https://www.wsj.com/articles/SB10001424052748704631504575533002339914406　

A new way to fight deflation by forcing managers to pay dividends or invest their cash hoards in growth.

By Nicholas Benes　　Oct. 6, 2010 10:40 am ET

Japan’s central bank this week returned to zero interest rates and quantitative easing to fight deflation. Whether that will work is another matter. One of Japan’s biggest deflationary problems remains its high savings rate, especially in low-yielding assets that don’t finance pro-growth corporate investment. To solve this problem, policy makers need to be more creative. Corporate-governance reform would be a good place to start.

“Frugal housewives” are not the main culprits in the deflationary savings glut. The proverbial Mrs. Tanaka’s savings declined to 5% of GDP in 2008 from 13% in 1993. In that time the total private savings as a percentage of GDP has remained steady at about 26% due to rising corporate savings. According to Japan’s census data, there are about 5,400 companies with capital over one billion yen ($12 million)—most of which are listed. In this group, the ratio of cash plus securities relative to net assets was 70% as of March 2009, the most recent data available. That works out to roughly 29% of gross assets.

This amounts to a huge deflationary drag as companies hoard cash instead of paying out dividends or investing to grow their businesses. Of that 70% figure, 57% was invested in a combination of cross-shareholdings, government bonds (savings), and subsidiaries’ stock. The statistics don’t separate out these components, but the first two categories tend to be large. A very large proportion of the average Japanese listed company’s net assets—perhaps in the region of 40%—is being invested non-core assets, the returns on which its managers can’t control and hence can’t add value to.

The key to solving this problem is to view high corporate savings as a failure of corporate governance. Because pervasive cross-shareholding comes with a tacit pact that the corporate cross-holders won’t vote to unseat management, side with activist shareholders against management, or even sell their holdings, there are few domestic institutional voices demanding dividend payments or more corporate investment. There are several concrete steps that could help fix this deflationary problem.

The first would be to enact laws defining a higher standard of fiduciary duty for all institutional investors, including banks and insurance companies. Currently fiduciary standards are very loose. For instance, Japan has no equivalent of America’s ERISA law that governs the fiduciary duties of companies investing pension funds on behalf of employees. And Japanese insurance companies—which invest much more in equities than their foreign peers, in return for insurance business from the companies in which they invest—aren’t subject to fiduciary duties at all.

Japanese Prime Minister Naoto Kan ILLUSTRATION: Associated Press

A solution would be to require any company that invests more than 35% of its total net assets in other listed-company stocks to assume a fiduciary duty on behalf of its shareholders. By undermining the tacit pact, this would make managers think twice about investing their excess cash in low-interest bank deposits and money-losing cross-shareholdings, a combination that destroys shareholder value.

A second reform would be to require institutional investors that serve multiple beneficiaries—such as insurance companies or listed companies—to vote all the shares they own, and disclose on their websites how they have voted. This would make it easier for shareholders to understand whether management is looking out for their interests in the way it manages its corporate savings. In the United States this has been the rule since 2003 for institutional investors with conflicts of interest akin to the close relationships that develop between Japanese managers in cross-shareholdings.

Third, Japan needs to strengthen the role of independent directors who are less likely to share management’s cozy relationships with firms in which a company invests its savings. The most important step would be to require listed companies to appoint independent outside directors equal to more than 50% of total voting board members. A recent survey by the Board Director Training Institute of Japan showed that 41% of Japanese employees (including many directors and managers) believe that “corporate governance at my company will not improve without greater numbers of truly independent directors.” Britain offers another good example in the way it requires a clear division of responsibilities between an independent chairman and the president or chief executive.

Japan is now revising its company law through the work of an advisory committee at the Ministry of Justice that is not open to the public. But these reforms face an uphill climb. Incumbent corporate presidents and directors are predictably opposed to requiring more independent directors who might question their decisions. And traditionally, the ministry keeps its head very low in such matters, waiting for a political consensus.

So support from the elected government will be important. The ruling Democratic Party of Japan thought improving corporate governance was a vote-getter when it included corporate-governance improvement in its successful 2009 election manifesto. Now the DPJ can show some of the “political leadership” the party has always promised.

Mr. Benes, the representative director of the nonprofit Board Director Training Institute of