Andrew Smithers of Smithers & Co and Charles Dumas of Lombard Street Research have recently made much the same point. Japan’s private savings – almost entirely generated by the corporate sector – are far too high in relation to plausible investment opportunities. Thus, the sum of depreciation and retained earnings of corporate Japan was a staggering 29.5 per cent of GDP in 2011, against just 16 per cent in the US, which is itself struggling with a corporate financial surplus.
Japan’s economic system is a machine for generating high private savings. A mature economy with poor demographics cannot use these savings productively. As Mr Dumas notes, US gross fixed business investment has averaged 10.5 per cent of GDP over the past 10 years, against Japan’s 13.7 per cent. Yet US economic growth has much exceeded Japan’s. Japanese corporations must have been investing too much, not too little. It is inconceivable that raising the investment rate, to absorb more of the corporate excess savings, would not add to the waste.
That is from Martin Wolf. If you mix together a great stagnation, a shift of national income away from labor, higher income inequality, and the Ramsey rule, you arrive at some very strange economic states of affairs, ones I never thought I would see. I also note that these high rates of Japanese corporate investment are not exactly concordant with the naive old Keynesian model. I would suggest however that cutting the investment rate is not an answer per se, rather Japan needs a high investment rate but with better quality companies and investment opportunities, which will not prove easy to achieve.