Corporate profits have been at high levels, and this has not only led to an increase in business fixed investment but also had positive effects on the household sector through a rise in household income.
Nevertheless, corporate profits are under strong pressure due to the effects of earlier increases in energy and materials prices and the increased sluggishness in economic activity, which have led to a decline in profitability.
The Japanese economy remained on a moderate recovery path, supported by a rebound in personal consumption reflecting improvement in employment conditions, with corporate earnings remaining firm, despite of some signs of weakness in exports, etc.
With corporate profits having stayed at favorable levels on the whole, albeit with some weakness observed in part, business fixed investment has continued on an increasing trend.
That is to say, although the tightening of supply and demand conditions in the labor market and high corporate profits may serve as a tailwind for wage increases-- as was the case during 2014 and 2015-- their effects are unlikely to be significant enough to further push up the rate of wage increases.
Specifically, one member commented that corporate profits would be much lower than the projection reported in the Bank's September Tankan survey. Several members pointed out that the effect of the downward revision of corporate profits on corporate bankruptcies and employment should be watched closely.
Second, corporate profits were likely to remain at high levels even with the effects of high crude oil prices factored in. Business fixed investment was also likely to continue increasing as firms had mostly completed adjustments in excess production capacity and debt.
Corporate profits have been high despite the surge in prices of raw materials such as crude oil. Large manufacturing firms in particular have made successive upward revisions to their profit estimates due to the increase in exports coupled with the depreciation of the yen.
Based on the fact that corporate profits remain at historical high levels and that labor shortages have been heightened under a"full-employment" condition, while the labor share remains below the long-term trend, wage increases may well be projected to accelerate.
To start with the corporate sector, despite the headwind from overseas economies explained earlier, corporate profits have remained at high levels, especially in the nonmanufacturing sector, and business fixed investment has been on a moderate increasing trend on the back of such favorable profits..
Corporate profits, which had marked successive record highs for several years up to fiscal 2007, are continuing to fall as a result of the rise in commodity prices in the recent past and the economic deterioration, and business sentiment is deteriorating.
Corporate profits have been recovering on the back of firm domestic demand and developments in the foreign exchange market. Business fixed investment has been picking up on the whole, including the manufacturing sector, which had been lagging behind.
Specifically, many members expressed concern over the various pressures from the financial markets, such as the recent appreciation of the yen, the rise in long-term interest rates, and the drop in stock prices, which were a burden on the already severe corporate profit situation.
These members added that, given the downtrend in prices, in addition to these developments in exports and production, the environment for corporate profits would inevitably be severe for a while and business fixed investment was likely to follow a declining trend.
One member commented that, although corporate profits seemed to be increasing, the basis for the increase was still fragile. This member concluded that one should be careful not to overestimate the degree of improvement in corporate profits and the effect on business fixed investment should be assessed cautiously.
Furthermore, corporate profits have been favorable with the firm employment and income situation continuing, and the mechanism for economic recovery has been operating steadily; therefore, the economy is likely to follow a moderate recovery path as effects including those of the decline in demand following the front-loaded increase dissipate gradually Chart 7.
The employment system in Japan was underpinned by a belief in ever-rising economic growth and the pyramid-like corporate structure with younger workers at the bottom of the pyramid. However, as older workers have come to dominate the workforce in a situation of low economic growth, labor's share of national income has risen and corporate profits have been squeezed.
The pace of improvement in corporate profits is expected to temporarily slow down, especially in the manufacturing sector, mainly because of the slowdown in overseas economies. However, corporate profits are projected to follow an improving trend, given that the past decline in crude oil prices will continue to have positive effects and the rise in demand at home and abroad is expected to raise sales volume growth.
One of these members, who had been concerned that the basis for corporate profits was still fragile, stated that there was now less cause for such concern given the improvement in domestic demand due to the increase in business fixed investment, the recent recovery in international commodity prices, and the recent weakness in the yen.
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