Boxing Day 2022 will mark a decade since the return to power of Shinzo Abe and the start of a run that would go on to make him Japan’s longest serving prime minister.
The late leader’s “Abenomics” economic revival programme, along with the extreme quantitative easing regime that the Bank of Japan imposed from 2013, were supposed to stimulate corporate investment, encourage focus on shareholders, raise wages and generally redeploy the mountains of cash held by the country’s huge cohort of listed companies. For a time, investors loved and bought the story.
Ten years later, the balance sheets of Japan Inc are stubbornly replete with cash and suggest that the corporate instinct to hoard (for better or worse) may never be overcome.
A vast 40 per cent of non-financial companies in the Tokyo Stock Exchange’s broad Topix index, noted CLSA strategist Nicholas Smith, will end this year with net cash of more than 20 per cent of their equity. The ratio of cash-hoarding companies is five percentage points higher than it was when Abe and BoJ Governor Haruhiko Kuroda took the reins. Back then, Smith added, Japanese banks were lending 71 per cent of their deposits; now it is just 63 per cent. All of this would be noteworthy under any circumstances, but is astounding after the pummeling of a global pandemic and energy crisis.
There are plenty of ways in which Japanese companies justify the fullness of their coffers. Top graduates — in an ever tightening job market — still choose companies on their perceived financial stability. The pandemic proved, conclusively, that unpredictable existential threats can jump out from anywhere. Companies with overseas M&A ambitions that were deep frozen by Covid-19 will identify the hoarded cash as dealmaking war chests. A more hawkish switch of BoJ policy could unleash massive financial pain. Geopolitical decoupling and the reworking of supply chains will absorb huge investment in the coming years. And so on. Some investors may, in an unstable and recessionary world, choose to reward this.
But the problem Japanese companies confront going into 2023 is that their cash piles paint a big target on their backs, related to the government’s plans for a historic rise in defense spending and its hope that significant wage increases will jump-start the economy.
On defence, the government has said that it would consider a rise in corporate taxes to pay for what it argues is the increased cost of ensuring Japan’s security against an ever more “challenging” China. Early grumbling by companies has been met by prominent commentators arguing that the corporate sector “owes” a share of the financial burden to the country that will protect its factories and offices.
On wages, the target takes the form of next year’s acutely charged “shunto” spring salary negotiations. For a quarter of a century, Japanese companies allowed wages to stagnate: all they had to do was keep pay very slightly ahead of inflation in a fundamentally deflationary economy. If companies fail to raise wages more substantially now that prices are rising steeply in sensitive areas like fresh food, they will be accused of breaking a social contract.
Japan Inc has, to a significant extent, made this situation for itself: for decades, chief executives have explained their cash hoarding by claiming their attention to shareholder interests was equally shared with the interests of staff and society. Over the next few months, they will be called to prove this claim. If they push back too hard against the tax, they will find it harder to avoid raising wages, and vice versa.