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Shifting to a Country that Increases Gross National Income (GNI) Instead of gross Domestic Product (GDP)

Take advantage of growth of overseas countries

Japan is already near being an investment-oriented nation, but the historic appreciation of the yen taking place should be regarded as a good chance to shift to a structure under which the country earns profits overseas through aggressive foreign investment. The earthquake has resulted in an increase of companies newly starting overseas production or undertaking M&A of overseas companies in response to the power shortage and supply chain fragmentation. Such a trend has expanded even to the retail, service and construction industries, which are said to be domestic demand-oriented, due to the population decline and shrinking domestic market. Irrespective of the earthquake’s impact, we are in an era when companies get out of Japan to seek opportunities in overseas markets.

Actually, however, the increase of income from overseas has not led to increased employment or wages in Japan, with a decrease in domestic investment. Therefore, consumption does not grow and the economy remains stagnant. Why is this?

It could be because profits earned overseas have yet to be diverted sufficiently to domestic employment and wages. Companies and individuals may also be too concerned about the future to divert their money to wages and consumption. This is possible considering Japan has the most aging population in the world, with roughly 25% of the population being 65 or older, resulting in rising social security expenses, including pensions, and aggravation of national finances.

Japan will therefore need to position the increase of proceeds from direct foreign investment as the new source of economic growth, while at the same time providing workers with a larger share of the profits. Fortunately, Japan is about to catch up with the United States and the United Kingdom in the rate of return on direct investments, which implies that the country is about to establish a system under which companies steadily earn profits from overseas through aggressive overseas business expansion.

Needless to say, the current high value of the yen means a weak euro and dollar. It is highly possible that Japan will also face weak home currency, or yen depreciation, sooner or later because it also has a debt problem like in the United States and Europe. This is why the country should take advantage of the yen’s current high value.

Staying within the country in the future will make it impossible even to maintain the current level of GDP. Now both the nation and companies need to change their way of thinking and try to increase GNI by making forays overseas. If Japan then becomes an investment-oriented nation and establishes a virtuous circle in which overseas profits lead to increased domestic employment and wages, this will be the country’s new course.

Translated from “Kokunaiseisan dewanaku kokuminseisan wo fuyasu kuni ni,” Shukan Ekonomisto (Weekly Economist), November 1 2011, pp. 24–25. (Courtesy of Mainichi Shimbunsha)