Listed companies in Japan hold cash and deposits totaling 118 trillion yen. The total amount of cash and deposits held by TOPIX 500 stock index constituent companies has roughly doubled from around 55 trillion yen in FY2013, while the ratio (weighted-average) of cash and deposits to total assets held is 10.7%, which is well above the shares of 6.6% among major U.S. companies and 7.7% among major European companies. Over the same 10-year period, total annual dividend payments increased from 8 trillion yen to 25 trillion yen and annual share repurchases expanded from 3 trillion yen to 17 trillion yen, raising total annual shareholder returns 3.5-fold. On the other hand, the ratios of capital expenditures and research and development spending to sales have remained almost flat. Funds generated through profit growth have been allocated more to the buildup of cash and deposit holdings and returns to shareholders than to growth investments. That is the real picture of capital allocation over the past 10 years.
Policy debates over these cash holdings and deposits in 2026 have become sharply divided. At the Expert Panel on the Revision of the Corporate Governance Code (CG Code), institutional shareholders called for explicit provisions requiring review and disclosure of excessive cash and deposit holdings, while companies argued that singling out cash and deposit holdings in particular for scrutiny would undermine managerial independence and pursued the deletion or modification of such provisions. A tense exchange occurred again during the process of compiling the Growth Investment Guidance, which was published by the Ministry of Economy, Trade and Industry. Ultimately, both the revised CG Code and the Guidance arrived at the same conclusion: cash and deposit holdings should not be universally criticized as long as a company can explain the rationale for holding them; holding an appropriate level of cash and deposits is part of the allocation of business resources. In other words, a compromise was reached by developing the norm “cash retention accompanied by accountability.”
The author participated in deliberations on the two documents as a member of the Expert Panel on the Revision of the Corporate Governance Code and as a member of the Subcommittee on Value Creation Management under the Committee on New Direction of Economic and Industrial Policies of the Industrial Structure Council. In those two advisory bodies, the author proposed a framework that is central to this article: the concept of an “optimal cash holding level,” under which companies estimate required cash reserves by decomposing them into three distinct categories and discussing and disclosing the results at the board of directors level. The references to cash and deposits in both the Guidance and the revised CG Code reflect the results of deliberations conducted by the advisory bodies.
Rules concerning companies’ cash and deposit holdings have thus been established. However, a critical question remains: How should “accountability” be defined? Without a methodology for estimation, explanations provided by companies may be limited to qualitative, unverifiable statements, such as “to prepare for various contingencies.” Meanwhile, investor demands may remain limited to compliance with mechanically calculated threshold benchmarks. As a result, dialogue could devolve into emotional arguments. The purpose of this article is to provide a practical protocol that addresses the methodological void.
Ask a Different Question—Not “Is the Level of Your Cash Holdings Too High or Low?” But “Have You Defined the Optimal Level?”
Dialogue between companies and investors over cash and deposit holdings often turns unproductive. Investors accuse companies of holding an excessive amount of cash and deposits, whereas companies respond by emphasizing the need to prepare for contingencies or future potential investment opportunities. Investor arguments rely mostly on mechanically calculated threshold values, such as cash and deposits as a proportion of total assets or as a proportion of market capitalization (so-called “cash-rich” benchmarks), which do not take into account the specific business profiles of individual companies. Companies respond qualitatively without specifying the quantitative figures necessary to prepare for contingencies. As the two sides lack a common language to discuss the level of cash and deposit holdings, their dialogue degenerates into a binary “right-wrong” argument about whether holding cash is appropriate.
In essence, this article’s argument is that the question itself should be changed. The question should not be whether or not the level of cash and deposits held by a certain company is excessive or insufficient. It should be whether or not the company has defined and validated its optimal level of cash and deposit holdings under oversight by the board of directors. Under this framework, there is nothing problematic about maintaining substantial cash and deposit holdings. The real problem would be letting funds accumulate without defining the rationale for the level of such holdings. In other words, unless the optimal level of cash and deposit holdings is defined, requiring companies to allocate surplus funds to growth investments is not logically substantiated. Whether funds are truly “surplus” is only determined after establishing the optimal level. The difference between preparing for contingencies and letting funds accumulate idly is the presence or absence of that definition, rather than the level of cash and deposit holdings itself.
Three Categories of Optimal Cash Holding Levels—A Framework for Estimation
The author proposes the approach of estimating the optimal cash holding level based on decomposing it into three categories of required funds with distinct characteristics.
