Abstract
In Chap. 5, we examined the causes of deflation mainly from the viewpoints concerning the appropriateness of the monetary policy. So far, however, we cannot say that we have found a convincing explanation for the causes of long stagnation and deflation after the burst of the bubble, including the continuation of such a situation after the excesses of the corporate sector had been removed. We have been arguing that the fundamental problem was in the corporate sector. So, in this chapter, we examine company behaviors that lay behind the macroeconomic developments, through the analysis of financial statements of companies. As we have seen, under the long stagnation, particularly after the financial crisis, fundamental changes took place in the Japanese economy, including a sharp increase in unemployment rate, a rapid decline in regular employment and a shift to non-regular work, a fall in nominal wage, a switch of the corporate sector from an excess investment to an excess savings position, and a mild but chronic fall in the Consumer Price Index (CPI) (deflation). Almost all of the changes (employment, wages, pricing, and investment) are related to company behaviors. So, in order to understand the mechanism of these phenomena, or the cause of the stagnation and deflation, we need to see what happened to companies.
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- 1.
Companies in Fig. 6.1 exclude financial and insurance companies. The same applies to all subsequent figures.
- 2.
Physical assets (excluding land) is the sum of “expenditure for construction that is not completed” and “other physical assets (excluding land)” in the financial statement statistics of corporations by industry.
- 3.
The ratio of outstanding FDI (converted to the yen using the year-end exchange rate) to stocks held for investment purposes has been around between 30% and 40% from the latter half of 1990s to the beginning of 2010s. It showed a sharp increase since the first half of 2010s, reaching a level above 50% in fiscal 2016.
- 4.
Particularly, for small- and medium-sized companies that were highly dependent on borrowing from financial institutions, borrowing from financial institutions had been functioning as funding similar to capital contributions for which only interest payments were required and repayment of principal was not expected. Therefore, faced with curbing of new loans (or possibly, forcible collection of outstanding loans) by financial institutions after the financial crisis, these companies had no choice other than trying to defend themselves by, for example, strengthening their net asset positions.
- 5.
In addition to such behavioral changes of companies, however, it is possible that external factors contributed to the nominal wage decline and emergence of deflation. This issue is examined later in this chapter.
- 6.
The total asset turnover ratio is usually defined as the value of sales divided by total assets. In the text, the term, physical assets (excluding land), is used instead of total assets.
- 7.
Estimation is conducted as follows. It is assumed that the physical assets/sales ratio was optimum and that there was no excess assets in FY 1990. The optimum size of physical assets is calculated for each of the subsequent years by multiplying the amount of sales in each year by the physical assets/sales ratio in FY 1990. That part of the actual size of physical assets that is greater than the estimated “optimum” size of physical assets in each year is regarded as excess assets.
- 8.
The shrinking population or the expectation of the population shrinking is sometimes cited as a cause of the decline of expected growth rate. However, the number of people of working age in the population started to decline in the mid-1990s, and the total population started to decline in the latter half of the 2000s. It is probably since about 2010 that the economic effects of the population shrinking started to be widely recognized. Developments in expected growth rate do not seem to be in line with evolution of the demographic facts. Refer to the supplement to this chapter for information about the demography and the economy.
- 9.
As Fig. 6.7 in this chapter shows, cash and deposits held by companies sharply increased from the latter half of 2000s. This is partly due to the shock of the GFC, but the fact that it continues to increase demonstrates the strength of defensive attitude or risk avoidance.
- 10.
Labor income share = (labor income in real GDP)/(real GDP) = (real wage per worker [w]) × (total number of workers [N]) / (real GDP [y]) = w/(y/N). Therefore, the rate of change in labor income share = the rate of change in real wages − the rate of change in labor productivity. So, if an increase in real wages exceeds an increase in labor productivity, as is the case shown in Fig. 6.29, the labor income share rises.
- 11.
The decline in ROA may have been another factor that contributed to the restraint on investment.
- 12.
Expanded use of non-regular workers has been in progress in almost all sectors from 2003 to 2015 (Ministry of Internal Affairs and Communications, “Labour Force Survey, Detailed Tabulation”). The share of non-regular workers is high in restaurants, hotels, wholesale and retail, real estate, and services, including medical and welfare. Also, the share of non-regular workers substantially increased in such sectors as transportation, restaurants, and hotels. At the same time, employment in manufacturing sector has been declining, and employment has been rising in such sectors as medical care and welfare and restaurants and hotels, showing a shift in industrial structure toward domestic demand-type services industries. Among the sectors in which increased employment has been provided, the wage levels in those sectors, such as medical care, welfare, and wholesale and retail are relatively low and the wage levels in information and communication are high. The wage levels in regulated sectors, such as railways and electricity, gas and water supply are high (Ministry of Health, Labor, and Welfare, “Basic Survey on Wage Structure”).
- 13.
If we include social security contribution borne by companies, costs of hiring a regular worker become further high as compared with hiring a non-regular worker.
- 14.
In terms of the rate of change, the average rate of change vis-à-vis previous year of Japan’s export price index (yen base, monthly) over the period from January 1976 to December 2013 was −1.2%.
- 15.
The ratio of household consumption to household income is defined as the ratio of final consumption expenditure of households to the combined amount of nominal income of households, including employment income, property income such as net interest received, and operating surplus and mixed income (that is, personal business income).
- 16.
Images of the stagnation mechanism in each of the first, second, and third stages are given in the supplement to this chapter.
- 17.
Particularly due to restraint on investment in physical assets over an extended period of time, it is possible that supply capacity of companies may have been significantly reduced, leading to a decline of potential growth rate. The potential growth rate of Japanese economy estimated by the Cabinet Office declined from 4.4% in the 1980s, to 1.9% in the 1990s, and further, to 0.7% in the 2000s. Thereafter, it has risen somewhat, and it was estimated to be 1.0% as of second quarter of 2017.
- 18.
Motani (2010, 140) wrote, “As the working age population continues to decline, the domestic demand-type industries, which account for a large part of employment, constantly suffer from excess supply and their business performance will never improve.” Examples of demand stagnation in terms of quantity that Motani indicated include the following:
-
The number of new cars sold domestically hit a peak in 2000, decreasing thereafter.
-
The number of books and magazines sold domestically hit a peak in 1997.
-
The quantity of goods transported domestically (weight × distance) hit a peak in fiscal year 2000.
-
The quantity of alcoholic beverages sold domestically started to decrease from fiscal year 2002.
-
The quantity of tap water used per one person hit a peak in 1997.
-
- 19.
Shirakawa (2012a) further states, “In the 1990s, low growth was mainly brought about by the deleveraging associated with the unprecedented bursting of the bubble. In the 2000s and thereafter, the major causes of low growth in Japan have been rapid population aging and population decline.”
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Aramaki, K. (2018). Deflation and the Mechanism of Corporate Behavior. In: Japan’s Long Stagnation, Deflation, and Abenomics. Palgrave Macmillan, Singapore. https://doi.org/10.1007/978-981-13-2176-4_6
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