Abenomics Fails to Shake Japan Firms’ Addiction to Cash: Economy

Japanese firms boosted their cash stockpile to a record in the first quarter, underlining challenges Prime Minister Shinzo Abe faces a year and a half into his drive to reflate the economy.

Nonfinancial companies’ holdings of cash and deposits rose 4.1 percent to 232 trillion yen ($2.3 trillion) at the end of March, while they increased borrowing from private banks at the slowest pace since the final quarter of 2012, a Bank of Japan report showed yesterday. Households kept more than half of their assets in cash and deposits.

Firms’ reluctance to plow cash into projects at home increases the urgency for Abe to deliver on promises to boost the growth potential of Japan’s economy with his “third arrow” of Abenomics. With domestic prospects limited, direct investment overseas jumped 21 percent from a year earlier -- a 10th straight quarter of double-digit gains.

“Companies and households are still not convinced about Abenomics,” said Kazuhiko Ogata, chief Japan economist at Credit Agricole SA in Tokyo. “Abe has to show he can boost the economy by implementing, not just compiling, the growth strategy, and the BOJ may have to do more to boost the economy and sentiment.”

Japan’s benchmark Nikkei 225 Stock Average has fallen 5.9 percent this year, the worst performer among major global stock markets tracked by Bloomberg News, reflecting dimming expectations for Abenomics. The index rose 1.4 percent at 10:16 a.m. in Tokyo after the Federal Reserve said U.S. growth is recovering and interest rates will remain low for some time.

Growth Strategy

The tendency to stick to cash suggests BOJ Governor Haruhiko Kuroda’s efforts to stoke risk-taking has yet to gain much traction in an economy that he’s trying to steer out of 15 years of deflation. Kuroda has said encouraging companies and households to make investments is a key transmission channel for the central bank’s unprecedented easing to achieve a goal of stable 2 percent inflation.

Small and mid-sized companies plan to cut business investment by 5.2 percent for the year ending March 2015 from the previous year, according to a report today by Japan Finance Corporation.

Abe plans to cut the corporate tax rate in stages from the fiscal year starting April, lowering it below 30 percent in a few years, as he seeks to boost Japan’s competitiveness and attract foreign investment.

The task for the prime minister is to overcome opposition from vested interests as he tries to unshackle businesses in the medical and agricultural sectors. He also needs to find revenue to fund the lower corporate levy, or risk worsening the world’s heaviest debt burden.

Falling Population

Demographics present one of the stiffest headwinds to efforts to stoke a sustained recovery: Japan’s aging and shrinking society means overseas markets offer better prospects for Japanese companies seeking growth.

The flow of direct investment abroad by Japanese companies was 1.25 trillion yen in the first quarter, raising the balance to a record 66 trillion yen, according to the BOJ.

The population is projected to fall to 124 million in 2020 from 127 million in 2012, according to the National Institute of Population and Social Security Research.

“Many regions are not realizing the benefit of Abenomics and the impact of the falling population and aging is appearing,” Kazuyoshi Terakado, head of Japan’s regional bank association, said yesterday in Tokyo. “We need the growth strategy to spread to regional economies.”

Households have borne the brunt of Abe’s bid to reflate the economy and contain government debt. Real incomes are falling as base wages failed to grow for a 23rd month in April, when consumer prices -- boosted by the first sales-tax increase since 1997 -- rose 3.4 percent.

Household holdings of investment trusts increased 10.2 percent to 78 trillion yen at the end of March -- accounting for 4.8 percent of their assets -- the slowest pace of growth since the third quarter of 2012, BOJ data show. At the same time, cash and deposits held by households rose 2.1 percent, increasing for a 29th straight quarter.

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