Unstash the Cash! Corporate Governance Reform in Japan

Abstract

Japan's high corporate savings might be holding back growth, by preventing a more effi cient use of resources. Small and medium enterprises (SMEs) have been the main contributors to high corporate cash balances, but more recently larger companies have also increased cash holdings. This paper focuses on the causes and consequences of the current corporate behavior and suggests options for reform. In particular, Japan's weak corporate governance-as measured by available indexes-might be contributing to high cash holdings. An empirical analysis on a panel of Japanese fi rms confi rms that improving corporate governance would help unlock corporate savings. The main policy implication of the analysis carried out in this paper is that a more ambitious and comprehensive corporate governance reform should be a key component of Japan's growth strategy. Such a reform would help remove some of the bottlenecks of the legal and corporate governance framework which encourage high corporate cash holdings and prevent a more pro-growth use of resources.

Is Japan Really a “Buy”? The Corporate Governance, Cash Holdings and Economic Performance of Japanese Companies

“…Thus, the conclusion that Japanese firms typically hold more cash than US firms is robust to the treatment of marketable securities, and holds up even when we stack the deck by including marketable securities for US but not Japanese firms. This finding is consistent with the evidence in Aoyagi and Ganelli (), who also report that Japanese firms hold more cash than firms in other G7 countries.…”

“…Because we posit that this inverse relationship is due to governance reform, we do not expect to observe this relationship in other periods (Japanese firms in the 1990s) or settings (for US firms). Our use of cash holdings as a measure of governance quality for Japanese companies is supported by Aoyagi and Ganelli (2014), who show that the cash holdings of Japanese firms are inversely related to the "Proprietary Bloomberg Score", a comprehensive governance index applicable to Japanese companies that includes measures of board size, percentage of outside directors and disclosure quality.…”

The Rise in Corporate Saving and Cash Holding in Advanced Economies:

“…For example, weak corporate governance has been found to be correlated with high cash holdings in Japan, seeAoyagi and Ganelli (2014).14 In the US and UK on the other hand, the trend toward higher private (household and corporate) net lending has been offset by larger government net borrowing, leading to current account deficits on aggregate.31©International Monetary Fund. Not for Redistribution…”

Macroeconomic Effects of Japan's Demographics: Can Structural Reforms Reverse Them?

“…Corporate governance reform. Research by IMF (2013a), Aoyagi and Ganelli (2017) and Sher (2014) suggest that firms in Japan hold too much cash. Corporate governance reform, by allowing that surplus cash is used for investment, could boost the level of investment by 5 percent according to Sher (2014).…”

“…Labor supply shocks were also used for increased migration. For the case of corporate governance reform, shocks to borrower riskiness (to lower it) in the financial accelerator mechanism were used to increase the level of investment after 10 years (in line with estimates by Sher, 2014 andGanelli, 2017). Finally, tariff and non-tariff trade barriers shocks were used to capture trade agreements.…”