The first category is “routine operating funds.” It refers to funds that are necessary for day-to-day business operations, and is essentially related to cash flow management. It should be calculated with due consideration given to the peak levels of payments made as part of monthly and weekly cash management, sales seasonality, the cash conversion cycle (CCC), and liquidity imbalances within the group. Many companies maintain cash equivalent to one or two months’ worth of sales as a rule of thumb, but the important thing for companies to do when using this methodology is to validate such benchmarks against actual cash management data and then to establish them as evidence-based benchmarks.
The second category is “contingency funds set aside for unexpected crises.” This is the amount of funds necessary to withstand external shocks equivalent in intensity to crises like the Global Financial Crisis or the COVID-19 pandemic. In principle, the estimation of the necessary level of funds depends on the assumed stress scenario. For example, companies might estimate a scenario like “Sales will continue to decline by X% for Y months while access to external funding becomes difficult.” The company should then project the cash outflows under those conditions and use that for calculating the required funding amount, while also taking into account both the volatility of its business and the largest crisis that it experienced in the past. When making the calculation, one important item should be deducted, namely alternative sources of liquidity, such as committed credit lines and overdraft facilities. Cash and deposit holdings are not the only sources of contingency funding for companies. Designing a preparedness plan that combines cash and deposit holdings with committed facilities is more capital-efficient, and disclosing the principles behind the design in itself improves the quality of dialogue between companies and investors.
The third category is “funding for opportunistic investing.” This category is intended to enable companies to immediately respond to major investment opportunities, such as large-scale M&A transactions and capital expenditures. Attractive investment opportunities often come up abruptly, leaving little time for funding procurement. Companies should assess the scale of their investment pipeline and debt-financing capacity, and then calculate the amount of funds that should be readily available as “equity capital” for immediate deployment. Disclosure regarding the third category has a distinct significance. Communicating the purpose of these funds as investment ammunition in quantitative terms demonstrates that these cash reserves are not intended for shareholder returns. Put another way, if a company sets this category at a high level but fails to execute on investments, it will draw the scrutiny of investors. The proof of investment preparedness emerges out of concrete investment execution.
The optimal level of cash and deposit holdings is not the sum of the three categories but the largest figure among them because the same pool of liquidity serves in the role of any of the three categories in different scenarios. Since each category represents the total funding necessary under the particular scenario, the largest figure would cover any of the cases. In reality, it is unlikely for a crisis and a large investment opportunity to appear simultaneously, and if they did, management could reconsider either option. In contrast, if the total sum of the three categories is adopted as the optimal level, this framework itself could justify companies holding an excessive amount of cash and deposits on the pretext of preparing for contingencies.
That said, the optimal level should not be treated as a fixed-point estimate. Given fluctuations in either the business environment or the investment pipeline, the optimal level should be set as a range (expressed in monthly sales equivalents, such as “X to Y months’ worth of sales”) and be subject to annual review. For funds exceeding that range, companies should establish a capital allocation policy that specifies the priority rankings among growth investments, shareholder returns, and debt reduction. The rankings may differ by stage of corporate development. What matters is that those rankings are discussed by the board of directors and disclosed.
Estimation, Discussion, and Disclosure by the Board of Directors
There are three reasons why this review process should not be confined to the finance division but should be discussed by the board of directors. First, under the revised CG Code, explanation and continual review of management resource allocation is specified as the role and responsibility of the board of directors. Since cash and deposit holdings constitute the most liquid business resource, determining the appropriate level of cash holdings is at the core of this responsibility. Second, setting the level of contingency funding is fundamentally a decision regarding risk appetite, which is a matter of risk governance, which must be overseen by the board of directors. The third reason is its importance in responding to emergencies. When a company is faced with activist demands for greater shareholder returns or a hostile takeover bid, there is a critical difference in the quality of response depending on whether the company has routinely engaged in discussion and decision-making over the reasonableness of its cash and deposit holdings or is ill-prepared for such contingencies and has to hastily account for the level of its holdings after the situation arises.
In practice, the review of the optimal level of cash and deposit holdings may be integrated into an annual review cycle, just like the reviews of capital cost and the business portfolio. The finance division should review the estimation and changes in the underlying assumptions concerning the optimal levels of cash and deposit holdings for the three categories of funds, while the board of directors should examine the appropriateness of the levels and monitor the deviations between the actual levels and the target range, as well as the allocation of excess funds. Outside directors are responsible for reviewing whether assumptions have been set in ways that are overly favorable to management—for example by utilizing excessively severe crisis scenarios to justify maintaining excessive cash and deposits.
