'Cancer' in Japan's Economy Stephanie Strom New York Times Service Wednesday, April 4, 2001 Focus in Crisis Shifts From Banks to Indebted Firms TOKYO For all that has been printed, broadcast and said about a looming banking crisis in Japan, attention here has shifted from the banks to their borrowers.
Bankruptcies are mounting while corporate earnings, exports and asset values are falling, all of which constrains the ability of Japanese companies to repay their debts.
Yoshimi Watanabe, a member of Parliament from the governing Liberal Democratic Party, figures that in the past 10 years, asset value equal to about two years of Japanese gross domestic product, or more than $8 trillion, has been lost.
"The impact of this is huge on the balance sheets of Japanese companies, and it's increasing," he said. "It's increasing the way cancer cells increase, and like cancer it has moved to another part of the body, the banks. But make no mistake, its roots are in corporate Japan."
The problems of Japanese companies and those of the banks are two sides of the same coin. Japanese banks have lent ¥353 trillion ($2.8 trillion) to Japanese companies, central bank figures show. They also have lent ¥8.4 trillion to local governments, most of which are effectively bankrupt.
Of course, not all of the loans are bad, but the number of dud loans is increasing. And many are collateralized by assets with shrinking values.
Research by David Atkinson, a banking analyst at Goldman Sachs (Japan) Ltd., found that 85 percent of problem loans were in the construction, retail, real estate, financial and services sectors, which account for 62 percent of Japanese companies and 56.1 percent of all domestic loans as of September.
At current earnings levels, Mr. Atkinson estimates that it would take businesses in those industries 150 years to pay back their loans. The government is considering giving companies a 10-year grace period to deal with their debts.
"There is not a single sector that could repay within 20 years, let alone 10!" Mr. Atkinson wrote in a research report.
Consider the case of Kumagai Gumi Co., a general contractor crippled by roughly ¥1 trillion of debt. In December, its lenders, led by Sumitomo Bank Ltd., forgave ¥430 billion of that debt in exchange for a restructuring plan that calls for reducing the work force 30 percent over three years, selling assets and closing 14 of the company's 17 foreign offices.
The plan envisions a Kumagai Gumi with ¥242 billion in debt - 12 years from now.
Time is not the only problem with the company's plans. It is counting on realizing ¥220 billion from asset sales, but prices are falling rapidly because of deflation. It also plans to use ¥150 billion of profit to achieve its goals, but the lucrative public works projects that have kept many a Japanese construction company going are petering out, and profit margins in private-sector construction are razor-thin.
"We are making a rather conservative estimate for the amount of orders that we will be receiving in order to set up a real firm target," a company spokesman said in explaining why it would take so long to achieve the goal.
Perhaps the biggest problem with the plan is its underlying commitment to keeping Kumagai Gumi alive 12 years hence. Mr. Atkinson argues that of the 1.5 million companies in the five high-risk industries, only one-third are needed to meet the demand for their services.
That is what scares Japanese policymakers who are trying to come up with a solution. Hakuo Yanagisawa, minister for financial services, has been watering down his plans for simultaneous overhauls of the corporate and financial sectors ever since he introduced them in January because the prospect of surging unemployment, declining wages and the forced sale of assets was too frightening for his political colleagues to contemplate.
Initially insistent on sweeping write-offs that would plunge deadbeat companies into bankruptcy, Mr. Yanagisawa is now talking about encouraging consolidation, forgiving debts Kumagai Gami-style and ensuring that small and medium-sized businesses, a pillar of support for the Liberal Democrats, do not suffer too much.
Mr. Yanagisawa declined to be interviewed, but few people have any illusions about the pain that a thorough overhaul of the corporate sector would entail.
"If you're talking about really writing off bad debt, then you're talking about foreclosing on the bad debtors, about bankrupting a lot of companies," said Richard Katz, author of "Japan: The System That Soured" and senior editor of the newsletter Oriental Economist.
Mr. Katz estimates that a full clean-up of the corporate sector, and thus the financial system, would entail the loss of 2 million to 3 million jobs and put further strains on public spending. Neither is palatable in the current political environment, with the Liberal Democrats facing a steep uphill battle in a parliamentary election in July.
Copyright © 2001 The International Herald Tribune
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