Bankruptcy Rises Following New Rules

Back to Contents of Issue: March 2000

by Shozaburo Nogami

Corporate bankruptcy cases in Japan rose over the previous year for the first time in 13 months last November, as the changing conditions for securing funding took their toll on the nation's smaller companies.

According to Teikoku Databank, probably Japan's best-known private research firm for corporate credit investigation, 1,372 companies failed that month, up 0.9 percent from the year before. Roughly 72 percent of those failures were caused by the recession. Of the total number of failures, 1,355 were among small and medium-size enterprises capitalized below ¥100 million.

The corporate bankruptcy rate had been decreasing since November 1998, when government measures to facilitate funding at smaller companies started to take effect. Financial institutions had become increasingly reluctant to take on the risks involved in handing out loans to smaller companies, so in October 1998 the government set up a pool of ¥20 trillion as part of a special loan guarantee system, under which eligible companies could borrow money from private banks with the government as their guarantor. Just one month following its implementation, bankruptcy cases decreased 4.6 percent year-on-year, a figure that reached double digits over each of the following 12 months.

Last October, with less than ¥4 trillion remaining in the pool, the government decided to add another ¥10 trillion to the program, and extend it to March 2001. This time, however, under criticism that the system was being abused, wasting taxpayer money, and keeping afloat weak companies that should be left to go under, the government created stricter criteria for borrowing under the system. Many believe that this, coupled with a fall in lending at special high-interest, nonbank lenders, was responsible for the rise in bankruptcy cases.

The number of companies whose guarantee applications were approved fell in October 1999 to 118,548, or 47 percent lower than the previous October and 68 percent lower than the previous month.

Aggravating the situation was the scandal at Nichiei Co., Japan's largest lender of high-interest-rate shoko loans, which are extended mainly to smaller companies on personal guarantees instead of collateral. News that a former Nichiei employee demanded a guarantor sell his body parts in order to pay back outstanding loans has, understandably, spooked potential guarantors, thus leaving many cash-strapped small companies with no source of funding.

With an estimated 700,000 firms said to be borrowing from Nichiei and similar outfits, November's rise in bankruptcies could herald the beginning of an upward trend -- again.

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