Companies must focus on aggressive investments and wage increases

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The business climate among major manufacturers is deteriorating due to the increasing burden of resource and raw material costs. However, it can be said that now is the time for companies to invest aggressively. It is hoped that they will focus on capital investment and raising wages.

In the Bank of Japan’s quarterly Tankan economic survey for September, the diffusion index for large manufacturing companies, a major indicator of business sentiment, fell one point from the June survey to eight. . This is the third consecutive quarterly decline.

Japan depends on imports for many of its resources. In addition to the impact of Russia’s invasion of Ukraine, the weak yen and strong dollar caused import prices to rise. This trickled down to areas such as transportation costs and material prices, putting pressure on corporate profits.

By sector of activity, the “non-ferrous metals” and “pulp and paper” indices showed a notable deterioration in the business climate. The Tankan index for “motor vehicles”, a key Japanese industry, improved four points as the shortage of semiconductors eased, but still remained severe at minus 15.

Major manufacturers were expected to be a driving force in the economic recovery, given their strong business performance. Worryingly, the business climate among them continues to be gloomy.

Moreover, the diffusion index of the large non-manufacturing sector, despite the favorable wind of the recovery in economic activities, only rose by one point to 14. The “accommodation and food services” index improved, but that of “retail trade”, which is suffering from the rise in purchase prices, has decreased.

In such circumstances, a strong appetite for capital investment can be seen as a positive factor. Businesses, both manufacturing and non-manufacturing and of all sizes, expect to increase their capital investment in fiscal 2022 by 16.4% over the previous year, the largest on record in a September survey.

The business environment is at a major turning point, as it is urgent for them to make decarbonization efforts and also to deal with digitalization. If they don’t invest now, they won’t be able to regain their international competitiveness. It is hoped that management will continue to make aggressive investments.

The most important thing is to raise wages. Household budgets, especially those of low-income people, are increasingly stretched due to high prices for energy, food and other commodities. It is essential for companies to raise wages above the rise in commodity prices, in order to revive consumption and restore the virtuous cycle of the economy.

Large manufacturers, especially those that export heavily, will see their overseas sales in yen increase due to the weak yen. Companies that benefit from the depreciation of the yen have a social responsibility to take the initiative to return the profits to their employees through measures such as increasing their winter bonuses. They must also make efforts to improve the treatment of non-regular employees.

Companies’ internal reserves, which are the accumulation of past profits, continue to rise, surpassing 500 trillion yen for the first time at the end of fiscal 2021. Surely companies must have sufficient surplus to allow wage increases and capital investment.

(From Yomiuri Shimbun, October 4, 2022)

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