Going Belly Up In Japan

Bankruptcies are soaring as 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 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 Japan, as well as the easy availability of loans from the consumer lending industry. The plight of so many bankrupt Japanese also points to a consumer economy that is probably still too fragile to support a strong recovery.

THE END. 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 Japanese becoming insolvent 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."

The stigma is especially great for the throngs of fortysomething executives and shop-floor workers who were accustomed to job security and steady pay raises. 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.

If many Japanese are eager to borrow, the consumer finance firms are eager to lend. 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 and give ATM cards to Japanese who successfully apply for credit. "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 firms like Takefuji and Promise Co. say their databases on consumers' credit history are better than those of banks at spotting potential deadbeats. Nonetheless, 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.


Yet few expect the big consumer finance companies to throttle back very much. Given Japan's all-time-low interest rates, they're making a killing by borrowing at 5% and lending at double-digit rates. The cumulative earnings of Takefuji, Promise, and Acom are expected to jump 22%, to $1.1 billion, when they report fiscal 1996 results in May. For now, the Bank of Japan seems committed to a low-interest rate policy that helps companies and banks overcome the aftereffects of the '90s blowout in property and stock prices. The irony is that this strategy benefits the go-go consumer finance lenders who may be contributing to another debt mess--this time in households across Japan.

Before it's here, it's on the Bloomberg Terminal.