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shows that this measure has been on a steady downtrend, with the numbers particularly low for large corporates. So far, the government’s approach has relied more on carrots than sticks, with Prime Minister Abe using a combination of moral suasion and sweeteners to encourage firms to disgorge profits. The pattern has continued as we approach FY2017. For example, local media have reported that the government is considering offering corporate tax breaks to SMEs that raise wages, in light of more modest wage growth at SMEs. Discussions are also underway in the Prime Minister’s office about reforming working practices with the immediate focus on “Equal Pay for Equal work (EPEW)”—i.e. reducing the wage gap between regular and non-regular employees. But the issue is contentious from both a capital and labour perspective. And considering the time it will likely take for related legislation to pass in the Diet, we think the lack of compliance mechanisms may mean that the immediate impact of EPEW will be limited. Instead, the debate seems to have shifted towards limiting excessive and unproductive overtime work. This is low-hanging fruit that does not address the issue of Japan’s labour market rigidities, which are at the heart of the problem of suppressed wages and weak household spending power. That said, there are signs that the government’s patience is wearing thin and that the Prime Minister is increasingly leaning towards direct intervention. For example, the government has already delivered a minimum wage hike in FY2016 and plans to take the national average up to JPY1,000 by 2020 via yearly hikes of 3%. These policy changes should offer small tailwinds for the recovery in private consumption. We also think the debate over a possible retained earnings tax is unlikely to go away. We are sceptical it will be introduced in this year’s tax reforms. However, the government’s escalating war on corporates hoarding cash is likely to lead to a continued rise in dividend payouts and share buybacks (Chart 21). Chart 20: Firms' cash-out ratio*, % 4qtr ma Chart 21: Dividends and share buybacks by Japanese firms (TSE 1st section listed) 40% a thY trn) 30% 15 r i [ 20% 10 wl 11 10% -) I 0% "PT FS PPP at wh oP ahah wk 1980 1985 1990 1995 2000 2005 2010 2015 SES Se cd Od” cP oY BY © -_ | | FPPC FFEEEEE ES Allfirm sizes = ===Large firms Small firms m Share buyback Source: BofA Merrill Lynch Global Research, MoF *The cash-out ratio is defined as personnel Source: Nikkei Astra, BofA Merrill Lynch Global Research expenses, capex, and dividend payouts as a share of cash and liquid asset balances Note: FY2016 dividend is companies’ guidance. FY2016 share buyback is estimated by annualizing the YTD numbers as of November 2016 Risk factors: largely from overseas A key risk to our 2017 outlook on the domestic side may be weaker-than-expected growth in real labor income, or a continued surge in the household saving rate, which would constrain consumption. However, we think the biggest risks in either direction stem from abroad. Specifically, we see higher uncertainty over global trade, risk sentiment, and FX as a result of political transitions in the US and Eurozone. We consider multiple policy scenarios under a Trump presidency. Trump’s campaign promises have mixed implications for Japan. On a positive note deregulation, tax cuts, and aggressive infrastructure spending could boost US aggregate Bankof America 8 Japan Economics Viewpoint | 18 November 2016 Merrill Lynch HOUSE_OVERSIGHT_014417