Japan Inc says goodbye to going bust in 2014

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For the first time in 24 years not one company listed on Japan's stock markets went bankrupt, Teikoku Data Bank figures for 2014 show, a sign that Prime Minister Shinzo Abe's effort to spur the economy, dubbed Abenomics, is working for companies in capital markets.

The first arrow of Abe's three-pronged effort to drag Japan out of two decades of deflation – monetary stimulus – saw the Bank of Japan unveil a massive stimulus package in 2013 that would increase its monetary base at an annual pace of 60-70 trillion yen. In October, it expanded its monetary stimulus, and the effort appears to be paying off.

"The massive quantitative easing expanded the monetary base – and encouraged banks to extend lending to smaller, struggling listed companies," said Takuya Ishida, analyst for credit research firm Teikoku Data Bank.

Banks rolling in cash

Japan's banks are swimming in excess funds. Collectively, they are sitting on 11 trillion yen (about $493.4 billion) of short-term assets, or what Barclays bank analyst Tamura Shinichi calls "waiting money" – excess funds the banks are looking for somewhere to park.

In addition, the government continues to back a 2008 law that directs banks to roll over lending to small and medium-sized (SMEs) businesses that request it. The scheme was originally designed to keep SMEs afloat after the global financial crisis in 2008, according to Shinichiro Kobayashi, Senior Economist at Mitsubishi UFJ Research and Consulting (MURC).

While the law expired in March 2013, the Financial Services Agency has directed banks not to suddenly call in their loans.

This is not particularly profitable for the banks, but "they can't cross their regulator," said Koboyashi. "They make some money as long as the borrower doesn't go bankrupt."

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The scheme keeps many weak "zombie" companies in business, he said. The number of companies using the scheme continues to rise, reaching over 5 million in fiscal 2014 from 375,905 in fiscal 2009.

As a result, not one of the 3,469 companies listed on the various Japan Exchange Group stock markets filed for bankruptcy in 2014 – the first time since 1990. However, stock-listed corporations represent less than one percent of all registered Japanese companies, according to Teikoku.

Second arrow

The second arrow of Abenomics – fiscal stimulus – provided a tailwind through a public works program to rebuild the northeastern region and build new infrastructure ahead of the 2020 Olympics in Tokyo, according to Ishida.

In its first budget after coming to power at the end of 2012 Abe's administration bumped up public works spending by 15.6 percent to 5.26 trillion yen (around US$44.8 billion) for the fiscal year 2013. It later expanded the budget by another 12.9 percent to 5.97 trillion for fiscal 2014 and will maintain that level in fiscal 2015.

While construction companies represented one fifth of total bankruptcies among unlisted companies in 2014, the number of construction bankruptcies fell for 27 consecutive months starting in October 2012, as a result of Abe's second arrow.

Meanwhile, total bankruptcies stood at 9,180 in 2014, below 10,000 for the first time in eight years.

Sustainable trend?

The biggest risks going forward are rising raw material and labor costs, Ishida warned.

If the yen weakens to 140 against the dollar, as Capital Economics forecasts end-2015, smaller companies that typically rely on imports may be hit hard, although the recent collapse in oil prices could offset some of the pain, said Thieliant.

Yen weakness hit SMEs in 2014, with 345 citing it as the cause of bankruptcy, more than double that of 2013, while the number of employees who lost their jobs nearly doubled to 5,270, according to figures from Teikoku.

Whether real wages grow remains to be seen. Real wages have posted on-year declines for every month since July 2013. One of Abe's key campaign pledges during the December elections was to push companies to raise wages.

But, given the companies managed to survive the consumption tax hike and weathered a technical recession in 2014, neither Teikoku's Ishida nor MURC's Kobayashi see any reason for bankruptcies to increase this year. And the support will continue: "the banks will only gradually reduce their exposure, even to the weakest companies," said Kobayashi.