Grim Exposition Of Fundamental Flaws in Abe's Abenomics

Loose monetary policy goes a long way toward liberating a country from economic torpor. However, monetary policy alone is insufficient for the whole journey. I have for a long while been railing that the Abe Cabinet has to get down to brass tacks and figure out ways to punish companies for hoarding their profits rather redistributing them to shareholders, converting them into higher pay for employees or deploying them in investments. (Link)

In a video that everyone should watch, Charles Dumas, the chief economist for Lombard Street Research, agrees. (Link - video)

That exports continued to underperform last month despite the effective devaluation of the yen (Link) only makes the Dumas presentation all the more damning.

Given that Abe 2.0: The Return of the Princeling was orchestrated by a select group of (often China hating) empire builders of the zaikai who crowd around Abe on the weekends, not letting others with their pesky opinions near their superannuated golden boy, the chances that the PM will be made aware of the changes necessary to save Abenomics, much less implement those changes, are very, very low.


Image: Council on Economic and Fiscal Policy meeting of 22 July 2014
Image courtesy: The Prime Minister's Residence

For The Abe Corporate Income Tax Pledge, A Poem

As a follow up to my post of this morning, a reader's senryu from the editorial page of my daily dead tree news delivery device:

減税を
献金で買う
大企業

Genzei o
kenkin de kau
daikigyo

Big Business
which buys tax cuts
with donated cash

- Koyano Takeshi
Higashi Yamato City

Source: Tokyo Shimbun, 14 June 2014, page 5.

So unclear are the merits of the corporate income tax cut proposal that Mr. Koyano way out there in the far eastern section of the Tokyo Metropolitan District can only think it has been put forward as the consequence of a corrupt quid-pro-quo.

Japan's Corporate Income Tax: Who Pays?

On Friday, Prime Minister Abe Shinzo told reporters that his government was laying out the groundwork for an eventual reduction of Japan's effective corporate income tax rate from its current over 35% to under 30% sometime in the near future (Link). Abe and his advisors had proposed an accelerated reduction to under 30% in three years's time. However, the Finance Ministry and the Liberal Democratic Party's tax committee gagged at the inevitable giant shortfall in government revenues. (Link - J)

Abe's announcement has won the approval of the usual suspects. The Nippon Keidanren's new head honcho is thrilled (Link - J). The Sankei Shimbun's editors called the move "indispensable" (Link - J). The reliably underinformed and innumerate William Pesek called it "the centerpiece of the Japanese prime minister's initiative to boost growth." (Link)

Uh huh.

Discussion of lowering the effective corporate tax rate in the media is shallow to the point of malfeasance. Even the reliably lefty and level-headed Tokyo Shimbun, which knows the score as the percentage of Japanese corporations actually paying ANY corporate income tax (under 30% of all corporations, just over 50% of those with base capital of 100 million yen or more - Link J) cannot sponsor an intelligent debate about the subject. (Link - J)


So let's look at some basic facts regarding the rates of corporate income tax companies pay, courtesy the only folks who seem to ask any questions, the Japan Communist Party and its party organ, Akahata ("Red Flag").

Take the above graph, published in Akahata on April 30. Based upon data demanded from the Tax Office by JCP member Sasaki Kensho, it shows that the actual rate of tax paid by Japanese corporations varies widely according to size and is never anywhere near 35% nominal rate. Micro-companies, ones with base capital of 5 million yen or less pay effectively pay about 22%. Small- and medium-sized companies pay anywhere from 23% to 27%, with the peak in the Mittelstand range of companies with 100 million to 500 million yen in base capital.

Above the 100 to 500 million yen range, the actual rate of tax companies pay drops precipitously. Egregiously, companies engaged in consolidated accounting, i.e., all the major corporations who are the names on the walls at the Nippon Keidanren, pay an effective 13% rate of tax.

Source:
http://www.jcp.or.jp/akahata/aik14/2014-04-30/2014043001_01_1.html

What rates of tax are individual companies paying? Here are some numbers, again via the JCP and Akahata.

