Many japan observers (including myself) have been complaining about corporate japan's ("irrational") cash hoarding mentality. In some instances it goes so far that net-cash holdings on individual companies exceed their market capitalisation.
Many observers interpret the tendency of Japan's corporate officers accumulating an ever increasing amount of cash as a result of the bust of the bubble economy in the 90's and the depression of the japanese economy that followed. As the japanese economy in aggregate became extremely overleveraged during the bubble area in the 80's, Coporate officers responded to the crash by using the free cash- flow to pay-down interest bearing debt (deleveraging). Nobody really doubts that this response was a rational one.
But while the depression went on and on, the deleveraging morphed into cash hoarding at many japanese corporations. Many observers labeled those actions as irrational, resulting from an extreme risk aversion.
But is it really irrational?
Nope, if you think about it, the cost of debt is (effectively) nothing, the return on cash is (effectively) nothing. You aren't paying corporation tax due to past losses so no interest deductability, so why be on the hock to the bank? Makes sense if you ask me.
ReplyDeleteGood point.
ReplyDeleteTaking real interest rates into account your argument gets even stronger.
I would imagine that the opposite would happen when inflation expectation rises, then people will start to spend and borrow and the velocity of money thus rises.
ReplyDeleteI too would expect the cash balance to be minimised by corporate Japan if inflation exectations do rise significantely.
ReplyDeleteBut not because of the velocity of money picking up (I doubt there is a stable (positive) linear relationship between inflation expectations and the velocity of money), but rather if inflation (expectations) are higher than nominal interest rates ==> negative real interest rates ===> equal to (same effect as) a tax on excessive cash holdings ==> rational to minimise cash holdings