Japan Inc. Holds Italy-Sized Cash Pile as Abe Urges Spending

Japan’s companies stockpile of cash reached a record in the first quarter as they poured investment abroad, underscoring Prime Minister Shinzo Abe’s challenge to boost the nation’s investment and wages.

Private companies’ cash and deposits rose 5.8 percent from a year before, to 225 trillion yen ($2.4 trillion) -- an amount in excess of the size of Italy’s economy or the liquid assets held by American firms, Bank of Japan data showed in Tokyo. Businesses held 55 trillion yen in direct investment abroad.

The report underscores the appetite for manufacturers to ramp up operations in faster-growing economies as they await evidence for Abe’s growth agenda opening new opportunities at home. Without a revamp of corporate governance practices that forces Japan Inc. to deploy its cash pile, it will be tough for Abe to transform the economy, economist Masaaki Kanno said.

“This is a very big problem in Japan’s economic system,” said Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo and a former BOJ official. “The problem is lack of corporate governance -- the role of shareholders should be to urge managers to use cash more profitably.”

Abe, 58, plans to roll out legislation to reduce corporate regulation later this year, after next month’s election for the upper house of parliament. Meantime, he and his Cabinet have set targets for increased investment at home and urged businesses to boost wages as they enjoy a bump in profits from a falling yen.

No Guarantee

The prime minister’s growth plan offers no guarantee of revitalizing Japan, Moody’s Investors Service said in a credit outlook report today. “The outline lacks steps to significantly increase corporate investment in the domestic economy,” analysts David Erickson and Tom Byrne wrote.

A government report yesterday showed Japan’s exports rose more than forecast in May as a weaker yen boosted the value of overseas sales, even as the volume of goods shipped abroad declined. The BOJ’s release, known as the flow of funds report, added to evidence of increase in profits.

The cash and deposit holdings of Japan’s non-financial companies reached a record in the January-to-March period, according to BOJ figures dating back to 1979. The $2.4 trillion equivalent compares with the $1.8 trillion in liquid assets -- such as cash, deposits and money-market fund shares -- held by nonfinancial U.S. firms, according to Federal Reserve data.

“Excess net private savings to a large extent reflect the malaise that Japan has been in -- of deflation and low growth,” said Paul Sheard, chief global economist at ratings company Standard & Poor’s. “The corporate sector is not going to take that money and suddenly start investing, start increasing wages or hiring more workers if it doesn’t see a more optimistic future.”

Low Debt

Among the 198 non-financial companies on the Nikkei 225 Stock Average, 42 have more cash than debt, according to data compiled by Bloomberg.

The BOJ’s efforts to end 15 years of sustained deflation will help encourage companies to deploy their cash, according to Finance Minister Taro Aso.

“They are hoarding cash because of deflation,” Aso said in parliament in Tokyo yesterday. “Deflation makes the value of money higher if you just keep it. But inflation won’t allow that to happen and it will be an impetus” to spend, he said.

Growing Economy

Japan’s gross domestic product jumped at an annualized 4.1 percent pace last quarter, propelled by consumer spending and exports while business investment declined. GDP will rise 2.85 percent this quarter, then sustain 3.25 percent gains in the following two periods, according to the median estimates in Bloomberg News surveys of economists. Next year, growth is forecast to slow when the government boosts the sales tax.

The flow of funds report showed households had a financial deficit of 12.1 trillion yen in the period, the biggest since January-to-March 2009, reflecting that shoppers opened their wallets wider. Japanese typically see a net outflow of funds in the first and third quarters of the calendar year, with inflows in the second and fourth periods, when bonuses are paid.

“In that sense maybe Abenomics worked -- it encouraged the household sector,” said Kanno at JPMorgan.

Abe’s 10.3 trillion yen fiscal package enacted earlier this year, and BOJ Governor Haruhiko Kuroda’s April commitment to double the monetary base, helped strengthen consumer confidence to its highest level since 2007 in May. Anticipation of BOJ stimulus helped send the yen down 7.9 percent in the first quarter against the dollar, after a 10 percent tumble in the previous three months.

Cautious Households

Households remained cautious with their investments, keeping 54 percent of their holdings in cash and deposits in the first quarter, compared with 55.2 percent the previous three months. Net assets rose 4.7 percent to 1,207 trillion yen, the highest level since the second quarter of 2007 -- before global money markets began to seize up with the collapse of the American subprime mortgage market.

“The big question for Abenomics is are the Japanese consumers and investors going to switch out of cash -- that’s going to underpin a long-term change,” said Barend Janssens, the head of RBC Wealth Management’s emerging markets division in Singapore.

Japanese bank lending overseas in the fiscal year which ended in March rose 26 percent from a year earlier to 52 trillion yen, the most since fiscal 1998, when the Asian financial crisis struck Japan’s trading partners in southeast Asia. The nation’s lenders have been expanding in the region, following manufacturers including Nissan Motor Co. that have boosted their operations there.

Looking Abroad

The total stock of Japan’s foreign direct investment rose 22 percent to 55 trillion yen at the end of March.

Last month, Sumitomo Mitsui Financial Group Inc. agreed to buy 40 percent of Indonesia’s PT Bank Tabungan Pensiunan Nasional for about $1.5 billion, its biggest purchase of a foreign financial firm. In 2007, it bought 15 percent of Vietnam Export-Import Commercial Joint Stock Bank. Mizuho Financial Group Inc. followed its rival into Vietnam last year.

“With Japan’s local market shrinking due to adverse demographics and long-term prospects still cloudy, Japanese companies are looking abroad,” said Izumi Devalier, a Japan economist at HSBC Holdings Plc in Hong Kong. “This trend is not going to change overnight. I think the FDI surge is a long-term trend.”

(Updates with Moody’s report in the sixth paragraph)
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