The Japanese Discover The Perils Of Plastic

For one candy company executive in Tokyo, the road to bankruptcy court started with a $19,000 car loan in 1989. The extra money tasted sweet to a man who for 19 years had stretched his modest salary to support his wife and two children. So he took out more loans, buying electronics gear and furniture. To keep up with payments, he took out even more loans or drew cash on his credit cards. By late last year, he owed $167,000.

Meet Japan's new deadbeat generation. Once admired for their frugality, the Japanese are seeking court protection from creditors as never before. Analysts expect personal bankruptcies to reach 20,000 in the 12 months ending in March, nearly double the year-ago rate. "People have just spent too much with no understanding of how much they can pay," says Hisao Misawa, executive vice-president of Consumer Credit Clearance Inc., a Tokyo-based collection agency. Over the past five years, consumer debt has soared 65%, to $460 billion.

IN THE SOUP. The collapse of Japan's nascent version of a casino society is hardly good news for U.S. exporters. Saddled with a $43 billion trade deficit, U.S. officials are pressing Japan to stoke up its economy and urge its consumers to spend. But with financial wipeouts increasing daily, the Japanese banks and credit companies that flooded the nation with plastic in the booming 1980s are getting stingier while government regulators are giving them closer scrutiny.

The image of the Japanese as fastidious savers started to tarnish in the late 1980s, when a speculation binge in stocks and real estate got under way. When the stock market crashed in 1990 and real estate crumpled, heavily indebted high rollers ended up in bankruptcy court. One example is a 44-year-old cook who started playing stocks with a $500 investment. He wound up $344,000 inthe hole.

Many of those buried in debt are younger Japanese, hooked on plastic while still in college. Tempted by monthly cash loans of $1,600 and revolving credit, recent graduates use credit cards to buy cars, clothing, skis, and airplane tickets. Catering to jet-setting young secretaries and other travelers, for example, Visa International boosted its cardholders in Japan from just 5 million in 1987 to 37 million now. Overall, the number of cards issued in Japan doubled from 1985 to 1990, to 166 million.

NIGHT WORK. Cardholders pay a hefty price for easy credit. Interest rates are 27% on borrowed cash, roughly a third higher than rates in the U.S. But despite the high rates, one or two cards are not enough for the biggest spenders. When cardholders can't keep up with interest payments, they often turn to consumer-finance companies, with names such as Promise and Benefit, for more loans at rates of up to 40%. If these debts aren't paid, lenders sometimes take strong measures such as sending thugs to a deadbeat's house where they humiliate him by shouting insults, often all night.

But it is the issuers of credit cards that have the most to lose as personal bankruptcies head skyward. The extent of card delinquencies has doubled in Japan to about 0.7%, even though that's only one third of the U.S. delinquency rate. Japanese issuers don't usually swap data on how many cards a new applicant already holds. But they keep issuing new cards.

Not surprisingly, the debt woes are spawning a cottage industry: bankruptcy counseling, mostly in Tokyo. Bankruptcy lawyer Kenji Utsunomiya, for example, has written a book and held phone marathons to explain bankruptcy proceedings. Officially, Japan's bankruptcy rate is much lower than the U.S. total last year of 880,000. But in fact, many of Japan's 700,000 debtors who were sued last year are also "virtually bankrupt," says Utsunomiya.

One bright spot for card issuers is the tradition among Japanese of paying off debts. But that may change this summer when revolving credit is expanded to include holders of bank-affiliated credit cards, giving them the option of postponing bill payments. With thousands of debtors already on the edge, that's one new temptation many Japanese could probably do without.