Unemployment. Japanese Unemployment. Unemployment

Transcription

1 Unemployment Japanese Unemployment Recent Unemployment rates 4.3% in Japan (Aug 05) 5.1% in US (Sept 05) Historically Japanese unemployment rates have been much lower than in the United States Japanese unemployment rates exceeded US unemployment rates for the first time in Japanese unemployment rate hit 5% for the first time in July Unemployment Unemployment Percent Year US Japan 1. Definitions differ slightly, not very much 2. Highest unemployment is among the youth, and Japanese youth are not in the labor force Japanese youth are studying for college entrance exams, have less financial needs (parents provide support), have short summer vacations, and no summer jobs But often work as tutors in the underground economy 1

2 Unemployment 3. LFPR is 54% for US teenagers, 17% for JP teenagers 4. Family farm or business You must work 15 hrs/week to be employed in the US, but only 1 hr/week in Japan Agricultural sector absorbs excess workers Japan 8.5% in agricultural sector US 2.9% 5. Female labor force is pro-cyclic 6. Firms help workers find alternative jobs with subsidiaries and affiliates Unemployment 7. More adjustment in hours and productivity No temporary layoffs Q Q = L H L H 8. Wage are more flexible Bonus system Shunto One year contracts 50 Lifetime Employment Lifetime Employment by firm size Percent sticking w ith lifetime employment not sticking to lifetime employment hard to choose Year sticking to lifetime not sticking to lifetime employment hard to choose no answer , ,999 over 5, no answ er 2

3 Recent Changes? Lifetime Employment Average Number of Years Working for the Same Company Male Employees of Large Companies Recent Changes? Seniority Wages Ratio of wages of male workers years old to those years old, large companies only Labor Market If Japan is going to make efficient production a major objective in the future, the nature of an employee s work should become the determining element in his or her reward. We recommend that the base pay should not be affected by such personal characteristics as age, sex, marital status, or length of service. Keidanren (1955) Facts do not always match intentions Japanese Savings 3

4 Savings Savings as a Share of GNP Japan United States % 18.7% % 18.0% Japan Prewar: low savings and high international borrowing Postwar: little international borrowing but high savings Why Did Japanese Save? 1. Cultural Factors 2. Demographic and Socioeconomic Factors 3. Institutional Factors 4. Government Policies 5. Economic Factors 6. Miscellaneous Factors 4

5 Cultural Factors Confucian heritage diligence and frugality But savings rates are higher after WWII Not all Confucian countries have high savings rates High Degree of Risk Aversion Japanese hold more safe assets (bank deposits vs stock market) People save for illness and unforeseen emergencies Unintended bequests motivated by longevity risk Old people save in Japan Japanese Americans have high savings rates? Cultural Factors Demonstration effect is weak Geographic and linguistic isolation Weak with respect to nondurables, food Strong with respect to electric appliances, durables Prevalence of intergenerational transfers Evidence that saving for bequest is more important than saving for life cycle purposes Bequests are most important factor behind high savings Demographic and Socioeconomic Factors Age structure of the population Low proportion of the aged (now aging quickly) 15% of Japanese and 21% of OECD residents were over 65 in 1980 Low proportion of the young Long and increasing life expectancy Longest life expectancy at birth and at retirement Age gap between husband and wife Older households 5.64 years gap All households 3.27 years Longer period of expected widowhood Demographic and Socioeconomic Factors Prevalence of the extended family Extended families permit economies of scale and shared consumption goods Percent of extended families is declining Distribution of income is very equal, so savings should be lower High share of self-employed Savings rates of self employed are higher than other occupations Greater income fluctuations Save for business investment Inferior pension and welfare benefits 5

