THE odd thing about prudence is that too much of it can be deadly. Timid drivers crawling along a motorway create more risk than they avoid. Children who are over-protected from germs end up with weaker immune systems. Economies are the same: too much saving can lead to a loss of vigour or, as Keynes put it, to a “paradox of thrift”. That is why Japanese and South Korean firms, two of the world’s biggest hoarders, need to be cajoled into parting with their cash. Corporate saving has risen across the rich world in recent years. Bosses have felt a greater need to protect themselves against financial turmoil. There have also been fewer opportunities for investment in ageing economies. But East Asia is an extreme case. Japanese firms hold ¥229 trillion ($2.1 trillion) in cash, a massive 44% of GDP. Their South Korean counterparts hold 459 trillion won ($440 billion) or 34% of GDP. That compares with cash holdings of 11% of GDP, or $1.9 trillion, in American firms. If East Asia’s firms spent even half of their huge cash hoards, they could boost global GDP by some 2%. Politicians in both countries are now trying to bully companies to hoard less, though in rather different ways. Japan’s prime minister, Shinzo Abe, has called for bosses to grant pay rises above the country’s 2% inflation target. He has also introduced a slew of reforms designed to strengthen shareholders’ rights, the feeblest in any big rich country. A special new Nikkei index, for instance, includes only companies with strong corporate governance. South Korea’s government, in contrast, is poised to introduce a tax on excess profits (see article). To avoid this levy, firms will have to increase wages, dividends or capital spending—and foreign investment might not count. economist/news/leaders/21620203-japanese-and-south-korean-firms-are-worlds-biggest-cash-hoarders-hurts-their
Posted on: Sat, 27 Sep 2014 23:19:48 +0000
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