Merryn's Blog

How to make the West more Like Japan – and vice versa

Here in the West, corporations tend to prioritise short term profits rather than returns on long- term capital investments. A change in accountancy rules could help, says Merryn Somerset Webb.

I saw Andrew Smithers - of strategy firm Smithers & Co - last week. He has long been of the view that the best thing Japan can do to sort its problems out is to change the way depreciation is treated in company accounts.

There's a reasonable explanation of this in a letter Andrew wrote to the FT recently. The upshot is that profits in Japan are regularly understated relative to profits in, say, the US. This is why many analysts look at cash flow rather than profits when attempting to value Japan.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

At the same time, Smithers would like to see corporation tax in Japan slashed - it is currently around 40%. Add that to the generous treatment of depreciation, and Japanese corporations end up with more incentive to invest than to focus on profits.

Here in the West, however, we have the opposite problem. Our corporations tend to prioritise short term profits rather than returns on long- term capital investments. You can put that down to the skewed incentive structures we give our executives (as we often do here), but you might also put it down to a stricter depreciation regime and to a much lower corporation tax level making profits isn't penalised here.

Advertisement
Advertisement - Article continues below

One of the things we have been talking about recently, is the way in which economic models work differently in different places they can be destroyed by changes in behaviour or by existing structural differences. This is one example of this. In Japan there is over investment; here, we are constantly told there is underinvestment.

Another letter to the FT (which I am afraid I now can't find) suggested that we could deal with that by doing the opposite of what Japan needs to do - shifting to tough tax and easy depreciation measures.

It wouldn't find much favour from our profit-driven markets and executives, but we might find in the short term at least (before everyone found new ways to off shore their profits) that it boosted capital investment.

Advertisement

Recommended

Visit/519858/how-long-can-the-good-times-roll
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Visit/516758/beyond-the-brexit-talk-the-british-economy-isnt-doing-too-badly
Economy

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
Visit/economy/uk-economy/brexit/600791/will-britain-close-its-doors-to-immigrants-post-brexit
Brexit

Will Britain close its doors to immigrants post-Brexit?

Details have not yet been forthcoming, but Britain will soon have a new immigration policy. What will that mean for businesses and investors?
8 Feb 2020
Visit/investments/property/house-prices/600795/uk-house-price-rise-brexit-bounce
House prices

Is the jump in house prices just a Brexit bounce, or is it more durable?

UK house prices rose sharply in January. Some of that is down to the end of Brexit uncertainty – but not all. There is a real risk that prices will ke…
7 Feb 2020

Most Popular

Visit/investments/commodities/silver-other-precious-metals/600812/buy-silver
Silver and other precious metals

You should all own some silver. Just don’t expect it to make you rich

Silver is cool, beautiful and immensely useful. But for investors it's the most frustrating of metals. Dominic Frisby explains why you should own some…
12 Feb 2020
Visit/economy/600802/money-minute-wednesday-12-february-grim-times-for-european-industry
Economy

Money Minute Wednesday 12 February: grim times for European industry

Today's Money Minute previews industrial production in the eurozone, plus the latest from America's central bank.
12 Feb 2020
Visit/investments/investment-strategy/600804/the-secret-to-avoiding-being-panicked-out-of-your-portfolio
Investment strategy

The secret to avoiding being panicked out of your portfolio

With the coronavirus continuing to occupy headlines, investors still aren’t sure how to react. But the one thing you mustn’t do is panic. Tim Price ex…
11 Feb 2020
Visit/investments/stockmarkets/european-stockmarkets/600725/is-2020-the-year-for-european-small-cap
Sponsored

Is 2020 the year for European small-cap stocks?

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, on why he believes European small-cap stocks are performing well.
12 Feb 2019