Toyota Motors 0%
Mitsubishi Corp. 6.2%
Canon 27.8% (a surprise)
Nissan 10.9%
Honda Motors 18%
Komatsu 13.7%
Mitsubishi Land 24.5%
Isuzu 21.3%
Kyocera 13.9%

Source:
http://www.jcp.or.jp/akahata/aik14/2014-06-10/2014061001_01_1.html

Yes, it does look bad that the fabulously profitable Toyota Motors, whose chairman Toyoda Akio is not only a loyal supporter of Prime Minister Abe (Link) but who is the only person under 60 years of age in the directorate of the 2020 Tokyo Olympics (i.e. -- the person who will still be around when the Olympics are held in 6 years's time) pays not one yen in corporate income tax.

So it is the mid-sized companies who are not only paying taxes but who are paying them at a higher rate than anyone else. The big names, the ones with the exceedingly clever accounting departments, are taking advantage of every break they can get.

As for the economic impact of a reduction of the effective tax rate, increasing the retained earnings of corporations while crushing government revenues, I have ranted about the 220 trillion yen (2.2 trillion USD) that Japanese companies already hold in cash and equivalents -- i.e., the Everest of money that is neither invested, paid to the workers and nor returned to the shareholders -- before. (Link)

So what the hell is this talk of reducing the corporate tax rate about? Quietly, if you ask honest members of the LDP, it is about attracting foreign investment from non-Japanese sources. Japan's corporate income tax can be seen as an invisible barrier (oxymoron alert!) against foreign corporations investing in Japan, since these non-Japanese companies tend to be based in countries where investors demand profits -- which puts them a severe disadvantage in competing in Japan against Japanese corporations whose shareholders actually like it when the company books losses -- BECAUSE THEN THE COMPANY PAYS NO TAXES.

Pax vobiscum.

Later - In comments, Jason Mortimer provides an important rejoinder to this post, to which I have offer a short response.

Fire On That Mountain

The Wall Street Journal's JapanRealTime blog has published a chart of corporate Japan's Mt. Fuji of retained earnings. It shows corporate Japan, after entering a downward trend on the socking away of cash, switching post-Lehman Brothers into a "bury me under a pile of gold" mode. (Link)

The chart show companies adding to their cash Mt. Fujis in the fourth quarter of 2012 and first quarter of 2013 much as they had in the previous three years. However, the sharp drop off of cash on hand (in 10,000 yen bills, the mass would weigh around 22,200 tons) after the March end of the fiscal year seen in 2010-11 becomes weaker in 2011-12. In 2012-2013, the drop off disappears entirely, with companies having having as much cash in their accounts in September as in March.

Looking at this mountain, it would not be out of place for Abe Shinzo to stand up before a gathering of the captains of industry and commerce to say, "After all I have done for you, this is how you say, 'Thank you'?"

A corporate sector so unwilling to invest in new equipment, seriously increase employee pay or distribute earnings to the shareholders deserves Abe Shinzo's disdain. It certainly does not deserve a reduction in the corporate income tax rate, which would generate even large stashes of earnings companies do not know how to use.

Until such time as the corporations start to seriously deplete their savings accounts, it will be difficult for Abenomics to be more than a damp squib. Noises about a cut in the corporate tax cut will also be just that, noises, made in order to retain the interest of foreign investors who, coming from economic systems where there is no tolerance for companies hoarding cash or, alternatively, generating no accounting profits (71% of Japan's companies paid no income tax in 2012), would otherwise look at investing in Japan as not just depressing, but insane.

Photo image: Tanigawadake on 27 June 2007
Photo courtesy: MTC

Estimated Are The Prophets And The Fruits Of Their Labors

Yesterday NHK reported the results of a pair of surveys it conducted mid-month asking public corporations about their business conditions and personnel plans for the year. The first was of leading corporations (shuyo kigyo -- with no definition as to what that means); the second was of small- and medium-sized enterprises (again no definition but the content of the survey would preclude the inclusion of no single employee proprietorships). The response rate for the leading corporation survey was fantastic: 100 companies of 100 surveyed reporting. The response rate for the SMEs survey mediocre: 201 out of 346 corporations, or 58%.

What made two surveys particularly interesting was the difference in between the content and NHK's framing of it. Last night's 19:00 News 7 (Nyusu seben) broadcast -- the nation’s most-watched news broadcast -- began with a smiling Takeda Shin'ichi assuring the viewers, "We have some very heartening news tonight..." -- which made it sound as though something truly wonderful was about to be unveiled.

