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”