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.
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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
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.
-
Beating inflation takes more luck than skill – but are we about to get lucky?Opinion The US Federal Reserve managed to beat inflation in the 1980s. But much of that was down to pure luck. Thankfully, says Merryn Somerset Webb, the Bank of England may be about to get lucky.
-
Rishi Sunak can’t fix all our problems – so why try?Opinion Rishi Sunak’s Spring Statement is an attempt to plaster over problems the chancellor can’t fix. So should he even bother trying, asks Merryn Somerset Webb?
-
Young people are becoming a scarce resource – we should value them more highlyOpinion In the last two years adults have been bizarrely unkind to children and young people. That doesn’t bode well for the future, says Merryn Somerset Webb.
-
Ask for a pay rise – everyone else isOpinion As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why you should do that too.
-
Why central banks should stick to controlling inflationOpinion The world’s central bankers are stepping out of their traditional roles and becoming much more political. That’s a mistake, says Merryn Somerset Webb.
-
How St Ives became St Tropez as the recovery drives prices sky highOpinion Merryn Somerset Webb finds herself at the epicentre of Britain’s V-shaped recovery as pent-up demand flows straight into Cornwall’s restaurants and beaches.
-
The real problem of Universal Basic Income (UBI)Merryn's Blog April employment numbers showed 75 per cent fewer people in the US returned to employment compared to expectations. Merryn Somerset-Webb explains how excessive government support is causing a shortage of labour.
-
Why an ageing population is not necessarily the disaster many people think it isOpinion We’ve got used to the idea that an ageing population is a bad thing. But that’s not necessarily true, says Merryn Somerset Webb.