What was revealed, however, seems rather less than "wonderful":

- Of the 100 leading corporations surveyed, 10 were confident enough to declare an economic recovery underway. 86 of the companies were less certain, judging that the best that could be said was that a moderate (yurayaka na) recovery was underway.

- Of the SMEs, less than 20% were declaring increased profits for the year. 46% will be reporting flat-lining results. 25% will be reporting decreases in profits and 8.5% will be declaring losses.

- The two surveys found nearly identical levels -- 71% of large corporations, 72% of responding SMEs -- studying ways to raise take home pay. Not intending to increase pay, mind you, studying (kento suru) whether to increase pay and how to do it. These potential pay raise figures would furthermore be limited to remuneration for full-time employees -- no word on the remuneration of the nation's legions of part-time workers.

- 32 of the leading corporations were considering raising pay using automatic wage hike mechanisms (teiki shokyu); 30 were considering raising bonuses and 11 were thinking of "increasing monthly compensation by some way or another." Only 9 of the 100 leading corporations were thinking of revising upward the numbers listed in the basic tables used to calculate remuneration (beesu appu).

Links:

- 100 leading corporations survey report (Link - J + video)

- SME survey report (Link - J + video)

[NB: hurry to copy down contents as link rot sets in soon -- MTC]

Given the lack of the measurement of definitive moves toward higher base pay, which would be indicative of the nation's corporate executives being willing to share an Abenomics-derived economic bounty, Takeda's bubbly intro seemed almost sarcastic -- and NHK generally does not have sarcasm in its tool kit.

What is furthermore interesting in the SME survey are the high levels of performance reported. Only 8.5% of the NHK respondents were preparing to report losses. This would seem to stand in direct contradiction to known percentages of corporations declaring losses on the financial year.

Below is a wonderful graph compiled by the folks at the Tokyo Shimbun of the historical trends of loss accounting as reflected in the percentage nation's corporations exposed to the corporate income tax. The red line is all corporations; the blue line, corporation with at least 100 million yen of base capital.



As the graph shows, since the bursting of the bubble a steadily increasing fraction of the nation's corporations are fiddling with accounts so as to declare themselves unprofitable in the current fiscal year. In Fiscal Year 2011-12, the most recent year available, only 28% of all Japanese companies paid corporate income tax, with only about half of larger capitalized firms (53%) paying the tax.

Self-selection of a particularly active kind is therefore taking place in the NHK survey. We can guess that a goodly number of the 42% of SMEs who failed to return the completed survey are companies with horrible books. We must also assume that the 46% of SMES reporting unchanged results have clever accountants who take potentially reportable profits and bury them in the bad ideas and dumb decisions of previous years.

On a somewhat ancillary note, the Tokyo Shimbun graph should drive a stake through the heart of a particularly egregious misperception of Japan: the purportedly minor size of Japanese non-profit sector. The clichéd complaint is that the lack of a large formal non-profits as they are known in the Anglo-American world -- the research centers, the foundations, the think tanks --represents a glaring weak point for Japanese society and Japanese capitalism.

As the above graph illustrates, Japan's non-profit sector is not small. It is in fact HUGE -- with the majority of the country's non-government workers employed in enterprises that should be classified as non- or even anti-profits.

House of Councillors Election 2010 - Buying Votes Where One Can

A glance at this morning's top news stories reveals a ruling party working its control of the dispensing of goverment goodies to either nail down or tamp down constituencies possibly crucial to the outcome of this summer's House of Councillors election.

In a move guaranteed to make believers in fundamental structural reform gag, Democratic Party of Japan Secretary-General Ozawa Ichiro and People's New Party leader Kamei Shizuka made grand appearances at the convention of the National Postmasters Association (Zentoku) in Nagoya on Sunday. Ozawa promised the assembled that the Diet would approve the government's proposed amendments to the postal reform law in the current Diet session. The Kamei-drafted amendments, which halt the privatization of the postal savings bank and breakup of the postal services into separate business units, is now in committee in the House of Representatives. Presentation of a bill halting postal reform is having international repercussions and is portrayed in the media as the PNP tail wagging the DPJ dog. Nevertheless, Ozawa seemed quite pleased with his welcome.

