JRI Research Journal;Vol.4 No.8,
Corporate Cash and Deposits can be Used for Growth Investment -23 trillion yen in industries with investment opportunities
Shinichi Nishioka
Summary
Cash and deposits held by companies are increasing. This is because companies have been borrowing more from financial institutions to prepare for the unforeseen consequences of the coronavirus outbreak.
As the economy normalizes, companies need to adjust their accumulated cash and deposits and debts. In this case, the desirable adjustment method for a company depends on whether there are investment opportunities. If there are no investment opportunities, it is reasonable to use cash and deposits to repay debts. On the other hand, if there are investment opportunities, it may be desirable to use cash and deposits as capital to make forward-looking investments. This makes it possible to further increase corporate value and eliminate excessive debt at the same time.
According to estimates, nearly half of industries have maintained high rates of return on capital, and thus are judged to have "investment opportunities." These industries have been making aggressive efforts to improve management efficiency and capture new demand since before the coronavirus outbreak, and their growth expectations have not been shaken by the virus. Of the 37 trillion yen increase in cash and deposits due to COVID-19, 23 trillion yen is held by these industries with "investment opportunities," which could be used for growth investment. This situation is quite different from that during the global financial crisis, when there were no investment opportunities, and much of the cash on hand was used to repay debts.
However, it should be noted that Japanese companies have been accumulating cash and deposits but have been cautious about using them for forward-looking investment even before COVID-19. In order for companies to make effective use of cash and deposits, the government needs to take steps to ease uncertainty over investment by presenting specific strategies, targets and schedules in growth fields, including digitalization and greening.