Selected Issues Papers

Drivers of Corporate Cash Holdings in Japan: Japan

Author/Editor:

Seho Kim ; Pablo Lopez Murphy ; Rui Xu

Publication Date:

May 18, 2023

Electronic Access:

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Summary:

In Japan, corporate savings have risen since 2000 in line with profits. A large share of the additional savings was kept as cash holdings (i.e., cash and short-term investments) rather than used for investment. Building on a rich literature, this paper identifies two additional drivers of corporate cash holdings using financial data of public and private Japanese firms. First, a higher share of intangible capital is associated with more cash holdings. This indicates the presence of financial frictions as intangible capital is not easily collateralizable. Such financial friction could be alleviated by shifting towards cash flow-based lending that is prevalent in the United States (US). Second, corporate tax cuts are associated with more cash holdings while having no significant effect on investment. Given the significant fiscal cost, the efficiency of corporate tax cuts should be re-evaluated.

Series:

Selected Issues Paper No. 2023/029

Subject:

Corporate income tax Economic theory Effective tax rate Financial frictions Intangible capital International organization Monetary policy National accounts Tax allowances Tax policy Taxes

Frequency:

Regular