The surprise selection of Kazuo Ueda to become the next governor of the Bank of Japan will break with decades of tradition and put an academic on that prickly throne for the first time in the postwar period.
Despite his longstanding prominence, combing through Ueda’s previous comments for hints of what his appointment might mean for the cost of money is heavy going.
Everyone is ravenous for guidance on what might happen should long-term interest rates creep higher — none more so than corporate Japan, which must not only confront the possibility of BoJ policy normalisation for the first time in nearly a quarter century (and several generations of senior management), but also recognise that normal was never all that normal. So how big might the coming readjustment storm be?
Barely in doubt, as Ueda takes his turn at the helm, is that the situation he inherits is deeply abnormal. Views differ on the peril (or lack of it) in Japan’s gross debt standing at 260 per cent of gross domestic product. But the BoJ’s 56 per cent ownership of the Japanese government bond market, and the $331bn it has deployed since December 1 defending its yield curve control (YCC) policy, clearly point to market dysfunction. Several front-runners for the governor job are known to have turned it down, which suggests a significant perceived risk of reputational injury. In theory, therefore, the wrench of even the slightest normalisation could be severe.
Many analysts suspect Ueda will oversee a slightly quicker retreat from YCC and a review of the wider ultra-loose policy framework than others would have done. He is clearly aware of how risky a disorderly exit would be, and must be trusted to avoid that. At the same time, no responsible Japanese chief financial officer should assume that money will continue to cost so little.
But what to do with that assumption? The answer, as always, lies with the very considerable piles of cash on which listed Japanese companies jealously sit — an insulation that may well diminish to the point of negligible the problems of any policy normalisation process for most listed companies. As of this week, according to research by the brokerage CLSA, some 56 per cent of non-financial companies in the broad-based Topix index were net cash. That compared with 21 per cent in the UK’s FTSE All-Share, 19 per cent in the MSCI Euro and 14 per cent of the S&P 500. Even Germany’s prudent CDAX constituents only got to 38 per cent.
Far more interesting than the scale of the Japanese corporate cash hoard, though, is the reason for its existence and where it is concentrated.
The shorthand explanation, historically, has been that Japanese companies feel the need to maintain a generous “rainy day” fund to ensure their survival through hard times. That imperative, say chief executives, is partly a function of a corporate culture that celebrates survival, and partly of being in a battle for talent in a job market that seems to rate employers by the robustness of their balance sheets. Either way, the need to preserve these rainy day funds against the day of crisis is often intimated to both staff and investors as a reason not to plunder them with wage increases and other capital deployment.
This line, though, is harder to justify after three years of pandemic, trade disruption and inflation — a rainy day like no other from which Japanese companies have collectively emerged with more cash than before. That leaves several possibilities. One is that the much greater notional crisis for which this cash is held is a mega-earthquake that hits Tokyo or Osaka, and which will challenge corporate survivability across the board. Another is that the cash has been saved against precisely the crisis many now face: a more realistic cost of money.
Intriguingly, Japanese companies do not frame it that way. When pressed, CEOs express a profound distrust of the nation’s banks — a feeling that dates from well before the emergence of the BoJ’s zero-rates policies and assumes that the lenders are not going to be part of the solution when survival is at stake. The further you descend through the stock market in terms of size, the more prevalent is this sentiment. Among non-financials in the Topix index of Japan’s 70 largest companies, the ratio of net cash companies is 24 per cent, in the mid-cap 400 it is 47 per cent. In the Topix Small index, the ratio is 58 per cent.
Japan’s cash hoarding may, accidentally, provide it with the means to ride out a normalisation process by the BoJ. But the hoarding itself points to an exceptionally abnormal relationship between lenders and borrowers that will not only underlie that process, but continue beyond it.