Populism and Economics by Charles Dumas

Author:Charles Dumas
Language: eng
Format: epub
Publisher: Profile
Published: 2018-03-09T16:00:00+00:00

Sources: OECD, TS Lombard, author

Conventional economic logic says that a cut in a country’s real exchange rate, by making it more cost-competitive, should lead to gains in market share – or vice versa for an increase in the real exchange rate. Germany and Italy both fit within this logic. But this logic only applies if the real exchange rate is the causative factor and the market share is the result. In Japan’s case, cause and effect appear reversed. It is the weakness of managements and product strategies that has forced a lower real exchange rate. In effect, Japan’s goods have become so uncompetitive in specification that only by slashing the price can they be sold.

Common observation supports this conclusion. Thirty years ago what people most wanted was Toyota or Honda cars, Nintendo GameBoys, Sony Walkmans and Sharp fax machines – all made in Japan. Nowadays, people still like the cars, though they are often more cheaply made outside Japan. But the electronics business has moved into hi-tech, led by US firms – and with the likes of Samsung in Korea also outperforming Japanese producers.

The result of this inversion of normal cause and effect is that Japanese exports have suffered in market share both in volume and price. It is highly likely that the rich cash flow in Japanese business has protected it from the cold blast of competition. But the loss of real income has not been escaped – it has simply been shifted onto the labour force, whose relative standard of living has been eroded rapidly by falling wages.

Total pay per worker has fallen at a ½% average rate over the past twenty years, and more narrowly defined wage rates by ¾%, while output per worker has been rising by ¾%. This disparity has been offset by a mix of a rising share of business saving and, more importantly, the falling relative value of Japanese exports. From the standpoint of Japanese people, after-tax income per head was just over two-thirds that of US people at comparable prices in the mid-1990s (i.e. with exchange rates adjusted for domestic price differences). But it has been ten percentage points lower in recent years, a decline of more than one-seventh in relative income.

The two human factors that seem to underpin this sorry tale of national decline are the cushioned complacency of the business elite and the docility and deference of the labour force. Is either likely to change?

Apart from the sheer comfort of their position, Japanese managements are locked into undue retention of cash by Japan’s industrial structure. Two-fifths of company shares are owned by other companies, who also control the investments and cash flow of pension assets that account for nearly another fifth of the stock market’s capitalisation. More than a fifth of the shares are held by foreigners, who are largely passive. That leaves only one-fifth in the hands of individual shareholders. If the cash flow were to be paid out as dividends (or share buybacks) most of it would remain under corporate control, with a significant portion going abroad.

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