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POLITICS

Editorial: Gov’t pressure on wages, capital spending may undermine private sector’s vitality

  • 2015-11-30 15:00:00
  • , Nikkei
  • Translation

(Nikkei: November 28, 2015 – p. 2)

 

 At companies, management is responsible for making decisions on their wage increases and capital spending plans. But is this basic principle of the market economy fully comprehensible to the government?

 

 The government has been urging business circles to raise wages and expand capital spending through public-private dialogue. Prime Minister Shinzo Abe demanded they come up with specific proposals.

 

 Sadayuki Sakakibara, chairman of the Japan Business Federation, widely known as Keidanren, has announced that he will urge member firms to pad wages more during their labor-management talks next spring. He also noted that it will be possible to boost capital spending by 10 trillion yen in fiscal 2018 once the effective corporate tax rate is lowered and other business-friendly environments are put in place.

 

 It is absurd that the government is interfering in decisions over wages and investment, as these should be left in the hands of businesses. Each company operates differently. If they are pressured by the government to increase wages and capital spending, they may lose competitiveness.

 

 Businesses have been shelving their capital spending plans due to China’s economic slowdown and other factors. Personal spending remains lackluster. Japan’s gross domestic product contracted for the second straight quarter for the three months through September. Meanwhile, companies’ earnings stay solid. That’s why the government is pressuring them to increase wages and capital spending, and that is understandable.

 

 But the problem is that the government is trying to distort the business strategies of companies. The market economy lets those who invest wisely survive and dispenses with those who fail to make wise decisions. This is how this mechanism functions. The interference of the government could undermine the vitality of the private sector.

 

 The role of the government is to create an environment friendly to businesses. It is responsible for lowering the effective corporate tax rate, reforming rock-solid regulations, and carrying out many other tasks.

 

 There is a widespread mistaken perception about companies’ internal reserves. At the end of March, corporations were hoarding a record 354 trillion yen. Calls are growing for plowing these funds into capital spending and wage increases, but many companies retain them in the form of machinery and equipment. Merely focusing on the numerical value of 354 trillion yen could lead to confusion.

 

 The government and the ruling parties are looking into the possibility of taxing internal reserves. But this may impose dual-taxation on companies if they are taxed again after the corporate tax is paid. The feasibility of this proposal is being called into question.

 

 It goes without saying that companies need to make better use of funds. It is true that there is plenty of money available in the industrial sector. Once they chart clear growth strategies, they will soon know where to invest. Management of firms should keep in mind that investors are watching closely whether they are investing in the future. (Abridged)

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