Structural issues of the Japanese economy as seen from corporate internal reserves ~Will dependance on real estate lending continue?

Structural issues of the Japanese economy as seen from corporate internal reserves
~Will dependance on real estate lending continue?

In our November 15th post, we talked about the balance of bank loans for real estate reaching a new high in June of 2016. Coincidentally, immediately after the article was written the Bank of Japan announced that the amount of real estate ending in the first term of 2016 (April to September) had increased by 14.7% from the same period last year, reaching 7 trillion 20.6 billion yen. Including the real estate bubble period of the latter half of the 1980s, this was the second consecutive time the first financial period had seen a new record. According to the news agency who reported this, the reason real estate loans are inflating is that "corporate capital investment is sluggish, and borrowing by real estate related companies has become more active due to the Bank of Japan's negative interest rate policy". This sentence is a fairly straightforward representation of the current state of the Japanese economy. From the banking side, the "positive" reason for this is "real estate enterprises capital demand is healthy and earnings can be made steadily", while the "negative" reason is "corporate funds demand is not growing, and there is no choice but to direct funds towards real estate".

Since 2012, the ordinary profit of Japanese corporations has been showing an average annual growth of 10%, although it seems this will decrease due to a higher yen. (Calculated using the Ministry of Finance's "Corporate Enterprise Statistics"). On the other hand, corporate capital investment has seen slumps such as when it fell into negative figures between the second half of 2012 to the first half of 2013. From 2014 it switched back into positive figures, but it is undeniable that there is a possibility of another drop due to currency trends.

According to the corporate enterprise statistics announced in September, the internal reserves of Japanese corporations in FY2015 are about 377.9 trillion yen. As an increase of 20 trillion yen over last year, this is the 4th consecutive year to set a new record high. While these statistics are based on the data of 2.76 million Japanese companies, approximately half of these internal reserves can be accounted for by only the 0.2% that make up the 5,000 "capital of 1 billion yen or more" companies. In other words, large companies are not actively carrying out capital investment, and are keeping profits for their internal reserves. Since 1990, overcoming numerous crises such as the bursting of the Japanese bubble economy, depression shocks, and natural disasters has lead Japanese companies to build a solid earnings structure. Another way of looking at this is that it is nothing more than the result of not increasing wages or engaging in aggressive investments in preparation for risk. This is the biggest structural problem of the Japanese economy.

The yen depreciation of the yen to the dollar is progressing due to expectations regarding the Trump administration's policies, but corporations remain uncertain regarding the high yen. it seems unlikely they will be able to continue making aggressive investments going forward. In the end, it seems that dependence on real estate loans is set to continue for the time being.

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