Japan's Northeast Faces Prospect of Rising Bankruptcies

The tsunami that struck Japan’s northeast coast last year washed through Kouzo Inoue’s aluminum factory, which stands just 600m from the Pacific coastline, in Miyagi prefecture. Mr Inoue survived the disaster but was left with a flooded factory, Y130m in debts and a need to find fresh funds to restart his business.

Japanese 10,000 Yen bank notes
Luc Novovitch | Photographer's Choice | Getty Images
Japanese 10,000 Yen bank notes

A year on from the March 11 earthquake and tsunami that wiped out whole communities along Japan’s north-east coast, many households and small business owners, such as Mr Inoue, are still struggling to get back on their feet despite government initiatives to make it easier to receive funding.

According to the chambers of commerce in the four most heavily affected prefectures in the Tohoku area, 3,535 member companies, or 18 per cent of all members in the region, lost entire buildings or factories to the tsunami.

“The first two to three months were really tough,” says Seiichi Seto who lost his rice and vegetable farms in the deluge. “I went around to financial institutions to try to borrow funds but was rejected and I felt that maybe there was no hope. I was at a loss what to do,” says Mr Seto.

After his request for a personal loan was rejected by every bank he approached, Mr Seto set up a hydroponic farming company with two other farmers, which was able to obtain funding from investors and local banks.

The government has set up various organizations and initiatives in an effort to ease the financial burden on small businesses and to help them restart their operations.

But so far, requests for help from indebted borrowers have been far below expectations, triggering concerns that those unable or unwilling to seek help will be forced into bankruptcy.

For the time being, “a lid is being kept on bankruptcies by various measures. But there are a large number of companies on the verge of bankruptcy”, says Keiji Konno, financial analyst at Teikoku Data Bank’s Sendai office.

Bankruptcies as a direct result of the disaster so far total 630, or three times the number in the 12 months after the 1995 Hanshin-Awaji earthquake, according to Teikoku Data Bank, which specializes in corporate bankruptcy data.

The four worst affected prefectures – Iwate, Miyagi, Fukushima and Ibaraki – have set up Industrial Recovery organizations to buy the debts of small business owners so that they can borrow fresh funds to restart their operations. If the borrower’s bank agrees to sell its loans to the recovery organization, the borrower is then exempt from interest and principal payments for 10 years.

However, of the four organizations, only Miyagi and Iwate have bought any loans, and even then just five so far.

The response to these measures has been muted partly because financial institutions have been under pressure to revise temporarily the terms of loan repayments, say industry officials.

Between March and the end of last November, financial institutions in Iwate, Miyagi and Fukushima, had revised lending conditions for loans totaling Y646.1bn ($8bn), according to the Financial Services Agency.

Mr Inoue at Kyowa aluminum is one business owner who has been able to obtain a one-year extension on the principal repayment.

Some borrowers, meanwhile, have been relieved by windfall income from donations equivalent to their annual income and earthquake insurance, says Kyozo Fujita, deputy director of the management committee of Individual Debtor Guidelines for Out-Of-Court Workouts, which helps households negotiate debt rescheduling and forgiveness from their banks.

The government hopes demand for debt relief will grow as regional reconstruction plans become clearer, making it easier for businesses to formulate plans for the future, government officials say.

But there is concern that before that happens, bankruptcies will start to increase as the temporary factors keeping companies and households afloat – from donations to the banks’ support – fizzle out.

“If the banks start asking for some repayment, more companies will go bust,”says Mr Konno.

Banks are reluctant to sell their loans to the government-backed organizations, because they buy the loans at market value, which generally means the banks will have to take a loss.

Consequently, Mr Inoue, for one, has not sought the help of Miyagi’s Industrial Recovery organization out of concern that his banks might say, “we can’t do business with you any more”, he says.

The challenge facing the government is to convince the banks to sell their loans at a loss, or risk a grim scenario of mounting bankruptcies in already long-suffering regions.