Why companies have adopted this strategy is impossible to say. Perhaps they see the weak yen as a passing phenomenon, not something on which to base major investment in new production. Or perhaps their unwillingness to invest in Japan is a reflection of Japan’s gloomy demographic reality. Why not, instead, make investments abroad, both to diversify, and as a hedge against long-term trends in domestic consumption?
At any rate, investors love this kind of thing. Fat margins, and without all the risk inherent in expansion.
FINANCIAL ENGINEERING IN ASCENDANT
Corporate Japan has taken advantage of low rates and capital market funding to get their balance sheets in order, not to mention piling up cash from those record profits. Japanese firms held 217 trillion yen ($1.8 trillion) in cash at the end of last year, a pile equal to about 40 percent of annual national economic output.
Some of it is finding its way into share buybacks, with 3.7 trillion yen in buybacks last year, the most since the global financial crisis. That will help to raise returns on equity, which in Japan typically run just above half of those in the U.S.
Some of the cash is also going to mergers and acquisitions overseas, again hardly a vote of confidence in the prospects for Japan or Abenomics. Thus far this year, Japanese firms have made $41.8 billion in foreign deals, as compared to $53.4 billion for all of 2014, according to Dealogic data.
Companies are also benefiting from something that should be familiar in the U.S., namely very weak wage growth. Total cash earnings in Japan rose just 0.1 percent in March and have been, in real terms, declining for two years. Again, this is good for corporate profitability but not great for the economy as a whole.
Just another in the long series of lessons that a country’s stock market is not a very good indicator of its economic health.
As for corporate investment, not only has it been weak, but the most recent Tankan survey by the Bank of Japan shows a gloomy mood among corporations. Big firms plan to cut capital expenditure by 1.2 percent in the new fiscal year, according to the survey.
The irony, or rather the reward for investors, is that all of this gloomy economic news means that corporate Japan is likely to get a big and increasing dose of more of the same monetary policy. Many analysts expect the BOJ to announce additional QE later this year.
Doing the same thing over and over and hoping for different results may not work for Japan’s economy, but it sure has created a nice ride for investors.
(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.com and find more columns at blogs.reuters.com/james-saft)
(Editing by James Dalgleish)
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