Going Belly Up In Japan

Bankruptcies are soaring while consumers binge on borrowing

Somewhere on the southern Japanese peninsula of Shizuoka, a 36-year-old former restaurateur and his family live in hiding. He's not running from the law, but from the severe social stigma attached to bankruptcy in Japan. Last year, his Yokohama eatery, financed by $160,000 in loans, went bust. So he fled south. "I have my pride," he explains over a mobile phone. "People started gossiping about what had happened, and Japanese gossip is frightening." He will reveal no more than the fact that he now works as a security guard. Such stories illustrate the rise of a new class in Japan of what one might call debt-heads. As bizarre as it seems, the country that boasts one of the highest savings rates in the world is also home to a growing number of individual bankruptcies (chart). Last year, some 56,494 individuals filed for bankruptcy, up 30% over the year before. And Japan's Ministry of Finance (MOF) is bracing for a similar jump this year. The figures reflect the new challenges of making ends meet in post-bubble Japan, as well as the excesses of a consumer lending industry that makes borrowing easier than ever. The plight of so many bankrupts also points to a consumer economy that is probably still too fragile to support a strong recovery.

Of course, these numbers still don't compare to those in the U.S., where 1.2 million Americans filed for bankruptcy last year. But the U.S. has twice the population of Japan. And some Japanese bankruptcy lawyers think the actual number of insolvent Japanese going bankrupt every year is closer to 500,000. "Many people don't file for bankruptcy," says Kenji Utsunomiya, an attorney specializing in the field. "In Japan, if you go bankrupt, it's the end," he explains. "You cannot find another job" and "you cannot get married." Many Japanese mistakenly think they will go to jail if they file for bankruptcy. So many go into hiding instead of filing.

SOUR BETS. The stigma is especially great for the throngs of fortysomething executives and shop-floor workers who were accustomed to job security and steady pay increases. Now many of these midlevel employees are caught up in cost-cutting campaigns that slash salaries and bonuses. Or they are finding their jobs at risk when their companies go bankrupt. Each year for the past five years, more than 100,000 employees have lost their positions because their companies have failed, and credit research firm Teikoku Data Bank Ltd. expects the number to increase this year. "1997 is working out to be the kind of nightmare year in terms of [corporate] bankruptcies that we expected for 1996," says James Fiorillo, banking analyst at ING Barings Ltd. in Tokyo.

Many bets on future prosperity have turned sour. Attorney Utsunomiya is representing one client who took out a $480,000 loan to buy a home and borrowed another $160,000 from consumer finance lenders. When he lost his $62,400-a-year position at a food company and took another job at half the pay, he couldn't make ends meet.

Indeed, the bankruptcy surge seems to be spawning new cottage industries. Sho Hatori, president of the moving-van company Life Bord Yokohama, has begun a side business of helping debtors relocate in secret, after the client has paid off all debts. "Everyone deserves a new start," he says.

Hatori will enjoy a brisk business for years to come, thanks to the increasingly reckless ways in which ordinary Japanese borrow and the brazen marketing of consumer finance firms. In parts of Tokyo it's hard to walk into a telephone booth without seeing screaming ads from companies such as Mainichi Shinpan promising quick loans of up to $8,000--no questions asked. Some companies require only cursory credit applications before people are eligible for up to $4,000 in some cases. Of course, the interest payments are outrageous--as high as 29%. But you can't beat the convenience. The consumer finance firms operate automated teller machines (ATMs) in discreet locations throughout Tokyo and give ATM cards to Japanese who successfully apply for credit. So borrowing cash on the run is a snap. "If I wanted to go out drinking before, I would have to borrow money from my friends," says Takashi Endo, 25, a part-time waiter who has also borrowed about $480 from consumer credit companies to help pay for his surfboard. "It's just easier this way," he said, grabbing some cash from a Takefuji Corp. ATM. Consumer finance companies like Takefuji are more accessible than credit-card issuers, who take several weeks to process an application. "We can complete a credit check in less than 40 minutes," says Ritsuo Matsubara, a manager at Promise Co., another finance company. Companies like Promise say their databases on consumers' credit history are better than those of banks at spotting potential deadbeats. Still, in February, the MOF ordered these companies to tighten up their screening of applicants and restrict consumers from simultaneously borrowing from more than three consumer finance purveyors. "People do not have a high enough awareness of their limits," says Kichizo Sakamoto, executive director of the Japan Credit Counseling Assn., which advises consumers on debt problems. Few expect the big consumer finance companies to throttle back very much, though. Given Japan's all-time-low interest rates, they're making a killing by borrowing at 5% and lending at double-digit rates. Indeed, the cumulative earnings of Takefuji, Promise, and Acom are expected to jump 22%, to $1.1 billion, when they report their fiscal yearend results in May. Consumer credit, excluding mortgages, has gone from $505 billion in 1990 to some $600 billion now.

HOT HANDS. During a recent Sunday afternoon in Tokyo's Shinjuku district, everyone from students to middle-aged mothers could be seen slipping into consumer finance companies' ATM booths to get their hands on more yen. Last year, after the birth of his first child, restaurant worker Motoyuki Kurosawa, 25, borrowed $1,600 from a consumer finance company for a downpayment on a larger apartment. "My salary is increasing, but not by very much," says Kurosawa, wearing his white uniform on a break. "We need an extra room." Kurosawa hopes to pay back his loan over several months.

Until tougher measures on consumer lending are put into place, more and more consumers likely will slip into insolvency. For now, the Bank of Japan seems committed to keeping interest rates at all-time lows to help companies and Tokyo banks overcome the aftereffects of the '90s blowout in property and stock prices. The irony, though, is that this strategy is benefiting the go-go consumer finance lenders who may be contributing to another debt mess--this time in households across Japan.

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