The Art of a Failed Economy

Back to Contents of Issue: December 1999

During the bubble economy of the late 1980s, Japanese corporations became the nouveau connoisseurs of the art world, snapping up masterpieces one after another with little regard to either quality or price. Today, as many as 10,000 paintings, valued at \1 trillion ($9.5 billion), are stored in bank vaults, secured by the banks as collateral against loans to failed corporations. Caught by the huge gap between acquisition cost and current market price, with some works now valued at no more than 20% of their acquisition price, the paintings remain untouched, out of public view, facing a highly uncertain future. In an attempt to rescue at least some of the masterpieces from their cold storage fate, a new institute specializing in the appraisal of art was launched in September of this year. Working under Kanetora Taira, president of the privately owned Tokyo Museum of Modern Art (MOMA), the (tentatively named) Research Institute for the Safe Transaction of Art (RISTA) plans to ascertain the authenticity of these stored works and establish their current market value using online information and a database of overseas museums, including the Art Institute of Chicago and the Netherlands' Van Gogh National Museum. "We have found that a considerable quantity of artwork on display at national and public museums, and much of the vast store of bubble-era masterpieces hidden in bank vaults, is either fake or of a lesser quality," says Taira. "My intention is to help Japanese banks, corporations, and national tax authorities determine the intrinsic value of these works, and help owners clean up their nonperforming assets."

The truth hurts
With the Japanese Ministry of Finance putting more pressure on companies to disclose their actual financial status, and with market-value accounting standards coming into force from April 2000, companies will be forced to reassess the practice of carrying art assets on their books at bubble-era prices. "Since Japan's blue-chip companies and banks now wish to list on overseas stock exchanges, they may face the wrath of overseas shareholders if they are found to have nonperforming art assets on their balance sheets. Companies might face lawsuits if the works of art also happen to be worthless fakes," adds Taira. As a fee for the appraisal, Tokyo MOMA charges 10% of the maximum purchase price of the art, and expects to earn some \600 million in the first year alone.

Moreover, the Japanese government is standing behind Taira's art appraisal scheme, and officers from the Ministry of Finance, the Ministry of International Trade and Industry (MITI), and the Agency for Cultural Affairs, along with staffers from two major auditing companies and several banks, have been participating in preparatory meetings held by RISTA. Through their involvement, government agencies are hoping to hasten the cleanup of the bad debt tangled up with the art.

Let's go shopping
In the late 1980s, Japan's spending spree on high-priced impressionist and postimpressionist paintings astounded international art fanciers. In the rest of the world, market prices for art generally follow stock market fluctuations, but in Japan this rule went by the wayside, with art fever being fueled by the inflation-induced buildup of wealth in real estate. Japanese players applied the same theories to the art market as they did to real estate speculation, putting faith in the simple reasoning that the more limited the supply, the higher the price. According to this logic, the finite supply of paintings would cause prices to catapult . . . it was a sure thing.

The art frenzy peaked in 1990 when Ryohei Saito, chairman of Daishowa Paper Manufacturing bought the Portrait of Dr. Gachet by Vincent Van Gogh for $86.5 million, along with Le Moulin de la Galette by Pierre-Auguste Renoir for a world-record $78.1 million. (The purchase broke the previous record of $38 million for Van Gogh's Sunflowers, purchased by Yasuda Fire and Marine Insurance in 1987, the $37.6 million paid by Mitsukoshi Department Store for Picasso's Acrobat and Young Harlequin in 1988, and the $52 million for Les Noces de Pierrette by Nippon Autopolis in 1989.) Japanese companies made their purchases with little regard for quality or price, becoming a dominant presence at auctions in New York, London, and Paris. The opaque nature of the painting transactions lured numerous corporations in need of a quick repository for paper wealth.

Painting? What painting?
In Japan, paintings need not be registered, and they may change hands in complete anonymity -- making them an ideal means of asset concealment. Japan has no public auction market and no public forum for establishing art prices. The difficulty of having works of art valued objectively was heavily exploited by companies, and proved a convenient medium for evading the scrutiny of tax and financial authorities. Many companies took advantage of the ambiguous value of art for borrowing, lending, concealment of assets, money laundering, bribery, and tax evasion. The paintings were even used for raising funds for political donations and contributions. A company willing to make a donation to an influential politician would buy a painting for, say, \55 million from an art dealer. The art dealer would deliver the painting to the politician, who -- on the spot -- would sell the painting back to the art dealer for \50 million. The politician pocketed \50 million in cash as a political donation (read: bribe), and the art dealer earned \5 million as commission. The art dealer would then issue a fictitious sales slip, leaving no trace of any shady financial transaction.

A spate of financial scandals using artwork surfaced after the collapse of the economic bubble, involving the now defunct Itoman, a medium-sized trading house, and Mitsubishi Corp., one of the largest trading houses. In September this year, the Osaka District Court sentenced a former president of Itoman to seven years in prison for his involvement in the largest art-based financial scam of the late 1980s. This was followed by Itoman's bankruptcy, and the resignation of the high-profile president of Sumitomo Bank (the major credit bank involved in the art scandal). The crime? Itoman had been using art as a medium of exchange in order to inflate real estate values.

