Japan flag on stock investment trading with coin and graph.
Japan is preparing to revise its corporate governance regulations for publicly traded companies, hoping to encourage businesses to invest their $1.8 trillion cash reserves, expand operations, or return returns to shareholders.
June 11, 2569 at 10.44:XNUMX a.m., Reuters reported that The upcoming revisions to Japan's corporate governance guidelines, set to take effect this summer, are raising expectations among investors that Japanese companies will begin making better use of their accumulated cash reserves of approximately US$1.8 trillion. This includes returning returns to shareholders, mergers and acquisitions (M&A), or investments for future growth.
The proposed amendments, prepared by the Financial Services Agency (FSA) and the Tokyo Stock Exchange (TSE), emphasize more efficient use of capital by companies, continuing the capital market reforms that have been ongoing for the past decade and have helped propel the Japanese stock market to record highs.
One clear example is Makita, a major Japanese tool manufacturer, which announced its clear cash management policy for the first time this year. It stipulated that it would hold only 2-3 months' worth of sales in cash and cash equivalents, with any excess funds used for investment and shareholder returns.
The company stated that it will pay shareholders returns of at least 50% of net profit, acknowledging that changes in governance and pressure from institutional investors are key factors driving the need to communicate its capital usage more clearly.
Inflation is forcing companies to stop holding onto cash.
Many Japanese companies have tended to accumulate cash since the asset bubble burst in the early 1990s and the decades-long period of deflation. However, the current resurgence of inflation is eroding the value of that cash.
Analysts from CLSA believe that holding large amounts of cash without generating returns is no longer a suitable option.
"Companies need to be more proactive. Holding onto massive amounts of cash is no longer acceptable to the market," he said, warning that companies that fail to boost their share prices will face increased risk from activist investors and takeover attempts.
Many investors believe that Japanese companies still place insufficient emphasis on capital allocation and need to improve consideration of this matter at the board level.
Investment banks expect a surge in M&A activity in Japan.
Investment banking experts expect these governance reforms to fuel continued growth in M&A activity in Japan.
Investors believe that Japanese companies with significant cash surpluses will increasingly seek acquisitions that create added value and align with their long-term strategies. Meanwhile, deal advisors indicate that Japanese companies are more willing to sell non-core assets or businesses than ever before.
This trend has resulted in significant growth in sell-side M&A activity in Japan recently.
Aggressive investors are increasing pressure.
Reforming corporate governance guidelines has also become a key tool for proactive investors to pressure companies to use cash more efficiently.
Last April, Palliser Capital urged SMC Corporation to implement a $3.8 billion share buyback program to demonstrate leadership in managing excess cash before new corporate governance rules came into effect.
This year also saw Japanese companies face the most aggressive proposals from investors at shareholder meetings in history, while institutional investors began voting against management more frequently than ever before.
A war in the Middle East could delay plans to use cash.
However, uncertainty stemming from the war in the Middle East has begun impacting the funding plans of many companies. Toto, a major Japanese sanitary ware manufacturer, revealed in April that it had slowed down its plans to increase investment and share buyback programs in order to maintain liquidity in response to supply chain uncertainties and rising energy costs.
Many analysts also warn that governance reforms alone may not be enough to completely change the behavior of Japanese businesses without additional incentives or tax penalties.
"The use of moral pressure or non-coercive rules always has limitations." CLSA analysts said... "If the tax benefits remain the same, it will be difficult to force companies to do what the market wants."
refer : reuters.com
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