Net Profit Rate look at Japan
The data in this post was updated from errors. Correct data below.
As net profit rates rise in the aggregate, pressures for firms to raise prices to cover opportunity costs of capital decrease.
So why is inflation in Japan so low? Have net profit rates increased there since the 1980’s? Let’s take a quick look.
Data from Trading Economics.
GDI was around 270,000 in 1980
GDI was around 430,000 in 1989.
GDI was around 520,000 in 2007.
GDI is around 540,000 now.
Corporate profits peaked around 4,000 in 1980.
Corporate profits peaked around 10,000 in 1990.
Corporate profits peaked around 15,000 in 2007.
Corporate profits are around 17,000 now.
Interest rate reported by Bank of Japan was around 5% in 1980.
Interest rate reported was around 4% in 1990.
Interest rate reported was around 0.25% in 2007.
Interest rate reported is around -0.1% now.
Let’s calculate some quick aggregate net corporate profit rates.
Net profit rate = Profits/GDI – interest rate
1980 = 4,000/270,000 – 5% = -3.5%%
1990 = 10,000/ 430,000 – 4% = -1.6%
2007 = 15,000/520,000 – 0.25% = 2.6%
Now = 17,000/540,000 – (- 0.1%) = 3.2%
The trend of increasing net profit rates is evident. Current rates are up 6% since 1980. That is similar to the United States.
It seems to me that Japan’s problem with low inflation stems from increasing net profit rates since the 1980’s… And taking interest rates into negative territory is not fixing that problem.
So, raise interest rates?
It seems counter-intuitive, but might break the deadlock, and get rid of some deadwood (underperforming companies). It also has the advantage of providing retirees (whose portfolios are generally bond-heavy) a larger income.
However, it won’t work unless companies are taking on debt.
The downside is that Japan’s debt-to-GDP ratio is almost 230%. Can Japan afford to pay higher rates on its government debt?
Good insight from you… the high net profit rates imply zombie companies in Japan.
And it will still work even if companies are not taking on debt due to opportunity costs of lending and borrowing.
But Japan is in a ponzi scheme. That is why these net rates keep going higher. They cannot afford to keep up this game of pushing net profit rates higher and higher. Eventually Japan will hit a wall of not being able to raise them further. But how low will their interests rates have to go?
Warren: I’ve often wondered if our low interest rate aren’t part of the problem. I know a lot of aging baby boomers who have cut back on spending due to low rates from savings and from various annuities. Despite this, I keep thinking of the movie ‘Breaking the Sound Barrier’ in which they maintain control of the supersonic airplane by reversing the controls. The script writer had the excuse that no airplane had broken the sound barrier at that time, but that’s not how supersonic flight works. Still, an absolutely great movie and well worth watching if you can find it.
Warren: P.S. I’m not saying you are wrong, just that I share your temptation and realize that I’m being kind of out there even considering higher rates.
I can see now that these ever rising net profit rates are a ponzi type scheme based on interests going lower and lower. The net profit rates really are too high. They create a savings glut and push down interest rates. But they also keep inflation too low. The result is that the Fed rate can never lift off because the high net rates depend on low interest rates. The Fed is expecting firms to increase investment with high net profit rates, but the net rates do not create incentive to invest in production for society, only the rich which means asset bubbles. luxury condos and expensive retail. The cycle has to be broken. The Fed rate has to rise to restore balance and stop the vicious cycle of the ponzi scheme.
EL – Why do you use the dollar value of GDP and profits? Why not use the actual value in Yen? You get some confusing results when you do these translations.
Consider the Yen chart of Japanese GDP. According to Fred GDP is down from 2007 to 2015. But when you translate this to dollars you end up with an increase. What would happen if you looked at the USA and used the Canadian $ as the measuring stick? The results would be skewed by the currency changes.
Also, when you say “Profits are now” 17,000 what do you mean? Is this 17,000 billion ? 17,000 million?
The charts say “JPY Billion” on the right axis.
“[Raising interest rates] will still work even if companies are not taking on debt due to opportunity costs of lending and borrowing.”
I don’t follow. How would that work?
Even if a company does not borrow money, they still have that option. So the benefits and cost of borrowing have to be measured against other options as opportunity costs. So the effect of changing interest rates effects even those who do not participate in the financial markets, because they could participate.
It does put numbers behind earlier posts in which you talked about zombie companies.
A company making 25% less than the average can survive today, but would have been out of business in 1989.
“Even if a company does not borrow money, they still have that option. So the benefits and cost of borrowing have to be measured against other options as opportunity costs. So the effect of changing interest rates effects even those who do not participate in the financial markets, because they could participate.”
Sure, but if they are not borrowing now, they are not likely to start borrowing if rates go up.
There is borrowing and lending in the markets.
EL – A little help please? I looked at the source link you provided. This is what it says:
Japan Gross National Income 1980-2016 | Data | Chart | Calendar
Gross National Product in Japan increased to 540180.10 JPY Billion in the first quarter of 2016 from 538149.80 JPY Billion in the fourth quarter of 2015.
Ok. So current GNI is 540,180 Billion yen. That is about the same number that shows on the graph you provided. But the data you typed (and use to establish % changes) was 54,000 not 540,000.
What am I missing?
Thank you bk,
You are thinking better than me today… The GDI numbers were off by one zero… The percentages are more realistic now. The net profit rate has increased about 6% since the 1980’s. Which is about the same change in the United States. I have updated the post.
OK, I missed the point. But I still have trouble.
What does it tell us that the net profit rate was negative?
It tells us that a firms ability to stay in business it not dependent on net profit rate. So why should I think it tells me something about zombie businesses?
“low inflation stems from increasing net profit ”
It seems to me that both low inflation and increasing net profit stem from reduced labor bargaining power.
EL – Amazing. You acknowledge a 90% computation error, but then argue for the same conclusion.
The Profit Rate was not -3.5% in 1980. You get that by subtracting an interest rate for 10 year debt. Why? Macro comparisons are easy. Debt to GDP. GDP per population, GDP to profits, etc.
There is no reason to make this more difficult. “Profits” are defined as being after that expenses like debt service. No need to subtract some % rate that has no relevance. The ratio of profits to GDP are 1.5%, 2.5% 2.9% and 3.15%. These are small changes.
Do some reading. Japan’s problem with deflation is because they have a declining population. It is not a function of a 1% change in profit levels over 30 years.
“It seems to me that both low inflation and increasing net profit stem from reduced labor bargaining power.”
With a labor shortage in Japan, I do not think that situation obtains there:
And yet, labor share IS decreasing in Japan.
Japanese companies can outsource, too.