Japan has around 20,000 postmasters, spread evenly over the entire country. As such they would hardly seem worth Ozawa's and the DPJ's time. However, pandering to the postmasters is seen as the key to securing the votes of Post Office's large unionized workforce, their family members and the hundreds of thousands of largely elderly voters in rural areas dependent upon the Post Office for their banking, insurance and delivery needs. Winning the support of the postmasters is thought to represent the securing of up to a million votes nationwide -- which gives the postmasters significant leverage in an election featuring a deeply unpopular ruling party and a plethora of political rivals vying for the public's favor.

A few stops down on the Tokaido Shinkansen Line, National Policy Unit deputy minister Furukawa Motohisa visited Osaka to discuss with Osaka Governor Hashimoto Toru the possibility of establishing a special low corporate tax international business zone within the prefecture -- a pet project of the governor's. That Governor Hashimoto has recently established the Ishin no Kai, a political organization the governor hopes to transform into a full-fledged political party -- and that a candidate of the Ishin no Kai yesterday overcame candidates support by the DPJ, the Liberal Democratic Party and the Communists in a local election in Osaka Prefecture , are not likely to be unrelated -- particularly because of the candidates supported by political parties, the DPJ's candidate finished dead last.

That a national government gasping for revenues would actually be considering the establishment of low corporate tax zones in Hashimoto's bailiwick on the theory that a lower corporate tax rate would entice businesses to set up shop in Osaka (or elsewhere) despite the high costs for everything else (land, labor, energy...) is a belief that taxes the imagination.

Irrational Market Theory

What was I saying about likely outcomes should the government cut corporate taxes, as the Nippon Keidanren has demanded the government do? That instead of expanding their businesses, increasing the size of the economy, companies would just sit on the cash instead?

40% Of Listed Firms Effectively Debt-Free (behind subscription wall)
Nikkei Online

TOKYO --Publicly traded companies continue to improve their financial health, as seen by 654, or 41%, of them boasting more cash than interest-bearing debt as of March 31, according to a survey by Nikkei Inc.

T'is the top story of this morning's Nihon Keizai Shimbun -- that in an era of negative or near-negative interest rates over 40% of Japan's listed companies are debt-free.

Let me repeat that - at a time when the cost of borrowing money is so cheap that inflation will zero out one's interest payment, leaving one responsible only for paying back the principal of the loan, 4 out of every 10 companies cannot think of a way of taking free money from lenders in order to expand their business in any meaningful sense.

Talk about continuing shell-shock from the collapse of the bubble (18 years ago it happened!) - the paper describes not using leverage as being symptomatic of healthy corporate behavior (zaimu kaizen - "improving financial position" in the Japanese language original report). The article is not complimenting firms for holding down debt to a level where it is balanced out against book value, mind you. It is complimenting debt balanced out versus cash-on-hand!

Please forgive me-- but given this report, the idea that cutting corporate taxes will spur economic growth is simply not credible.

And pigs will fly...

The sheer, unadulterated greed of the corporate heavies--and the uncritical repetition of big business propaganda by their surrogates, the banking blowholes--just makes me ill.

Japan's Fukuda May Signal Cut in Corporate Taxes (Update1)
Bloomberg

By Keiko Ujikane and Tatsuo Ito -- June 23 -- Japan's government may signal it will consider cutting corporate taxes in an effort to encourage more foreign investment into an economy expected to grow at the slowest pace in five years this year.
The government will review corporate taxes to help cut business costs, according to a draft of its economic and fiscal policy released last week. The final 2008 policy will probably be submitted to Prime Minister Yasuo Fukuda's Cabinet this month.

"The government recognizes the need to cut corporate tax to help improve Japan's competitiveness,'' said Mamoru Yamazaki, chief Japan economist at RBS Securities in Tokyo. "It will be tough to get public support because a company tax cut would reduce revenue and require increasing sales or income tax.'"

Fukuda's first economic policy statement as prime minister comes as foreign investors urge Japan allow more foreign investment. European Union Trade CommissionerPeter Mandelson said in April that Japan is the developed world's "most closed'' market and needs to allow more investment from abroad.

