Cash hoarding by Japanese corporations – Why are they hesitant to spend?

Bloomberg News Online reported on December 20, 2013 that the Japanese Prime Minister is scheduled to hold a meeting with Japanese corporate executives represented by Mr. Hiromasa Yonekura, head of the country’s leading business lobby group, the Keidanren, and is currently the chairman of Sumitomo Chemicals Co. to discuss about the how to get Japanese corporations to increase their capital expenditure levels, and boost wages of their employees, all in the effort of trying to bolster the consumption and production expenditure levels in Japan.

This week marks the release of the latest fourth quarter 2013 Tankan business sentiment survey compiled by the Bank of Japan (BOJ) showing that both large and the small and medium sized enterprises (SMEs) decreased their overall capital expenditures by 4.00 percent and negative 2.00 percent respectively, as compared to the previous quarter of an increase of 5.10 percent for the former (large manufacturers), and negative 4.00 percent for the latter (small and medium sized enterprises). According to one of the Bloomberg Television interviews with a Citigroup equity strategist based in Japan during the early Asian morning trading hours on Dec. 20, he thought that the hesitance is partly due to the upcoming consumption tax hike from 5.00 percent to 8.00 percent in April 2014, and concerns over corporate tax reforms, including the approaching start of the new capital gains tax rules scheduled to be implemented by January 01, 2014. The estimate of the revised capital gains tax in Japan come Jan. 01 is 20.00 percent from the previous 10.00 percent. This upcoming tax ruling could potentially hurt several equity values of these Japanese corporations, particularly those corporations which are publicly listed, and private enterprises that have recorded any capital gains resulting from the one-time sale of assets on their balance sheets. Although the new tax regulations have been well anticipated, and will mostly impact the average retail investor holding shares, mutual funds, and other securities in their personal accounts, industrial corporations have also took this opportunity to accelerate arrangements to hoard cash, or to move assets into tax-free accounts in order to limit their exposures to the new tax hike rulings.

The latest tax reforms implemented so far are part of the ongoing series of fiscal policy moves intended to restructure the balance sheet of the Japanese government, including finding ways to deal with the swelling government debt levels. Japanese corporations are also aware that they will be one of the immediate targets being called upon to fund the majority of the government’s public spending programmes. However, most corporations are not being set up as non-profit organisations, and they have shareholders to account for, therefore in order to minimise such risks coming from the Japanese government, business corporations have undertaken moves to limit capital expenditure levels in order to deploy cash into other forms of investments that face limited exposure to such risks, including tax free accounts, and to a certain extent, offshore tax havens. As for other corporations in Japan where their operations are mainly domiciled locally, they will like to minimise their capital expenditures in anticipation of further tightening fiscal policies, which could potentially pose a threat to their local operations.

Bloomberg News reported that corporate holdings of cash and deposits rose to Japanese Yen (JPY) 224.00 trillion (USD 2.15 trillion). This statistic was being pulled from a recent Bank of Japan (BOJ) latest report, published on December 18, 2013, which indicated the level of confidence in the Japanese economy among corporations, which is low if one were to read off from the latest fourth quarter 2013 BOJ Tankan business sentiment index (11.00 versus 17,00 expected), and it has been a lot of hesitance by corporations to devote large scale capital expenditure plans due to the reluctance by many to spend more as a result of the various tax regulations, which are quite detrimental to the bottom lines of these Japanese corporations. In addition, as a result of the weakening Japanese Yen currency, corporate spending priorities have been shifted to the exporting business units, thus choosing not to spend on increasing remuneration levels of its employees, and funding its domestic operations.

Prime Minister Abe and his Cabinet are actively trying to persuade corporate executives to increase their capital expenditure levels in order to co-ordinate with the monetary reforms undertaken by the Bank of Japan (BOJ) to boost consumption and capital expenditure levels through the ongoing 2.00 percent inflation target measured by the country’s core-consumption price index (CPI, ex food and energy) . However, the combination of increased taxes, and lack of other government incentives are potential inhibiting factors that deter huge capital spending plans undertaken by the Japanese corporations.

I believe that the Japanese government needs to re-evaluate the existing tax policies which pose one of the biggest inhibiting factors in driving up capital expenditure levels. The Japanese corporations need to feel assured that taxation policies and reforms are not being driven by populism in order to restore the confidence of both investors and individuals. There could perhaps be tax incentives being provided to corporations which have undertaken massive research and development expenditures to discover new drugs, vaccines, and other forms of scientific research. Finally, there has to be a series of consistent corporate regulations that could potentially help to facilitate greater expenditure plans, especially when rules and regulations are being made open, fair and transparent. There has to be a lot convincing efforts made by the Prime Minister in order maintain the viability and credibility of ‘Abenomics’ going forward. The Prime Minister has not fully made clear of his policy goals, and instead, it has been left with a lot of doubts, concerns, frustration and hesitance to increase capital expenditure levels by these corporations. It is hoped that when the new capital gains taxes and consumption taxes start to kick in 2014, it should be being implemented in way seen as business friendly, and intended to fund the government’s budgetary needs.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc