Saying that Japan has a lot of backup cash in reserve is a huge understatement. In banks throughout the island nation, sits a pile of cash that many countries wish were their annual GDP. These are the cash reserves of the nation’s companies. Some view this as a testament to the economic might of the country, while others believe it is a wasted opportunity.
Firms listed in Japan held 506.4 trillion yen (US$4.78 trillion) in cash as of their latest filings, the highest level on record, according to data compiled by Bloomberg. This is more than triple the amount that was listed in March 2013, months after Prime Minister Shinzo Abe returned to power and vowed to put a stop to cash hoarding.
Companies have argued that the money serves as a buffer against hard times. Investors on the other hand are not too pleased. They believe that executives should invest it for growth or return it to shareholders.
It is not all bad news though. Abe’s government’s new rules for investors and executives have indeed led to larger returns to shareholders since he returned. However, Zuhair Khan, head of research at Jefferies Japan Ltd, estimates they’re only distributing about 40 per cent of profits to stock owners when they could afford to pay out about 70 per cent.
The hoarder-like behaviour of Japanese executives comes as no surprise to many market watchers, who say most firms adopted a conservative attitude when asset prices collapsed in the early 1990s. The ensuing period saw financial institutions failing and being unable to lend to businesses, thus instilling a sense of paranoia in executives. Today, said paranoia has shaped executives’ behaviour, leading them to remain independent of debt financing.
“The strategy is to have a lot of cash because that gives you strategic flexibility for acquisitions or a cushion for a rainy day because who knows when the economy might go bad,” Khan of Jefferies said.
Despite this, investors remain optimistic at the possibility for change. While they still believe cash will continue to pile up, an increasing number of activists and petitioners who are targeting companies with poor shareholder return have instilled some hope.