News: Analysis & Commentary: JAPAN
CASH IS KING FOR CORPORATE JAPAN
Japan's corporate barons are probably bemused at Chrysler Corp.'s current predicament. Kirk Kerkorian's $20.5 billion takeover gambit would drain the auto maker's $7.3 billion cash reserves and add $10.7 billion in new debt. Such money grabs are unheard-of in clubby corporate Japan--and so are big shareholders bent on instant gratification. Small wonder: Compared with Chrysler's, the huge cash hoards at Toyota Motor, Matsushita Electric Industrial, and Hitachi are under lock and key.
Instead of rewarding stockholders with dividends and buybacks, Japan's industrial giants have historically used their cash troves as war chests. Fat cash cushions have allowed exporters to slash prices abroad, grabbing more market share without worrying about profits. When Japan's bubble economy was at its airiest in the late 1980s, Japan's corporate leviathans gobbled up overseas assets. Indeed, part of their present wealth comes from big depreciation write-offs of plants and equipment bought during that investment spree. They also gambled in the stock and currency markets and took some big losses on trophy investments such as the Pebble Beach (Calif.) golf course.
Now, with the yen crashing through the 80-to-the-dollar barrier, corporate cash is staying home. Big multinationals able to cut costs to offset their less-competitive exports are simply sitting on their money, keeping it in yen-denominated bonds and short-term cash accounts. Middle-tier exporters are using their cash to offset lower profit margins, so they won't have to raise prices abroad to maintain market share. Domestic companies are burning up their cash as they scramble to cope with a growing flood of cheap imports.
With Japan's recovery so fragile, corporate treasurers are uninterested in domestic expansion, and capital spending has all but dried up. The downside of sitting on all those yen is that with interest rates at record lows, conservative cash management doesn't pay very well. Companies will be lucky to earn 2% aftertax on their short-term cash. "The opportunities are limited" for effective use of free cash, says Peter Tasker, equity strategist at Kleinwort Benson.
Nevertheless, treasurers are being more cautious than usual. They're putting corporate cash into domestic bonds and currency hedging--some lucky companies have locked in futures contracts at 100 yen to the dollar. And indebted companies are paying off their loans.
Then there are the Japanese executives who want to keep a safety net for the future--even if it means zero profits now. Toyota Motor Corp., for instance, can afford to sit back and watch the yen keep rising. It could break even with the yen as low as 50 to the buck, figures Lehman Brothers Inc. auto analyst Koji Endo. So it isn't transferring any of its $24.6 billion in cash into profits, letting margins fall rather than raise prices and sacrifice market share. "Nobody wants to be blamed as the generation that lost the money," says Fujio Cho, a managing director at Toyota.
MULTIMEDIA MOVES. Besides wanting a buffer against yen-induced earnings declines, companies have other reasons to save up. Beginning in 1997, they'll have to use current market value to measure their pension fund investments. Corporate Japan "has a 20% hole in the pension funds" thanks to the prolonged bear market that has battered their stock holdings, figures James Capel Inc. economist Jason James.
Plus, in its emergency yen-busting package released on Apr. 14, the Finance Ministry encouraged companies to buy back their shares to help the slumping Nikkei, now off 17% on the year and 58% from its peak in 1989. Buybacks would do wonders for Japanese companies' paltry 3.5% return on equity--vs. 18.5% in the U.S.--figures Tasker.
There's no denying Japan's flagship companies still have plenty of financial brawn. Matsushita Electric Industrial Co., which recently beat a retreat from its venture into Hollywood, will pocket about $5.7 billion from the sale of MCA Inc., less any currency losses. That's on top of the roughly $22 billion it has in cash and short-term instruments. With its Panasonic and Technics consumer-electronics units under pressure from weak demand and the strong yen, Matsushita President Yoichi Morishita says the company will use the MCA proceeds "in our important multimedia" and related businesses during the next few years.
Whether Matsushita's foray into the much-hyped multimedia field will be any more successful than its fling with Hollywood is anybody's guess. But in a system that shields corporate cash from predators and virtually ignores shareholders, Japan's corporate chieftains have plenty of freedom to fail.By Brian Bremner, with Edith Hill Updike, in Tokyo