Source: Li Xiaoyin on Wall Street
Barclays analysis said that corporate profit growth failed to benefit domestic households, the depreciation of the yen did not significantly boost the overall economy, and even dragged down wage growth, leading to a shift in the monetary policy stance of the Bank of Japan.
The yen has continued to weaken in recent months, and speculation is growing that the central bank will raise interest rates again this year.
On May 16th, Barclays Bank pointed out in its latest research report that although the depreciation of the yen has significantly increased the current profits of companies, especially in the manufacturing sector, the "trickle-down effect" on labor costs has not been confirmed.
Over the past decade, the Bank of Japan has adhered to the monetary policy of quantitative easing, which relies on the trickle-down effect, in which priority groups or regions benefit poorer groups or regions face-to-face through consumption, employment and so on. to promote overall economic growth.
In Japan, the trickle-down effect is mainly reflected in: the depreciation of the yen is conducive to the profit growth of exporters, especially large exporters, and over time, corporate earnings growth will gradually benefit households, thereby boosting the overall economic level.
As a result, a weaker yen has always been an economic boon for an economy that relies heavily on exports.
However, the report points out that whether it is corporate profit growth or real GDP growth, the depreciation of the yen has no significant positive impact on the economy, even dragging down wage growth, leading to a shift in the monetary policy stance of the Bank of Japan.
Trickle-down effect "failure", central bank position "turn eagle"
While the depreciation of the yen has given a strong boost to corporate profits, especially those of export manufacturers, these profits do not appear to have spilled into labour costs in any significant way, the report said.
We first estimate the elasticity of current profits against the dollar / yen (that is, the percentage change in profits when the yen depreciates by 1%) and take inflation into account.
The results show that since 2010, the exchange rate of the dollar / yen has contributed about 33 percentage points to the profits of the manufacturing industry and 15 percentage points to the non-manufacturing sector.
However, in the estimation of labor cost to the current profit elasticity, it is found that the data of manufacturing and non-manufacturing are both zero-that is, in the era of serious labor shortage, the profit growth of enterprises does not spill out to the outside.
Corporate profit data and balance sheets since the 2008 financial crisis show that profits have tripled, cash / deposits and retained earnings (internal reserves) have doubled, while labour costs have increased by only 7 per cent, the report said.
Excluding corporate profit spillovers, the report found that in terms of GDP growth, only service exports increased significantly, but had little effect on GDP.
In theory, exports should rise sharply, supported by the yen. But in order to get out of the "lost 30 years" of the Japanese economy, companies chose to expand overseas frantically, resulting in weak domestic production capacity and weaker-than-expected growth in goods exports and capital expenditure.
The increase in the share of overseas production limits the impact of the depreciation of the yen on commodity exports.
Data from 2023 show that service exports and inbound consumption account for only 4% of real GDP respectively.Candycrushcom.3% and 0.8%, while exports of goods and capital expenditure accounted for 15.6% and 16.2%, respectively, indicating that the impact of yen depreciation on the overall economy may be limited.
In addition, the report notes that dividends and coupons in dollar terms have increased the income account under the depreciation of the yen, but this is unlikely to translate into domestic capital expenditure or return to households as labour costs.
We estimate that for every 10% depreciation of the yen, the income account will grow accordingly.
However, judging from the breakdown of Japan's current account, the increase in employee compensation is negligible, with most of the increase coming from direct investment income and securities investment income.
Since the reinvestment income of direct investment is basically the internal reserves of overseas subsidiaries, it does not involve the actual capital flow. Even if it isCandycrushcomSome of it will not necessarily be converted into Japanese yen, and most of it may still be retained in foreign currency for future overseas investment.
What is more noteworthy is that the depreciation of the yen has even had a significant negative impact on real wage growth.
We find that the depreciation of the yen has no significant impact on the growth of expected wages, but will lead to a significant increase in the core CPI index.
This means that employees' real purchasing power does not increase significantly, but may be offset by inflation, so there is a downside risk, exacerbating the deterioration of domestic demand.
This may be the key reason driving the central bank of Japan to change its monetary policy stance, because the bank attaches great importance to the virtuous cycle of "wage-inflation", the report said.
Wall Street mentioned earlier that in early May, Kazuo Ueda made a public statement contrary to his previous loose position, warning of possible "monetary response measures" to currency market volatility.
Kazuo Ueda said imported inflation caused by a weak yen was becoming increasingly significant as Japanese companies began to raise commodity prices to pass on higher inflationary costs to consumers.
Kazuo Ueda's speech was significantly tougher than before, rekindling market expectations that the BoJ might raise interest rates in June.