Japan's Messy Toxic Cleanup Plan

The onus for tainted sites is on current owners--often foreign

On the face of it, new Japanese legislation mandating the cleanup of toxic sites is a triumph of environmental responsibility. Masako Nakamura certainly thinks so. The Tokyo ward official and green activist spent 10 years agitating for a law to force corporations abandoning poisoned factory sites to take responsibility for the toxic messes they left behind. "The lack of tough laws effectively protected polluters," says Nakamura, Japan's answer to Erin Brockovich. "But that's about to change."

So why are some foreign companies crying "unfair"? Because the legislation, which is expected to become law as soon as next January, would in some cases punish not the original polluters but the companies that own the blighted land now. If the polluter is bankrupt and deemed incapable of paying for a cleanup--a potentially common occurrence--the current landlord might be responsible for the entire bill.

That could affect several big U.S. companies--including General Electric Japan--which have been snapping up cheap loan portfolios, which are backed up by real estate, as well as investment properties. These bargain-hunting foreigners bought the land with the aim of redeveloping it or securitizing the rental income for resale as a financial product. Because it can be hard to conduct due diligence on property transactions in Japan, some buyers didn't realize until too late that their property sat on toxic sludge. According to one estimate, there are 93,000 polluted sites in Japan that could cost $100 billion to clean up. The government recognizes only 574 sites (chart), but keeps revising the number upward.

The last thing Japan's ailing property market needs is another disincentive to foreign investment. Moreover, because so many of the nonperforming loans (NPLs) in banks' portfolios are secured with real estate, the new law could hobble plans to sell bad debt at a discount to the likes of GE Japan. The pattern has been for financial companies to buy bad debt, seize the collateral behind it as part of a workout plan, then resell the revived loans to third parties.

But such workouts may wither if the collateral is dodgy. Indeed, GE blasted the bill in a recent letter to Japan's Environment Ministry. And on Mar. 11, the American Chamber of Commerce in Japan (ACCJ) issued a release calling for the pending legislation to be rethought. "The condition of the Japanese banking system is shaky enough without the addition of incalculable new liabilities," said the ACCJ. The Environment Ministry maintains that the concerns of GE and others are misplaced because the ministry has no intention of interpreting the law to hammer those who buy loans just to package them for resale. But for those who unwittingly bought toxic wasteland outright? "Caveat emptor," says Yoichiro Kurokawa, head of the Ministry's Soil Ecosystem Div.

U.S. companies have refrained from going public with their concerns about the new law. But they're lobbying intensively behind the scenes to have it changed. Although representatives of several U.S. companies attended a meeting on the issue at the ACCJ, none would comment. They don't want to be accused of trying to dilute legislation that has strong public support. In recent years, Japanese have become increasingly concerned about soil laced with hazardous substances, some of which may cause cancer.

For its part, the Environment Ministry is eager to shed its longtime image as a toothless tiger. At the same time, it does not want to get in the way of legitimate business deals. Indeed, one key purpose of the new initiative is to clarify responsibility for any needed cleanup at the many industrial sites now being converted to such uses as condominiums and amusement parks.

Corporate Japan, however, is in no condition to foot the bill for factory cleanups that on average run $25 million. Under the proposed law, the government will contribute a meager $4 million to a fund earmarked for deserted properties or plots contaminated by small-business owners. The government says it will seek matching contributions from Big Business. But the Japan Federation of Economic Organizations, or Keidanren, has no plans to chip in--because the fund won't help the large-scale enterprises that are its core constituency. "We won't touch it," says Hideo Takahashi, director of Keidanren's environment and technology bureau.

Nor are Japanese banks and foreign investors eager to go along. They still worry that they'll wind up paying more than their fair share--either in cleanup costs or falling land values for suspect properties. So pressure is building on the government to exempt particular lenders, bad loan buyers, and short-term real estate owners. It's an untidy start for a law that's supposed to clean up one of Japan's worst messes.

By Chester Dawson in Tokyo

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