-easy monetary policy, aimed at pumping extra money into an economy plagued by chronic deflation, is proving less effective than before.
According to the central bank’s statistics on financial flows, the corporate sector generated 16 trillion yen in surplus funds in 2004, bringing the cumulative total of such reserves to an estimated 80 trillion yen, a sum almost equal to the government budget. Conventional wisdom says that extra funds are invested sooner or later in machinery and equipment. With the economy in the slow lane, though, there is not enough of a motive for such outlays.
Funds not allocated for capital spending are going largely into government bonds and, in some cases, toward corporate acquisitions. The abundance of such funds is said to be part of the reason why Internet service provider Livedoor was able to raise a huge amount of money to buy out radio network Nippon Broadcasting System.
A money glut is an invitation to speculation. A takeover game can easily take a speculative twist as both sides resort to unconventional or artificial methods to win the battle with little regard for shareholders. That is hardly the way a sound capital market should work.
A corporate sector flush with money may be welcome to a government that must issue huge amounts of debt each year, but with the budget deficit reaching ominous proportions, selling IOUs at the present pace is not a viable option. Borrowing must be gradually reduced through spending cuts and other measures. Arguably, some of the corporate surplus could be absorbed through higher taxes on corporate incomes and financial assets.
The lackluster outcome of labor’s push this spring for better wages, known as shunto, shows that employers generally are reluctant to increase the hiring of full-time workers or reduce the income gap between full-time and part-time employees. To some extent, such passivism may be unavoidable in a slow-moving economy, but the spread of part-time work among young people will likely create more serious problems in the future.
The growing money glut is also putting the BOJ’s long-standing policy of quantitative monetary easing on the line. The bank’s known position is that it will continue to expand the monetary base until consumer prices stop falling and level off. Now, however, the effectiveness of that antideflation policy has come into doubt.
The fact is that banks also hold large reserves these days. So lenders generally are less eager than before to borrow from the central bank. With credit demand thus diminishing, the unprecedented policy of expanding the money supply at near-zero interest rates is no longer serving its intended purpose of stimulating the economy. On the other hand, cheap funds that yield little interest are flooding the capital markets, thus creating conditions conducive to speculation.
Maybe it is time that the Bank of Japan began moving toward ending its ultra-easy monetary policy. Indeed, the need for a more normal policy appears to be growing. A policy shift also seems in order for the sake of the countless number of depositors who have quietly lived through an extended period of rock-bottom interest rates.
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