Private sector companies in Japan are withholding a significant amount of money in fear of a total economic collapse in the country. Figures from the Bank of Japan (BOJ) indicate that corporates are holding up to 233 trillion yen, an amount that is equivalent to the country’s gross domestic product. This is an increase of 4.2 percent a year ago when Japan’s GDP lingered at 483.1 trillion yen.
Corporates Fear Collapse as Japan’s Economy Continues to SlumpThis data comes right after the ruling Liberal Democratic Party came out victorious in an election. Prime Minister Shinzo Abe is urging firms to increase salaries in a bid to reactivate the country’s economy.
Recent labor deliberations that happened over the spring allowed workers to access the greatest pay they have received in years. However, many Japanese firms have seen large profits as a result of a continuously weak yen, thereby outpacing the wage increases.
Abenomics, the Prime Minister’s latest set of economic reforms, is based on the premise of minimizing deflation and slow growth through encouraging large profitable firms to invest more and to increase wages for their employees.
However, a sales tax implemented in April saw the country enter a recession contrary to the government’s expectations.
According to Tsuyoshi Ueno, a senior economist with the NLI Research Institute, “The reason why there is an accumulation of capital is that companies are cautious about spending on salaries and new investments.” He further indicated that, “Corporate performance is improving…but the companies are not spending as fast as they are earning.”
Market analysts are of the view that releasing the almost USD $2 trillion that is held by corporates can boost economic recovery significantly. However, Japan is a free market and the government cannot force companies to spend. The better approach to get corporates to unleash their withheld capital is creating a positive business environment.
The Bank of Japan also indicated that another key factor to improving economic growth is encouraging consumer spending. Household assets for the rapidly aging Japanese population rose to a significant 1,654 trillion yen, an indication of the strength of the country’s domestic stock market.
Figures from the central bank further indicated the strong value of government bonds that totaled to 1,015 trillion in 2014. Domestic investors own up to 90 of government bonds.
Fitch Ratings have ranked Japan’s sovereign credit at a Rating Watch Negative. Analysts predict that Japan may be unable to reduce its public debt if the government fails to implement a consumption tax levy in 2016. Moody also rated the country’s debt burden as uncertain. Even though it is the third largest economy in the world, Japan has one of the largest public debts.
Market Impact on the YenThe economic upheavals have seen the Japanese Yen spiral in a downward trend, demonstrating high volatility and weakness against major currencies including the USD, GBP and Euro.
The government is over printing money to cut down on the public debt. However, this move further accelerates Japan’s economic into a liquidity abyss. The Yen will continue to weaken as the country’s debt rises past the GDP.