Illustration by Phil Couzens
Jesper Koll is a Managing Director and Head of Research at JP Morgan Japan Securities Inc. He has been analyzing and investing in Japan since becoming a resident in 1986.
So it seems the world is turning Japanese after all. For longer than a generation, global investors have tried hard to lecture Japan’s corporate community on the supposed evils of keeping high cash balances and saving too much. Now over the past year, corporations around the world appear to be competing to build higher and higher cash reserves. Indeed, data suggests that corporate cash-piles in America now stand at their highest levels in almost two generations. “Cash-is-king” seems to have become the rallying cry for corporate leaders around the world in the current post-financial crisis era.
For serious economists, there is no easy answer to the question as to why the corporate preference for cash has suddenly surged. In my view, a key top-down insight is that we are going through a period of massive “crowding out”—government deficits have been surging lock-step with increased public intervention in almost all aspects of the economy. The impact in the real world is that this cuts down private entrepreneurship and investment opportunities. It also raises risks of higher regulatory costs and, longer term, almost ensures that taxes will have to go up. All said, corporate leaders will want to build reserves for future costs, rather than go out and invest aggressively in increasingly uncertain future returns. In the money world, the growing need to fund budget deficits traps these private savings in government bonds.
Before we get too complex and theoretical, Japan’s corporate community offers many insights into why firms are savings so much. To lighten the debate a bit, let me tell you about the “hyaku-oku club” rule. It goes like this: The most exclusive clubs in the Ginza entertainment district have always been very clear about their membership policy. If you work for a company that has less than “hyaku-oku”—10 billion yen—in liquid cash on its balance sheet, you can not get admitted, no matter what. Clearly tastes in status symbols and preferences in leisure and entertainment may differ globally, but here in Japan there is no question that, for many corporate leaders, this iron rule of the Ginza Mama-san offers a perfectly fine incentive to hoard cash. It seems you’re better off entertaining your shareholders in one of these exclusive clubs than earning an extra ten or twenty basis points of return on equity.
The Ginza Mama-san does, of course, have a point: The higher the cash reserve, the greater the chance of survival during a crisis. Cash is a very tangible cover against hidden liabilities arising from, say, sudden lawsuits, a banking crisis, a global recession, an earthquake or the political regime changing to a system of imposing stricter regulations. The greater the uncertainty, the greater the value of cash holdings. Let’s not forget that at the height of the post-Lehman global financial seizure, even global Fortune 50 companies were denied letters of credit for simple cross-border trade finance.
So it seems that the prudence of the Ginza Mama-san was a leading indicator of global developments. Unfortunately, the actual result of this has not been a happy one here in Tokyo. Compared to the early 1990s, about one out of two clubs in Ginza had to close down for lack of business and relentless structural recession. In the end, high cash balances may be a good first line of defense in a crisis, but they do nothing to guarantee growth, management acumen, wage and employment growth, or value creation. Make no mistake: The Ginza Mama-san rule is lousy investment advice. Personally, I am not sure what is more tragic, the fact that about half of the Ginza clubs went bust, or the prevailing reality that all of the supposedly inefficient Japanese companies with excessive cash balances are still in business. In Japan, everyone seems to have lost. High cash prevails and so do low returns. The only real change is that we have fewer clubs to choose from.
On a more serious note, the new global corporate savings dynamics is starting to have a potentially negative impact on policy debate here in Japan, in my view. Can you imagine the schadenfreude-laced snickers in many boardrooms in Tokyo right now, as American companies, in particular, are busy building their cash-piles faster than ever? Policymakers and technocrats are also overjoyed: If foreign corporates are changing to “become Japanese” and save rather than invest, surely it must mean that Japan-specific factors—the tax and regulatory regime or corporate governance and ownership structure—are no longer a valid argument to push for change in Japan. The global corporate savings glut is but another development helping to justify the Japan status-quo here in Tokyo.
