The effect of pro-shareholder income distribution on capital accumulation: evidence from Japanese non-financial firms

Over the past decades, there has been a change in the pattern of capital accumulation, especially in developed countries. Although the profit rate and profit share recovered after the 1980s and 1990s, the rate of capital accumulation remained stagnant in many developed countries in the same period. This phenomenon is called “investment-profit puzzle” because the movement of the rate of capital accumulation is thought to be mainly determined by that of the profit rate or profit share. In this study, I examine the effect of financialization on the “investment-profit puzzle” in the Japanese economy. The profit rate and profit share of Japanese NFCs began to recover from the mid-1990s, whereas the rate of capital accumulation did not recover during the same period. This study reveals that pro-shareholder income distribution, namely, the rise in profit share that is evoked by financializationin in Japanese NFCs is the main cause of the “investment-profit puzzle” in the Japanese economy. In Japanese non-manufacturing industries, increasing profit share depress domestic demand and capital accumulation while it contributes to profit rate recovery. The trend of non-manufacturing industries determines the “investment-profit puzzle” in the Japanese economy.