An offer you can't refuse
Sarakin consumer loan companies -- the local loan sharks - were actually the first institutions to exploit the anonymity of art transactions and the ambiguous value of art. When lending money to a high-risk borrower, the borrower would be required to purchase paintings from the loan company at prices much higher than the market level. Although Japan's money lending law set the maximum lending rate at 36.427%, the money lenders would often demand as much as 70% on high risk loans -- with no lack of customers during the bubble era. The price of the paintings would make up the difference between the official rate ceiling and the rate that the loan company actually wanted. One of Japan's more notable art investment firms, Aska International, was owned by Yasumichi Morishita, the former president of Aichi Co., a sarakin consumer loan company. Dubbed the "King of Shady Money" by the Japanese press, Morishita chased after prizes at overseas art markets, collecting \50 billion ($384m) worth of impressionist and postimpressionists like Renoir and Monet, and he planned to invest a total of \200 billion ($15.36bn). In the fall of 1989, at an auction in New York, Morishita paid $100 million for a cache of some 100 impressionist and postimpressionist paintings.

Unfazed by the stock market collapse in early 1990, corporations increasingly viewed the exploding art market as another venue to make even more profits. But with the property market looking riskier (due to stricter governmental restrictions and the declining stock market), an increasing number of corporations were seeking to broaden their investment portfolios into the world of art. Thanks to an accounting system based on book value, art investment was expected to score substantial unrealized profits, accrued between the acquisition cost (book value) and the market price at time of valuation. As dealer and collector numbers were limited, the participation of novice players was necessary to drive up art market prices.

Bank loans were offered as leverage to drive up art prices. Banks launched new art-secured loans to attract more high net-worth clients. Typically, banks would lend up to 50% of a painting's value at 2% above the long-term lending rate. Fuji Bank was the first to offer such loans in cooperation with the Saison Group credit card company. Many other financial institutions such as Mitsui-Taiyo Kobe Bank (today's Sakura Bank), Mitsubishi Bank, Daiichi Kangyo Bank, and non-banks like Daishinpan - even department stores -- offered art-secured loans. As the loan scheme became hugely successful, with art prices shooting up, art investment fever spilled over to individual investors. In January 1990, a real estate company called Maruko Inc. sold shares to 11 paintings, including works by Renoir, Pablo Picasso, and Marc Chagall. The company also purchased Amedeo Modigliani's La Juvie at a price tag of \1.2 billion, and allowed individual investors to purchase investment shares for \10 million each. The paintings will be placed on the open market sometime between 1995 and 2000, with the expected capital gains to be divided among the fund members. Several other companies followed suit.

The Picasso goes where I go
The art market boom ended abruptly in 1989 when the Bank of Japan raised the official discount rate from 21/2 % to 4%, and then to 6% in 1990. As a result, many speculative art collectors -- such as Urban and Nippon Autopolis -- went under, and private museums run by art speculators closed. Financial institutions, left with massive painting collections as loan collateral, could not find buyers in overseas markets, as the end of the Japanese art boom caught everyone overexposed. Picasso's masterpiece Les Noces de Pierette exemplifies the sad fate of bubble-era paintings. With ownership transferred from one creditor to another, the painting has not seen the light of day for over a decade. Tomonori Tsurumaki, owner of the car racing resort Nippon Autopolis, purchased the painting in 1989 for $51 million, and in 1991 -- the year of the company's collapse-ownership of the masterpiece was transferred to Hazama, a construction company that engaged in race course construction. A major consumer loan company, Lake, then took the painting as collateral against a loan to Hazama, whose business had soured. Lake itself possessed a large collection of paintings, as it had been offering painting-secured loans in the late 1980s. To buttress its financial situation, Lake sold its stake in the mainline consumer loan business to America's GE Capital, a subsidiary of General Electric, in November 1998. Its collection of paintings (500 pieces, worth $200 million) will go on the block at Christies from 1998 to 2003. To this day, Picasso's painting remains locked up tight in the vault of Mitsui Trust Bank.

Taking it with you
Meanwhile, sighs of relief were heard at the 1996 funeral of Ryoei Saito, the former chairman of Daishowa Paper, who, in 1990, had bought Van Gogh's Portrait of Dr. Gachet for $82.5 million and Le Moulin de la Galette by Renoir for $78.1 million, as it was confirmed that these two masterpieces had not been cremated together with their owner. Saito's comment in 1990 that he wanted both paintings burned at his cremation caused uproar in the art world. The two paintings were saved from their fiery fate mostly because they had been taken as collateral against Saito's personal borrowings from Fuji Bank. Van Gogh's Portrait of Dr. Gachet was sold in 1997 to a connoisseur in Switzerland, and Renoir's Le Moulin de la Galette went to a U.S. owner in 1997. Saito, known as a fervent lover of arts, refused to show the paintings to anyone, including his own family. His son, Tomosaburo Saito, vice president of Daishowa Paper, recalled only one occasion when his father had taken the paintings from their warehouse to entertain a visitor from Sotheby's, at Kiccho, a famous Japanese restaurant.

Experts have agreed that the first stage -- seeing high-profile paintings sold to overseas buyers, as well as to Japanese public museums -- has come to an end. Now Japan's art market is entering a second stage, as players attempt to dispose of the lesser quality bubble-era artwork for which they paid hugely over-inflated prices. "As much as 70% of bubble-era paintings in storage have no provenance," says The Museum of Modern Art's Tairo. "Provenance -- the ownership history of the painting-determines the value of the painting, and helps determine if it is a forgery," he says. Half of the dozens of paintings secured by the collapsed Long Term Credit Bank, held as collateral on loans to the now-defunct EIE International (a resort developer), have no provenance, and this seems to be the latest evidence of the bank's reckless and shady financial art dealing. The vast collection of over-valued bubble era artwork serves as shackled testimony to the folly of Japanese corporations and the complete lack of governance over them.

Yoko Shibata is a freelance writer based in Tokyo. Contact her via

Note: The function "email this page" is currently not supported for this page.