2 Reasons for BOJ’s failure: Cashing Holding and Aging


BOJ’s Comprehensive Policy Review Has a Lot to Take in: Primer

Abenomics Won’t Work. And That’s OK.

IMF working paper: Unstash the Cash! Corporate Governance Reform in Japan

IMF working paper: Cashing in for Growth: Corporate Cash Holdings as an Opportunity for Investment in Japan


Varied policies already being pursued by the BOJ

1. QQE

スクリーンショット 2016-08-13 17.49.46
asset price bubble bursting      Q                      E

QE isn’t something new, and BOJ’s bond purchases are a continuation of previous policies. What changed is the scale of buying and various different programs.



category known as the policy-rate balance applied to about 25.7 trillion yen by July 15

1x-15NIRP drove down borrowing costs across the economy, cutting into commercial bank profits and pushed bond yields below zero.

3. In addition, a number of lending programs including a $24 billion dollar-lending scheme and lending government securities as pledge


Overall, the policies are meant to stimulate lending and demand for loans

– more specifically, push a transition from stimulus-driven to self-sustaining growth based on private consumption and investment


Problem 1. high corporate savings 

However, it won’t works as Japanese nonfinancial firms have accumulated huge cash holding at the expense of investment, dividends and wagethus holding back both aggregate demand and potential growth

スクリーンショット 2016-08-13 20.47.03Japanese nonfinancial firms held cash assets in 2013 of about 50 percent of nominal GDP or 250 percent of aggregate investment.

– more than half of Japanese nonfinancial firms could repay all their interest-bearing borrowings with cash. [2]
– means the real sector in Japan has become a net lender at a time of negative real interest rates

4 main reasons for accumulating cash in theory

  1. expenses of funding by selling assets or raising external finance
  2. uncertainty of cash flow position (profitability)
  3. agency problems that allow management to pursue risk-averse
  4. accumulate cash in foreign subsidiaries to avoid tax expense

“Transaction cost(1) and precautionary demand theories(2) can sensibly explain about 80 percent of the variation in cash holdings between Japanese firms and between 1999 and 2011”

But, they failed to explain the raising cash-to-asset ratios since 2011 [3]


More precisely:

  1. Japan’s high cash holdings are not driven by a particular industrial sector but rather broad based.
  2. SMEs have been the main contributors to high corporate cash balances, but more recently larger companies have also increased cash holdings.

Japanese specific factors:

  1. entrenched deflation expectations; 
  2. aversion to bankruptcies and lack of pre-packaged bankruptcy procedures; [5]
  3. takeover regulations and ownership structure; [6]
  4. role of banks in financing firms; [7]
  5. weak corporate governance [1]


  1. assisting small enterprises to obtain non-bank finance
  2. improving corporate governance in Japan could significantly reduce corporate cash holdings [8]

A better and simple way to reduce cash holdings:

– policies aimed at bringing rates of CEO duality in Japanese nonfinancial firms into line with international norms [4]


Problem 2. demography


It’s entirely possible that near-zero growth is the natural state for a mature economy in such circumstances.

+Increasing productivity growth / -decreasing labour force = rising per-capita GDP

also, +increasing aggregate supply / -shrinking demand = chronically mild deflation

Therefore, the underlying growth rate for Japan’s economy can only be increased if

  1. there’s a significant technological shock driving up productivity
  2. policy makers are willing to accept immigration on a large scale

“The lack of demand in Japan is chronic, and a one-off fiscal stimulus won’t jolt its economy into a lasting expansion.”


(The more urgent problem will be if to take additional easing action to prevent any additional rise in the yen)


Continue reading “2 Reasons for BOJ’s failure: Cashing Holding and Aging”


The aging population and a “new normal”

An outlook report from Prudential Investment Management offers an interesting view towards recent turbulence from the perspective of demography


The Turbulent Teens at Halftime: Will Low Rates and Slower Growth Continue?


A world of  a “new normal” with the relatively modest economic growth and record low interest rates of the past several year [1]

The aging population helps explain: labor force growth will be slower

female labor force participation soared and then peaked
the Baby Boom phenomenon has not been repeated



The lowest interest rates in human history

Interest rates in nature reflects the behavior of borrowing and lending money.

スクリーンショット 2016-08-02 19.11.12スクリーンショット 2016-08-02 19.11.53

Long sovereign interest rates tend to be around 5%.

Slow growth and deflation alone cannot explain if one reviews the history full of financial crises, worse growth and deflation.

Globalization of product and capital markets might help keep rates low

greater global competition helps keep inflation low, reducing inflation expectation
increased capital flows might mean lower returns in some parts of the world and help keep rates down everywhere


But maybe it’s just Central bankers have never been as aggressive as they are today at using monetary policy to try to influence economic activity.

スクリーンショット 2016-08-02 19.27.18.png

From 1651 to 1934, policy rates tend to be around 4%, ranging from 2-6%.
During the Great Depression and World War II, rates hit new lows below 2%.
During the inflation of the 1970s, rates soared into double-digits.
In response to the financial crisis of 2008/09, rates hit all-time lows.

In addition to low rates, central banks buy bonds on the open market, paying for them with central bank credits.

スクリーンショット 2016-08-02 19.55.18.png

If it’s all about artificially low rates due to the emergency of the financial crisis, the Fed funds rate might rise to that 2-3% range over the next few years like FOMC expects

However, market prices suggest that investors are not buying the Fed’s expectation, and rates will likely stay low by historical standard for the foreseeable future.

What rates would be without Central Bank intervention?

If rates are artificially low, we would expect borrowers to borrow as much as possible [2]

banks is clearly not trying to borrow more
Households have been de-leveraging

スクリーンショット 2016-08-02 20.14.18.png

It is  possible that today’s rates might not be far below fair prices. If so, why the lowest interest rates in human history?


The aging population

only one fundamental factor that is bigger now than it has ever been before: the greater number and higher prosperity of older people.

スクリーンショット 2016-08-02 20.19.01.png

That upward kink of 65+ corresponds roughly to

“savings glut”: the idea that excessive savings (assumed to be mostly from Asian nations with high savings rates) was holding down rates below

the housing bubble in the US: excessive demand for fixed income product relative to supply

The older get richer

スクリーンショット 2016-08-02 20.27.00.pngスクリーンショット 2016-08-02 20.33.50

Skew in wealth distribution to older Americans helps explain investment flows:

during the bull market of the 1980s and 1990s, when Baby Boomers were in their 30s to 50s, equity funds received the lion’s share of flows

but over the past ten years, reduce risk in portfolios by shifting from equities to fixed income
(There also could be a change from active to index)

スクリーンショット 2016-08-02 20.35.39.pngスクリーンショット 2016-08-02 20.37.18.png

In terms of spending, borrowing and saving:

Older people are more price sensitive and more likely to skew purchases to necessities like health care

older folks save more and borrow less



1. interest rates might stay relatively low, even as Central Banks, led by the US Fed, start to “normalize” rates

6%is gone, 3% for the 10-year Treasury bond yield might be a new average, as the aging of the population will both increase the demand and suppress the supply of debt

bonds might deliver returns of 2% or so and the expected nominal return of stocks might be 6-7% (with a 4-5% risk premium unchanged)

2. Inflation is unlikely as older people have greater price sensitivity and a lower marginal propensity to consume than younger people




Continue reading “The aging population and a “new normal””