Disclosure should focus less on the numerical levels and more on the company’s underlying principles. Companies should explain the adoption of the three-category framework, the major assumptions regarding each category, tolerable ranges for the levels, and allocation priorities concerning excess funds in corporate governance reports, integrated reports, and earnings briefing documents. It is not necessary to disclose details that would reveal competitively sensitive information, such as the investment pipelines of specific projects.
What I would like to emphasize is that disclosure serves a defensive purpose. When confronted with demands from short-term oriented shareholders for increased distributions, companies that have already disclosed the rationale for their levels of cash and deposit holdings can respond by stating, “We have adopted this range as the optimal level for our company based on the principles we have explained, and excess funds are already allocated according to predetermined priorities.” In this way, what would otherwise have been an unproductive argument can be transformed into constructive dialogue on the validity of the assumptions set. Disclosing the optimal level of cash and deposit holdings is therefore both an offensive tactic to encourage growth investment and a defensive shield that protects managerial independence.
I have one warning as to how this framework should be used. The three-category estimation framework must not evolve into universal benchmark figures that are applied across an entire industry. The optimal levels depend on the specific business profiles of individual companies, so they should naturally differ from company to company. What is being proposed in this article is not the standardization of the optimal level but the standardization of the process—that is, promoting the use of the process whereby each company defines its optimal level, the board of directors conducts constant review, and the underlying principles are disclosed. This is consistent with the CG Code’s fundamental principle of “comply or explain.”
The Next Moves for Companies, Investors, and the Government
The timeframe for companies is clear. The deadline for the submission of corporate governance reports based on the revised CG Code is the end of July 2027. For companies considering how to comply with Principle 4-2, the framework proposed in this article may serve as a concrete means of implementing the requirement for “constant review.” For mid-sized listed companies with high ratios of cash and deposits in particular, defining an appropriate level can be seen as an investment toward significantly lowering the cost of dialogue with investors. Companies that proactively undertake disclosures under the proposed framework will enjoy first-mover advantage in terms of trust from the capital market.
My proposal for institutional investors is to change the basis for proxy voting and evaluating engagement from mechanically calculated cash-rich benchmarks to the existence and quality of a process for determining the optimal level of cash and deposit holdings. Investors should ask whether the company has disclosed its approach to determining appropriate holdings, whether the board of directors has reviewed and verified that level, and whether the allocation priorities regarding surplus funds have been disclosed and are consistent with the actual results. This shift toward the process-focused standard would also address the problem on the investor side that was identified in the Growth Investment Guidance, that is, formalistic and mechanical proxy voting practices.
For the government, I offer three recommendations. The first recommendation is to compile and disseminate best practices concerning the estimation and disclosure of the optimal level of cash and deposit holdings, positioning the practice as part of a follow-up to the Growth Investment Guidance. Second, the collection of best practices should be connected to the Tokyo Stock Exchange’s compilation of case studies on management that is conscious of capital costs and stock prices. Third, the government should improve the environment for commitment line and corporate bond markets, increasing their depth and liquidity. As alternative means of liquidity become accessible, the structural need for companies to hold large cash reserves to prepare for contingencies diminishes, which creates greater room for allocating surplus funds to growth investment.
Conclusion—Cash and Deposit Holdings Without Definition Are “Idle Funds”; Defined Holdings Are “Preparation for Contingencies”
The total sum of 118 trillion yen in cash and deposits is in itself not a problem. The problem has been the absence of the processes for defining the rationale for the optimal level of cash and deposits in the system of corporate governance. Holdings without a defined rationale are called “idle funds,” while holdings with a defined purpose constitute “preparation for contingencies.” The difference between the two is not the absolute level of cash and deposit holdings, but whether or not the procedures exist for estimation, discussion, and disclosure by the board of directors.
Companies cannot implement growth investment, which is a proactive management tactic, without being confident of having a solid financial foundation. Only companies that have quantitatively determined the level of preparedness they need for contingencies can take a step forward and engage in bold risk-taking. Estimating, discussing, and disclosing the optimal levels of cash and deposit holdings may appear on the surface to be unremarkable processes, but they are the key to connecting discipline with growth. It is my hope that the framework proposed in this article will help companies put the processes into practice concerning the optimal level of cash and deposit holdings ahead of the 2027 Corporate Governance Report and contribute to the development of a common language for dialogue between companies and investors.
Note: The author participated in deliberations on the two policy documents discussed in this article as a member of the Expert Panel on the Revision of the Corporate Governance Code and as a member of the Value Creation Management Subcommittee under the Committee on New Direction of Economic and Industrial Policies of the Industrial Structure Council. The opinions expressed in the article are solely those of the author.
