Research by a major investment bank has demonstrated what FDs have known for years: investment quality is no less important than quantity. In a circular published in April, analysts at Salomon Smith Barney argue that, in the 1980s, Japan’s high rate of savings and investment was seen “as a key source of future economic strength”. But the lesson of the 1990s is that “getting more out of investment through better management is critical because it frees resources for consumption and for more efficient use abroad.” In fact, they argue, a lower nominal investment share of GDP can be a positive indicator if it is associated with robust activity and productivity growth, such as in the US in the current decade. They believe that Japanese over-investment has not prevented Japan’s dismal economic performance throughout the 1990s and reflects “inefficiencies in the mechanism for allocating capital – most notably, the weakness of capital budget constraints in a bank-dominated economy.” They add that recent reforms may make matters worse, and the report says that there will be large capital outflows from Japan, which will be seeking higher returns overseas, until Japan’s corporate sector restructures on a broad basis.
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