Japan Inc. Cash Hoard: New Rules May Unlock $840B

A significant revision to Japan's corporate governance code is on the horizon, potentially unlocking approximately $840 billion in cash held by listed companies. The Financial Services Agency plans to present draft rules this year requiring firms to verify effective use of their accumulated capital. While non-binding, the code strongly influences corporate behavior, addressing a long-standing issue of excessive cash on Japanese company balance sheets.

Analysts suggest this revision could lead to increased allocations towards growth investments, alongside more consistent share buybacks and dividends. This shift may significantly enhance the attractiveness of Japanese equities to global investors. Cash and deposits held by Topix companies, excluding financials, surged by 84% over the past decade to ¥130 trillion ($840 billion) by the end of 2025, with the IT and services sectors holding the most.

Sho Nakazawa, an equity strategist at Morgan Stanley MUFG Securities, estimates that return on equity for Topix 500 firms could rise from 9.3% to 12.1% if half of these cash holdings are effectively deployed. This improvement would bring Japanese corporate profitability closer to European peers. Prime Minister Sanae Takaichi has also been a vocal proponent of reducing corporate cash hoarding, advocating for its redirection into investments and wage increases.

While the Tokyo Stock Exchange supports promoting more effective resource management alongside the code revision, some experts express caution. Concerns exist that forcing shareholder returns might not inherently lead to higher shareholder value or that companies might undermine valid reasons for maintaining cash reserves. The focus will shift to companies' ability to identify quality growth investments.