Merryn's Blog

Japan diary: The simple fix that could shake up Japan’s economy

Japan is far from an economic wasteland. But one simple improvement could make it a whole lot more dynamic, says Merryn Somerset Webb.

141014-fuji

It was a gorgeous day in Tokyo the views from the tower of the Imperial Hotel are a nice reminder of some of the reasons I love it here (from the 17th floor you can just see Mount Fuji on a clear day).

Over lunch I talked to just-retired strategist and Japan expert Andrew Smithers. Later, I talked to an official from Japan's Ministry of Finance at a reception for the Daiwa Anglo Japanese Foundation (of which I am a trustee) at the British Embassy.

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With both I talked about the odd way in which foreigners insist in thinking of Japan as an economic wasteland, when it quite clearly is not (see my last post). That does not, of course, mean that it couldn't do with improvement.

Smithers offers one simple way to improve a range of things in Japan cut the depreciation allowances given to Japanese companies. These are currently much higher than in other countries, and far higher than productivity rates suggest they should be. This encourages over-investment (otherwise why would a country with a falling and ageing population invest so much?) and also allows companies to massively understate their profits (and hence their tax bill).

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Cut the allowances and you could set off a chain of excellent results: profits would rise; tax revenues would rise; then, wages would be likely to rise and so might dividends. Finally, as wages rose so might consumption providing a start at least to the rebalancing from investing and towards consumption* most think Japan needs.

Smithers says he sees no sign that Abe might be interested in this idea, but when I asked the man from the MoF if he thought Andrew was right, he said that he thought he was entirely right. There is hope. You can read Andrew's blogs on the matter for the FT here.

*The roads in Japan are full of gorgeously coloured cars, something that I think must reflect the reality of marketing consumer goods in an ageing society: if you want to keep sales up, you have to find a way to turn something bought infrequently into something bought more often by making it into a fashion item.

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