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Finance

Japan Inc. dipping into cash reserves for growth investments

TOKYO -- Japanese companies are finally starting to make good use of their nearly 100 trillion yen ($837 billion) in cash on hand, spending it on acquisitions and capital investments in a bid to improve efficiency and further boost earnings.

     Kintetsu World Express will purchase Singapore's APL Logistics for 140 billion yen, according to an announcement Tuesday. The Tokyo-based logistics company will purchase all of APL's shares and turn the peer into a subsidiary around June.

     "We had to listen to investors who were calling for us to use our cash on hand effectively," said Kintetsu World President Satoshi Ishizaki, noting that this was a huge decision that took a lot of courage. APL's annual sales stand at about 186 billion yen, equivalent to more than 60% those of Kintetsu World.

     Kintetsu World has about 50 billion yen in cash. The rest of the funds for the acquisition will come from bank loans and the capital market, meaning the company will no longer be able to bill itself as essentially debt-free. There were fears that the company would be unable to compete globally at its current scale, Ishizaki said.

     Canon, which has some 840 billion yen in cash reserves, will acquire the world's largest network video surveillance company, Axis of Sweden, for roughly 330 billion yen, making it the top player in that field in a single stroke.

     "We're always looking behind the scenes for M&A deals aimed at growth," said Fujio Mitarai, chairman and chief executive officer of Canon.

     Cash reserves at listed companies are at record levels, totaling more than 98 trillion yen. This accumulation owes to not just earnings growth, but also a sustained spell of historically low interest rates, which make it easy to raise funds.

     But investors are taking a hard look at how this money is used. When companies hoard what they earn, they maintain stable finances, but this comes at the expense of return on equity. A key benchmark for overseas investors, ROE measures how effectively businesses use the capital entrusted to them by shareholders to generate profits. Improvement in ROE often brings higher share prices.

     "We're hurrying to make investments for growth while prioritizing efficiency," says Mitsuo Okamoto, president of Amada, a leading manufacturer of sheet metal processing machines.

     Amada plans to distribute 100 billion yen to shareholders over four years, starting this fiscal year, and has earmarked 40 billion yen for acquisitions. It will set up an M&A team in April.

     Aoyama Trading, operator of the Yofuku-no-Aoyama apparel chain, plans to put 20 billion yen toward acquisitions over the next three years, starting in fiscal 2015. It will spend 130% of annual profits on dividends and share buybacks, saving none of its earnings and drawing down cash reserves.

     "Our ROE is substantially lower than the market average," said President Osamu Aoyama. His concern is that an equity ratio of 70% will cause investors to take a dim view of management efficiency no matter how much the company earns.

     With investors growing more demanding, "we decided we had to act now," says one executive at the retailer.

     Meanwhile, Fanuc is using cash reserves for capital investment. It will spend 130 billion yen on plants in Tochigi Prefecture and research facilities in Yamanashi Prefecture. Plans call for boosting production capacity for numerical control systems to improve its global competitive clout.

     Since the company had some 930 billion yen in cash as of the end of 2014, its reserves will still be high even after the planned capital spending. The question of how best to use those funds will likely remain an issue.

     "Japanese companies have increased their earning power, leaving leeway in their finances," says Junichi Misawa at Sumitomo Mitsui Trust Asset Management. "The fact that more of them are improving ROE and paving the way for growth is laudable."

(Nikkei)

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