In Japan, a fund will be collateral damage!

So long, activists. No one’s giving you any cash back, at least not anytime soon.
Companies and investors alike are stashing money as Covid-19 throws an uncertain future across the global economy. Liquidity is front of mind. Automakers and retailers in the US have drawn down billions of dollars on their credit lines to deal with impending shortages. But Japan Inc has an opportunity — to show hedge funds that have criticised serial cash hoarding and ineffective use of balance sheets that it’s had a point.
Piles of idle funds made Japan’s companies a target for global activists, including Paul Singer’s Elliott Management Corp and Dan Loeb’s Third Point LLC. Tokyo’s stock market has become their highest priority outside the US. At the end of last year, activists held 3.4 trillion yen ($31.1 billion) of Japanese stock, doubled from the start of a state-led push for corporate governance reform in 2015.
Now, cash on the books looks like a strategic asset rather than a drag. When this crisis ends, there will be great need for capital. PM Shinzo Abe is incentivising companies to retool supply chains away from China, the nerve centre of world manufacturing. The likes of electronics giant Panasonic Corp and auto-parts maker Aisin Seiki Co say they’re looking at options.
Setting up new factories and logistics operations doesn’t
happen without significant investment. Meanwhile, Japan’s perennial labour shortages, worsened by the pandemic, will mean more expenditure toward machines and automation. Inorganic growth via mergers and acquisitions will be on the back burner until losses are covered. Capital may also be redirected towards virus-related relief, such as producing ventilators.
So far, a big portion of Japan Inc’s cash has been put towards capital expenditure and research and development, with much smaller though increasing amounts for dividends and
buybacks. Total payout ratios relative to operating cash flows are near 20%, compared to 60% in the US.
Around half of non-financial companies have more liquidity than interest-bearing debt, versus closer to one-fifth in America or Europe. Only activist pressure has slowly shifted companies that far.
Hoarding is rooted in previous crises. Japanese companies, which typically rely less on external financing, have a chronic desire for cushions to survive cycles in an economy that’s always verging on a dip in growth. After the global financial crisis and the 2011 earthquake and tsunami, they resumed building balances to far higher levels than in other developed countries.
So activists zeroed in. Cash used for growth and returns as a portion of shareholder equity was around 20.5% as of last year, below the post-financial crisis average. Different companies hold their piles for varying reasons: small ones as a precaution; blue chips tend to want to invest more. Either seems like a win in the era of the coronavirus.
—Bloomberg