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Stocks

Can negative rates move 100tn yen mountain?

TOKYO -- The Bank of Japan began Tuesday an audacious attempt to encourage spending by imposing negative interests on banks that keep idle cash reserves.

     And this campaign could force companies to heed activist shareholders demanding higher dividends, like Tsuyoshi Maruki.

     Maruki, formerly of Nomura Securities and the now-defunct Murakami Fund headed by Yoshiaki Murakami, founded his own investment fund, Strategic Capital, in 2012. Its roughly 10 billion yen ($87.7 million) in assets are invested in cash-rich companies with stable earnings and undervalued shares, such as Daiwa Industries, Japan Digital Laboratory and Takara Printing.

     These companies have massive cash holdings despite their modest valuations. Commercial refrigerator maker Daiwa Industries' cash on hand is nearly on par with its market capitalization at 46 billion yen. Japan Digital's ratio of net cash to market capitalization is also among the highest in Japan.

     With Daiwa Industries' general shareholders meeting coming up in March, Maruki submitted a proposal for the company to lift its annual dividend from 10 yen per share to 67 yen. Its prospects for passing are dim, given that the founding family holds about 40% of outstanding shares. But Maruki likened shareholder proposals to an adult's duty to vote. "I want [Daiwa Industries] to use its money on growth investments first, such as moving into Asia [outside Japan] or buying cookware makers that it has synergy with," he said. "Even so, cash on hand that can't be used up should be returned to shareholders through dividends."

     In Japan, activists' demands for excess money to be paid out to investors had been seen as greedy. They were unlikely to gain traction among shareholders, much less companies themselves.

     But that may change in the new financial environment created by negative interest rates. As with the "Stamp Scrip" based on the ideas of German economist Silvio Gesell, simply holding cash causes its value to decline. Under negative rates, excessive holdings of financial assets will be a sin, said Masatoshi Kikuchi of Mizuho Securities.

     Also, institutional investors are obligated to give active feedback about a company's investments to help boost shareholder value. Letting companies leave their money idle with negative rates in place will be seen as a breach of fiduciary duty.

     Listed companies amassed nearly 100 trillion yen in cash on their balance sheets over years of deflation. The cash-rich businesses forming the base of this mountain of money are being exposed to sweeping change. Negative interest rates can reshape Japan's stock market.

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