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Japan Inc. afraid to create ripples in its $1tn cash pool

Flush with funds but treading water, companies can't afford not to invest in growth

Daiwa House employees work at a logistics facility. The homebuilder is investing more in building and managing logistics centers to capitalize on the growth of e-commerce.

TOKYO -- Boosted by record profits, Japan's listed companies are sitting on more cash than ever -- about a trillion dollars' worth. Yet most of them are afraid to funnel that money into takeovers and other growth strategies, preferring instead to hold those funds for a rainy day. Unless they learn to put their vast wealth to use, however, their current wave of profit growth will inevitably come crashing down.   

Emblematic of this caution is security services provider Secom, which racked up its fifth straight record profit in fiscal 2016. It boasted 462 billion yen ($4.13 billion) in cash on hand at the end of the year to March 31, up nearly 20% on the year and six times monthly turnover.

The cash-flush company has been increasing dividend payments, but other than that, it has left its pool of funds largely untouched.

"We keep a certain amount of cash on hand for investment and other spending down the road," said a Secom official. At the moment, however, no specific investment plans have been worked out.

Corporate Japan boasted a record 112 trillion yen in cash on hand at the end of fiscal 2016, up 3 trillion yen from a year earlier. That figure is double the companies' average monthly turnover.

No killer instinct  

Those big numbers are not backed by a killer investment instinct, however.

Japanese companies remain skittish on acquisitions and capital investment, spending only "within a range of their earnings from their core businesses," said Ryota Sakagami of JPMorgan Securities Japan.

A look at return on equity figures -- a measure of how much profit a company generates with their capital -- underscores just how ineffectively Japanese businesses are using their cash. Their average ROE is in the single digits, compared with more than 10% at companies in the West. Unless corporate Japan uses its expanding pool of cash to invest in growth, its capital efficiency will continue to suffer.

Building a new future

Daiwa House Industry is constructing one of Japan's largest logistics facilities in Nagareyama, Chiba Prefecture. Though traditionally primarily a homebuilder, the company is increasingly focusing on building and managing logistics facilities to take advantage of spread of electronic commerce. The company plans to spend 360 billion yen on logistics-related investments over the three years through March 2019, and aims to splash out even more, said Takeshi Kosokabe, senior managing executive officer.

Improving its ROE is very much on Daiwa House's agenda. The company aims to boost the figure to 15% by investing aggressively in the growing logistics market.

If the number of companies that share Daiwa House's thinking increases, the current wave of record corporate profits -- the fourth since the collapse of Japan's economic bubble in the early 1990s -- will very likely become sustainable.

Another company that is gambling on growth is Hirata, a manufacturing equipment maker in the city of Kumamoto in Kumamoto Prefecture. 

The company is spending big to expand production of devices used in machines to make OLED displays, widely considered the next standard. Officials from automotive and smartphone-related companies have been flocking to Hirata's offices.

Production facilities that the company added last year are "operating at full capacity," said Hirata President Yuichiro Hirata.

All that investment has bumped up Hirata's interest-bearing debt by 50% over the past year to 26 billion yen and lowered its equity capital ratio to 31%. But the company is using that bold spending -- including a record 2.2 billion yen set aside for capital investment for the current business year -- to chase its biggest profits ever.

Turning investors' heads

It is companies like Hirata, those pushing ahead with aggressive business strategies, that are attracting stock investors.

Only 40 Japanese companies were among the world's 500 largest businesses by market capitalization as of the end of March, but a closer look at the list is revealing. Nidec and Daikin Industries, which recently joined the elite group for the first time since 2000, have both expanded their overseas operations through aggressive acquisitions. Also, both have maintained high ROEs of around 14%.

The muted investment by corporate Japan is partly symptomatic of a broader international development. Advanced economies have entered an era of low growth. "The glut of funds in the corporate sector is a global trend, and even U.S. companies, which tend to be more conscious than their Japanese counterparts of the need to use their money efficiently, are cautious about investment," said Shigeki Sakaki of Nomura Asset Management.

Breaking free of this trend will require the boldness to gamble on growth and abandon the security blanket of stability.

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