Japan: Economic recovery continues as corporate savings rate declines - SocGen

The corporate savings rate, defined as the change in financial assets and liabilities as a percentage of nominal GDP, has become a key indicator of Japan’s economic cycle, according to the analysts at Societe Generale.

Key Quotes

“Since the late 1990s, Japan’s corporate savings rate has remained positive, which is atypical as it points to excessive saving by businesses. This has led to the destruction of aggregate demand and a prolonged situation of deflation and weak domestic demand.”

“The corporate savings rate has returned to a downward trend, coming in at 2.6% as of 1Q17. The decline confirms that Japanese corporates have started investing again, after years of deleveraging and restructuring. Going forward, we expect the corporate savings rate to drop back into negative territory, its normal state, as businesses increase investment and spending to maintain profits in light of a significant labour shortage. This should help Japan escape completely from deflation and weak domestic demand.”

“Since the start of Abenomics, the fiscal balance has improved significantly, improving from -9.2%in 2Q12 to -2.5% in 1Q17. This is likely the result of the economy growing under Abenomics and significant austerity measures including the consumption tax hike in 2014. However, going forward, as the government shifts to a more accommodative fiscal policy stance, the fiscal balance may not improve as dramatically. However, it should act as further support for Japan’s economic recovery.”