6 Demographic and Socioeconomic Factors Rapid increase of the college entrance rate 9.8% in % in 1976 Saving for college is offset by spending of those who are in college High labor force participation rate of the aged Working aged have very high savings rates but young may save less because they can work longer So this probably lowers overall savings Demographic and Socioeconomic Factors Rapid urbanization of the population People save in order to buy homes in urban areas Leave rural home to parents High cost of weddings/houses Expenditures on funerals and weddings used to be less significant savings Now weddings are lavish and expensive Largely offset by dissaving at time of purchase Institutional Factors Bonus system Bonuses are 25-30% of total compensation Bonuses appear to have positive impact on savings MPC out of bonus is much lower than normal income MPS is 0.33 out of regular wages, but 0.62 out of bonuses Important but not dominant Institutional Factors Bonus System Bonus is transitory income? Apparently not Habit-Buffer Income Hypothesis Rule of thumb save 50% of bonus Lump-Sum Payment Effect Psychologically easier and practically easier to save Eliminates necessity of budgeting Payroll Savings Plan specify % of bonus to be deposited Banks advertise to get people to bank bonus at bonus time 6

7 Institutional Factors Unavailability of Consumer Credit Relative unavailability until recently Consumer credit, housing mortgages Save to buy houses, land, consumer durables But loan repayment is a form of savings Need growing economy, then savings would rise with consumer credit limit Increases need for precautionary savings since they won t be able to borrow Institutional Factors Financial System Large number of banks, credit associations, credit cooperatives Postal savings system (deposit at any post office) Direct promotion of savings by banks Gifts to depositors, door-to-door solicitation Corporate promotion of savings with payroll savings plans at rates substantially above controlled rates paid by banks Government policies designed to keep banks safe Supervision, deposit insurance, rate ceilings Institutional Factors Long working hours Less leisure time, so consume less, save more Long working hours, long commute time Korea and Singapore also have long work weeks and high savings Early Retirement Age Traditionally 55 years to 60 years Long life expectancy, so longer retirement period savings But people actually work in second life LPFR for aged are high But workers see substantial wage cut after first retirement Seems to be significant Government Policies Tax breaks for savings Maruyu (tax free) system most of post war period 3 million deposits exempt from taxes 3 million deposits in postal savings system tax exempt Each individual eligible for tax exemption on interest on savings up to 14.5 million ($135,000) Easy to use family names and open multiple accounts Capital gains on land, housing, equities largely tax free 7

8 Government Policies Tax breaks for savings (continued) Most tax breaks abolished April 1988 Now 20% withholding tax on all interest income Capital gains on land, housing, and equities still get favorable tax treatment Employee property formation accounts for housing purchases and pensions remains tax free Government Policies Lack of tax breaks for debt US interest paid on housing and other consumer loans is tax deductible Not in Japan Limited tax credit for recent homebuyers Light tax burden High savings because tax burden is low Direct tax and social security contributions Lower than in US and Europe But may be indication of lack of social security more savings Government Policies Annual tax reductions Annual downward adjustments of income tax schedules to compensate for inflation Japanese view these as temporary tax reductions? Regressive tax system? Regressive in prewar period But more progressive than US postwar Government Policies Government Saving Promotion Activities 1875 Postal Savings System Cultivate public appreciation of savings BOJ Savings Promotion Department (1946) Central Council for Savings Promotion (1952) MOF Savings Promotion Center (1957) Provide discussion meetings, guide financial record keeping, sponsor children s banks, appoint savings promotion leaders 8

9 Government Policies Low level of social security benefits Inadequacy of social security broadly defined Health insurance, unemployment compensation, workman s comp precautionary savings Inadequacy of old age pensions Effect of social security on savings is theoretically ambiguous With social security, save less for your retirement Or save more because your kids must pay more taxes Government Policies Low level of social security benefits After 1973, old age pensions are comparable to other developed countries After 1973, social security improved and savings rose in Japan Barro effect? Recognition of need for retirement savings? Oil crisis uncertainty? Government Policies Agricultural subsidies Government subsidies to farmers (rice price supports) shift income to people with high savings rates Economic Factors Rapid Rate of Economic Growth 75% of Japanese savings can be explained by growth Wealth adjustment hypothesis If income is growing at a high rate and people want to maintain a constant wealth/income ratio, then Japanese savings would have to be high Life cycle hypothesis If income is growing quickly, then current income of young will exceed expenditures of old Leads to net savings because old dissaving does not offset young saving 9

