The following is from Hideo Tamura's regular column in yesterday's Sankei Shimbun.
The majority of Japan's economic commentators and media reporters are fools who are merely speaking from the knowledge they have received from the Ministry of Finance.
Hideo Tamura has become one of Japan's leading economic commentators by examining and thinking things through with his brain during his career at Waseda Political Science and Economics, the Nikkei Shimbun, and the Sankei Shimbun.
In other words, he has become a great scholar in economics.
This paper proves that he is one of the leading economists in the postwar world.
It is a must-read not only for Japanese citizens but also for people around the world.
The emphasis in the text except for the headline is mine.
Let the Weakening of the Yen Lead to a Revival of Domestic Investment by Businesses
With the yen's depreciation amid soaring energy prices, the "bad, weak yen" argument has been in full bloom in the media, but it is no good or bad with a weak yen.
A weak yen can be a catalyst for Japan's resurgence. The key is a capital investment by the private sector.
The graph below shows the yen's exchange rate trend against the dollar and private-sector capital investment since 1994.
As can be seen at a glance, there is a high degree of linkage between fluctuations in the yen exchange rate and capital investment in general, although there are some temporary exceptions.
Capital investment declines when the yen appreciates and picks up when the yen depreciates.
It can understand the reality of the Japanese economy with a single graph without resorting to complicated economic theory.
The other thing that catches the eye in the graph is the scale of capital investment.
While it has gone up and down repeatedly, it has been shrinking throughout the entire period.
It exceeded the ¥91 trillion level of 1997 in 2018 and 2019 but fell to ¥86 trillion in 2021.
Even if capital investment is about to recover due to the weak yen, the trend will not take hold in the long term.
Even if a weak yen is necessary for capital investment recovery, it is not sufficient.
How can we put private-sector capital investment on a stable expansionary track?
Gross domestic product (GDP) is roughly the sum of consumption by the private sector (households and others) and government, investment by the private sector and government (gross fixed capital formation), and the difference between exports and imports.
In Japan, where chronic deflation has persisted since 1997 as domestic demand has atrophied, investment depends on exports.
In particular, since 2008, when the Lehman Shock occurred, exports and corporate capital investment have been closely linked until 2021.
The correlation coefficient in statistics (with a maximum value of 1, which can compare to a hot newlywed couple) was as high as 0.9 during this period.
Incidentally, the correlation coefficient between the yen exchange rate and capital investment is 0.8, which is also high.
Overall, the yen's depreciation is a foothold for a recovery in capital investment.
It is especially true when the weak yen provides a tailwind for increased exports.
However, when overseas markets are unstable, as in the case of the new coronavirus disaster or Russia's invasion of Ukraine, which has wreaked havoc on the global economy, companies are hesitant to invest in plants and equipment.
That is why a steady expansion of domestic demand will support capital investment.
The obstacle is deflation, in which prices continue to fall.
Whether they are large companies or small and medium-sized enterprises, managers are more concerned about future price trends than the current situation when making capital investment decisions.
If the outlook for sales, which determines earnings, is not good, they are not inclined to invest.
They cannot raise wages because of high downward pressure on product unit prices.
They try to increase the number of low-wage, non-regular employees to reduce labor costs.
They would rather rehire the elderly than hire new workers.
As a result, the nation's income level as a whole will fall, domestic demand will atrophy, and prices will fall further.
While the rest of the world is experiencing inflation, Japan is experiencing deflation.
It is the role of the government to take the lead in paving the way for an end to deflation.
Successive administrations, however, have taken the opposite course, adopting policies that have preserved deflation.
When domestic demand began to recover, they cut fiscal spending, raised social insurance premiums, and raised the consumption tax rate, all under the guise of balancing the budget balance.
The second Shinzo Abe administration, which began in December 2012 under the banner of ending deflation, launched a policy of flexible fiscal spending and the Bank of Japan's extraordinary monetary easing but returned to budgetary austerity in FY14, including a significant consumption tax hike. Monetary easing succeeded in correcting the strong yen and boosted exports, but domestic demand atrophied due to fiscal austerity.
Nevertheless, corporate capital investment picked up in 2017 on the back of export expansion, but the government decided to raise the consumption tax rate again in October 2019, and consumption cooled sharply.
It was followed by the new Corona pandemic, which aggravated the deflationary recession.
The yen continued to depreciate, and the theory that the yen's depreciation was a lousy thing became rampant.
The people are worried that the rising price of oil, combined with the increasing cost of energy, will increase the cost of fuel to be paid overseas.
Fumio Kishida's administration is flailing about to pass the buck with cash transfers and other fiscal handouts.
The Kishida administration should take a policy to turn the yen's depreciation into an opportunity.
If the yen continues to weaken, it will be more advantageous to produce goods in Japan and export them than to make them overseas.
It will incentivize companies to stop reinvesting in China and other foreign countries and shift their overseas investment earnings to the domestic market.
The government should take this opportunity to reduce taxes on investment return to the domestic market significantly.
It should put on the fiscal balancing principle, and it should inject fiscal funds into growth areas to spur domestic investment by corporations.
The BOJ can provide support for fiscal stimulus through its ultra-easy monetary policy.
（Editorial Board Member)
