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

published 28 June 2013

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.

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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.

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Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.