Prime Minister Abe has asked us to express our views about private capital investment and wage increase at a public-private dialogue meeting on November 26. As for capital investment, there are data of what has taken place thus far but future investment is up to the management decision of each company so it is difficult to indicate specific figures. To expand domestic capital investment, it is necessary to improve the business environment.
Whether to make investments abroad or domestically depends largely on the competitiveness of the location. To boost competitiveness to attract businesses, an equal footing in terms of business environment is essential. Specifically, this means reforming corporate taxation, putting in place measures to encourage capital investment, easing regulations and stabilizing energy prices, among others. If these areas are handled appropriately, we can say domestic capital investment still has room for further growth.
As for corporate investment for growth and expansion, companies are making diverse investments, such as both domestic and overseas capital investments, research and development investment in and outside Japan, and merger-and-acquisition (M&A) investment. Putting all these together, corporate investment for growth and expansion has increased considerably in the past three years. Some say that companies are just accumulating internal reserves and are inactive toward investment, but that is certainly not the case. They are proactively making investments in various forms. Domestic investment last year totaled 69 trillion yen, and this year it is certain to surpass 70 trillion yen, so the amount is steadily increasing.
The biggest factor preventing domestic capital investment from making large increases is that a business climate on an equal footing with international standards has not been secured. There are other factors, such as restrictions in domestic markets and labor shortage. On the other hand, new markets are being created in growth fields. We are calling for the Fourth Industrial Revolution at a meeting between the government and the private sector as well as on other occasions. By utilizing new technologies such as Internet of Things (IoT), robots and artificial intelligence (AI), it is possible to drastically improve productivity at domestic manufacturing bases. By pushing forward these kinds of reforms, we think domestic demand will grow sufficiently regardless of the aging population and we can also expect investment to increase. In fields where new growth is expected, such as robot or smart communities, a hydrogen society and next-generation aircraft, there is ample room to expand investment opportunities in Japan, as well as for related industries. The business environment should be improved for that.
The labor union's demand has not come out yet so we are not in the stage of saying anything specifically. For the past two years, Keidanren has called on companies that have improved on their business performance to take positive steps. As a result, large wage increases were realized last year and this year. For next year as well, we plan to continue calling on companies that improved performance to take positive measures. We recognize that continuous wage increases are necessary to realize a virtuous economic cycle.
In the report of the Committee on Management and Labor Policy released in January this year, we said two things about wages. First, we called on companies that improved on their performance to positively consider raising wages. Second, we indicated that raising the base wage is also an option. I think this was the first time that positive reference to raising the base wage was made in the committee's report. I cannot yet say how the reference to raising the base wage will be expressed in next year's committee report. But wages should be considered on an annual basis, comprehensively including regular pay raise, bonus and lump sum allowance, and base wage raise. So it is important that the employee's take-home pay increases overall. In addition, various allowances and allocation of wage increase are also issues to be considered. Households with small children have a lot of expenditure such as education expenses, so they have a high propensity to spend. It will also become necessary to consider providing generous allocations to child-rearing generations down the line.
Companies' retained earnings
First of all, it is necessary to understand accurately what retained earnings are. Some say it is cash that companies save up, but that is not the case. It is not that 350 trillion yen exists in cash at companies, but in addition to cash and deposits, it also includes money that has already been spent in the form of capital investment, M&A and the like. Currently, companies' retained earnings amount to 350 trillion yen, but cash and deposits account for about 210 trillion yen. The overall annual sales of Japanese companies come to around 1,500 trillion yen, so the amount of cash and deposits is equivalent to about 1.5 months' worth of sales. This is not an excessive standard but rather an appropriate standard as operating capital. On the other hand, as companies' business performance is improving, we have no objection against the assertion that they should divert spending proactively toward domestic growth investment. But for that, the premise is improving the domestic business environment.
The reality of cash and deposits varies greatly depending on the company's scale and business category. For example, compared with large companies, small and medium-sized companies that have a hard time procuring funds would probably want to have more cash and deposits on hand. Also, if worrisome factors remain in the economy, companies may want to have a certain amount of cash. This comes against the backdrop of the fears companies experienced during the economic downturn triggered by the Lehman Brothers bankruptcy when they had trouble procuring operating capital as cash reserves were being depleted. When considering being prepared for a contingency, having cash and deposit worth about 1.5 months of sales is certainly not excessive.
Understanding of the current state of the economy
GDP for the July-September period contracted an annualized 0.8%, but looking at the breakdown, inventory investment had shrunk 2.1%. So if we exclude the impact of this element, we virtually had positive growth in that quarter. Actually, consumption has turned positive and there is no need to take the negative growth for two consecutive quarters in an overly negative light. Rather, as the drawdown of inventory progressed, we think the October-December period will see positive growth. On an annual basis, growth of just below 1% is expected this year while the economy is likely to grow around 1.5% next year. There is no change in the situation that the economy is on a growth path, albeit moderately.
On the Chinese economy, while there are shaky areas such as the steel and coal industries, the economy on the whole is maintaining growth of near 7%. Keidanren's member companies are also not looking at it in an excessively negative light. During the Japan-China Economic Association delegation's recent visit to China, Premier Li Keqiang expressed his strong determination to continue growth of 6.5% or more by moving forward with structural reforms. There may be some fluctuations, but looking at the Chinese economy overall in a calm and objective manner, we do not think there is need for major concerns.
Reduce burden of consumption tax hike
Keidanren has been opposed to the introduction of a reduced tax rate system and has asserted that the measure for low-income earners should be handled through benefits while maintaining a uniform tax rate. As long as the reduced tax rate system is to be introduced, Keidanren has asked for consideration toward small and medium-sized companies as well as studying of subject items under the premise of securing social security revenue in the comprehensive reform of tax and social security. We are aware that Prime Minister Abe has given instructions to come up with a system that can gain the consent of the people, to make considerations to avoid confusion among businesses and to secure the revenue source within the framework of the government's comprehensive reform of tax and social security policy. We think it falls under the same views as those of Keidanren.
There is massive demand for infrastructure in Asia, said to amount to around 9 trillion yen worth, so naturally there are cases in which we will face competitions with China and other countries. On the other hand, there are many areas in which Japan, China and the Republic of Korea can cooperate and join hands. The recent result regarding the order to build a high-speed railway in Indonesia was disappointing, but any project involves competition. To deal with the massive infrastructure demand, the combination of funding cooperation from financial institutions as well as competition and cooperation with various countries will become important.
Keidanren has called on member companies to make political donations based on their own decisions. It is up to each company to decide which political party to donate to, and we have compiled and released our policy assessment as a resource on which they can base their decision. Keidanren's role is to call for making political donations and to compile its policy assessment, and from there, it is up to the decision of each company. We are not calling for making donations with any numbers or any other kind of expectations in mind.