10 Economic Factors Rapid Rate of Economic Growth (cont) Permanent income hypothesis Income growth was faster than expected or believed to be temporary Bonus hypothesis Increase in income primarily took the form of bonus income Infrastructure hypothesis Consumer spending was constrained by a lack of roads and large houses Economic Factors High and Rising Land/Housing Prices Rapid increase in land/house prices forces people to save more? Inflation Unexpected inflation reduced real household wealth Some empirical evidence that inflation increased savings to restore real value of wealth Wartime Destruction and Postwar Hyperinflation Save to bring asset holdings up to prewar level Oil Crisis Increased uncertainty about the future High Rate of Return on Equities and Land Miscellaneous Factors Greater Prevalence of Natural Disasters Earthquakes, volcanic eruptions, landslides, typhoons, hurricanes, fires Less Fear of Nuclear War Slemrod(1987) Chance of a world war breaking out within 10 years is 50% or greater 15% of Japanese, 49% of Americans Why Did Japanese Save? Most important factors were Age structure of the population Bonus system Rapid rate of economic growth Other factors Tradition Low proportion of the aged Prevalence of extended family High share of self employed Unavailability of consumer credit Long working hours Tax breaks for savings Underdeveloped social security system 10

11 Japanese Savings Only the bonus system remains today All the other factors were transitory Consequently household savings rates are no longer unusually high Corporate savings are currently high So Japan still exports capital Cost of Capital How Do Firms Raise Money? 1. Borrow money from banks Must pay interest on loans 2. Sell bonds Must pay a fixed yield (interest payment) on bonds 3. Issue equity (stock) Equity value is based on two factors Stream of future dividend payments Value of assets of firm after banks and bondholders are paid off 4. Retained earnings Use profits to finance investment Cost of Capital Components of the cost of capital r c =w*r d + (1-w)*r e W is share of debt in total external funding r d is cost of debt funding r e is cost of equity funding Difference in cost of capital arise from difference in w, r d, and r e r d < r e Even though debt is cheaper than equity, you can t adjust leverage without affecting the relative costs 11

12 Cost of Capital International differences in the cost of capital Arbitrage tends to eliminate any differences Ignore exchange rate expectations Under Bretton Woods (1944), most countries adopted controls on international capital movements Free trade flows, but not free capital flows After 1973, most countries abandoned capital controls Japan maintained strict controls on foreign capital inflows until 1980 Cost of Capital Japanese cost of capital was historically low by any measure Until 1980, Japanese real interest rates were below US rates Approximately 100 basis points difference After 1980, Japanese rates rose, but were still below US rates Difference declined steadily during the 1980s Cost of Capital E/P ratios were very low historically Relationship between E/P and r P E E(1 + g) E(1 + g) = + r g 1+ r E(1 + g) + E(1 + g) + = ( 1+ r) ( 1+ r) ( 1+ r) If you adjust for differences in growth rates, the cost of capital difference is around 2% So cost of equity is low L Cost of Capital Japanese Debt/Equity ratios were historically very high In 1970, Japanese D/E was 1.6, in US 0.54 Since debt is cheaper than equity due to less risk, this also lowered the cost of capital So cheaper to invest in Japan than in US Lower cost of capital may have led to more investment and more growth 12

13 Long Term Outlook Consider a project that costs 5 and pays off 10 in ten years In general the payoff can be written as ( 1+ r) 10 If the Japanese interest rate is 5%, then the Japanese payoff is = 1.14 If the US interest rate is 10%, then the US payoff is $ $5 = $ Long Term Outlook Cultural/historical reasons Japanese stable shareholding promotes long run investing Difficulty of takeovers in Japan relative to US Hostile takeovers, while rare in the US, are even more rare in Japan Takeovers may lead to managerial myopia Stock markets have difficulty distinguishing LR and SR performance Firms that pursue LR strategies may be takeover targets So managers focus on SR performance over LR performance Capital Markets Long Term Outlook Low rates of managerial turnover may promote long run thinking True for mid-level managers, less true for senior managers Reduces free rider problems Suppose a firm with 10 of debt is worth 9 today but 11 tomorrow. Each individual bond holder has in incentive not to renew debt this period, even though they would all recover their money if they sat tight Firms with higher concentrations of bank borrowing tend to receive more loans following financial distress than firms with less concentrated borrowing 13