Germany, which had been strict about fiscal discipline, has turned to aggressive fiscal management to expand defence spending & infrastructure projects and is now moving toward realistic fiscal management; the stock market has been rising in anticipation of an improvement in economic conditions. Loosening fiscal discipline is only an excuse for worsening market confidence, and it has exposed the old LDP government’s disposition to prioritise fiscal soundness over people’s livelihood. If the LDP fails to change its old constitution, it risks a major defeat in the Upper House election in July, and it remains to be seen whether the LDP would be able to shift from its ideology of fiscal soundness that disregards the lives of the people to a new fiscal target that takes macroeconomic conditions into account in its June Basic Policies for Economic and Fiscal Management and Reform (Honebuto).
According to the BoJ’s Flow of Funds statistics, the corporate savings rate for Q424 was +4.6% (GDP%, 4QMA), down from +6.0% in Q2. Since corporations are entities that raise funds through borrowing or equity to conduct business, the corporate savings rate should be negative. However, in Japan, after the collapse of the financial bubble, companies have turned backward and continued to cut wages, investments & other costs and to reduce debt, resulting in an abnormally positive corporate savings rate.
This excess savings has become a force that destroys aggregate demand as companies under-spend, creating structural deflationary pressure. It is also the cause of the decline in the potential growth rate due to underinvestment.
The government is trying to restore companies from an abnormal excess savings rate (positive corporate savings rate) to a normal excess investment (negative corporate savings rate), to completely break free from cost- cutting and deflationary forces, and to transform the economy into a growth- oriented economy. With the corporate savings rate still positive, with the positive rate having widened and with structural deflationary pressures remaining, the government has been unable to declare an end to deflation because it is not convinced that it will not return to deflation. Movements in the corporate savings rate represent movements in the economy through movements in firms’ ability to spend. A large positive level of the corporate savings rate indicates that Japan’s economy is in bad shape.
The fact that the corporate savings rate has turned down from its previous rise indicates that the distribution to workers is beginning to move and that the risk of a severe downturn of the economy is still small. However, there is a risk of a negative real GDP QoQ in Q125.
If economic conditions in the US remain weak, there is a risk that the corporate savings rate would rise again, leading to two consecutive quarters of negative growth in Q225. Core core CPI (excluding fresh food and energy) rose +2.6% YoY in February, but economic weakness would cause inflation in H2 and decelerate to around 1% in H126, falling below the BoJ’s 2% price stability target.
Net domestic fund demand (corporate savings rate + fiscal balance), which is the combined spending power of firms and government, is the force that reflates and turns income to households. Net domestic fund demand had disappeared because the lack of corporate spending could not be offset by increased fiscal spending due to the excessive fear of fiscal crisis. The Japanese economy lost its ability to expand, nominal GDP did not escape from an average of JPY525trn, and the deflationary structural stagnation continued. As a result of the continued lack of income to households, even the middle class became exhausted. People’s lives became impoverished. The recovery from the disappearance of net domestic fund demand due to the fiscal expansion following the spread of the Covid led to nominal GDP turning from stagnation to expansion and a move toward a complete exit from deflation. However, due to the global economic slowdown, the BoJ’s premature rate hikes that led to an increase in the corporate savings rate (but not enough wage increases) and the excessive reduction of the budget deficit due to insufficient fiscal spending & tax cuts (absorbing funds from the private sector), net domestic fund demand has disappeared again and the Japanese economy has lost its ability to expand once again. Net domestic fund demand in Q424 was +2.6%, slightly down from +3.3% in Q3, and has continued to disappear.