The draft said the government will maintain its goal of balancing the budget by 2011, so that it can start reducing the public debt, which the Organization for Economic Cooperation and Development estimates stands at 182 percent of gross domestic product. To achieve this, the government needs to cut spending or find a way to increase revenue to fund social welfare costs.

Heizo Takenaka, economy minister under former Prime Minister Junichiro Koizumi, said in May that the government should lower corporate taxes by 10 to 15 percentage points to revitalize growth.

Tax Rate

Japan's effective corporate tax rate, which includes national and regional corporate taxes, is 40.7 percent, compared with 29.8 percent in Germany, 28 percent in the U.K., and 25 percent in China, according to the Finance Ministry.

A 5 percentage-point cut in Japan's corporate taxes would increase foreign direct investment by 12.7 percent in a year and add about 3.8 trillion yen to the economy over six years, according to Dai-Ichi Life Research Institute.

"Keeping the tax at this high level may prompt Japanese companies to go abroad while also making foreign companies stay away from Japan,'' said Toshiro Nagahama, chief economist at Dai-Ichi Life in Tokyo...

Now I know this is a wire service report so I should not be too hard on its authors for sacrificing depth for breadth and speed. Nevertheless, the report is purportedly trying to provide context, analysis and background to a major policy proposal. If that is the goal, why do they offer only one side of the coin?

Let us look at some of the claims made:

"Lowering corporate taxes may increase foreign investment"

Do the social scientists at Dai-Ichi Life Institute really believe that Japan fails to attract foreign investment because its corporate tax rate is too high?

Might it not be more of a side issue, as compared to, say:

poison pill defenses,

collusion by domestic companies,

regulations discouraging foreign ownership on national security grounds,

police sweeps against financial misdeeds that strangely always only nab foreign entities and Japanese mavericks,

anti-competitive regulations,

subsidies to domestic industries,

legalized dilution and

media-hyped up economic xenophobia?

Might these not have a slightly more significant impact on the investment decisions of foreigners than Japan's effective tax rate--whatever that might mean?

It was the discriminatory issues, not the tax rate, that Peter Mandelson was railing against, right?

"Lowering the corporate tax rate will increase growth"

By what mechanism? If the corporations reporting a profit (fools!) are granted an opportunity to pay less in corporate tax, what exactly will they do with this extra money?

Will they

- pay their workers a lot more?
- cut the prices they charge to consumers?
- increase their dividends or buy back stock from investors?
- investment in more plant and equipment?

If the corporations do any of the above acts, Takenaka will be right and the lost government revenues will at least make their way right back into the broader economy.

However, the chances of any of the above happening are not particularly high (Is there a profitable Japanese corporation anywhere that is suffering from a lack of cap ex?).

So where will the money go instead?

- Corporate cash hoards
- Propping up unprofitable divisions or unsound expansions
- Reduction of debt
- M&A

All of which have tended to have a contractionary effect on the broader economy, sucking liquidity and leverage out of the system.

What is infuriating is that the authors fail to highlight the systemic or public policy antecedents of the current corporate tax rate. Instead, in what is a thin veneer of analysis, the authors look at the politics of a corporate tax cut--a subject so self-evident that a log could do it.

"Cut corporate taxes at a time when the ruling party is talking about raising the consumption tax (a measure which, according to this morning's headlines, the PM is having some second thoughts about) and when the elderly are livid at having their pensions docked for medical insurance. Hmmm...might be a tad difficult..."

Oh, really?

Financial news has a categorical imperative to promote unbridled capitalism and its tenets, fine. Nevertheless, if a journalist is reporting on the political economy in Japan, he or she really has to know something about the political economy of Japan. Or find someone who does.

Was there anyone not the paid shill of Big Finance whom the authors might have consulted on a matter of public policy -- how the are tradeoffs are achieved and social policy goals might affect choices? You know, like a professor of public policy? Because just asking bankers and econ professors about what in their professional judgment would be best for the sliver of Japan they live in will promote a twisted view of Japanese government policy.


Later - I see that D over at Japan Lost, reading the same story, beat me to the punch on voicing his skepticism of the political feasibility of a corporate tax cut.