Thanks Kamei! Japan’s taxpayers now guaranteeing about 500,000 deadbeats

In the autumn of last year, Shizuka Kamei pushed through a debt moratorium law, primarily with the provincial goal of backing the small real estate companies in his home town of Hiroshima that were hit hard by the recession. At the time, I called this woefully short-sighted:

Small companies across Japan’s countryside that are having trouble making repayments should either restructure themselves, or fail and be restructured by creditors or new management. Many have antiquated management with regards to accounting, employment rosters, operational efficiency, supply chains, etc. Companies that can’t adapt to changed economic environments are supposed to fail. Yes, some good companies caught in unlucky times are destined to be caught in the current credit crunch as they are unable to repay loans and go bankrupt. But bankruptcy is a good thing! It is the engine of economic development that allows bad companies to fail, stifled talent to move elsewhere, assets to be sold at whatever price the market will bear, and bad management to be replaced. Yes, it sucks that people lose jobs and shareholders forfeit their investments, but that’s life! Letting this happen is a necessity for economic growth.

And on top of this, the poor local banks, only barely functioning after 15 years of treading water with the bad loan crisis, will now inevitably reduce their limited lending activities to nothing. There will be no money to lend, thus no local business growth or economic development, and thus no entrepreneurial activity. A short-term benefit for stabilized employment rates means the countryside gets screwed in the long term.

While my concern about small businesses refusing to restructure remained true, my concern for local banks was addressed when the final bill was passed (which you can read in Japanese here). The Japanese government — in other words, tax dollars — provide a statutory guarantee for these deadbeats. The mechanics of this are, under Article 11 of the Moratorium Law, that the government provides sufficient financial backing to the Credit Guarantee Union, which backs the financial institution undertaking the new obligation to support the small business. The Credit Guarantee Union is a government-backed public interest corporation that provides credit and loans to small businesses.

How many people and “small businesses” (defined as a company with less than US$3 million in capital and less than 300 employees) have applied for the moratorium in the last half year? About half a million:

Japanese banks have received a total of 521,030 applications for the easing of loan repayment terms from small and midsize companies and homeowners under the so-called debt moratorium law, the Financial Services Agency said Friday.

The applications, as of the end of March, since the law took effect in December last year involved 13.64 trillion yen and more than 90 percent of them were approved, the FSA said.

Congratulations, Japanese taxpayer — your tax yen are now financing these deadbeats. When the world is buzzing that Japan could be the next Greece, and could be sparked by one of any number of events (a failed Japanese bond auction, a sharp drop in tax revenue, a failure to implement tough fiscal and budgetary standards, a sharp contraction in Japanese GDP, a downgrade in sovereign debt by the ratings agencies), this is one of the worst policies that could be put in place.

10 thoughts on “Thanks Kamei! Japan’s taxpayers now guaranteeing about 500,000 deadbeats”

  1. Kamei in action:

    Q. I would like to ask you again about the money lending business. I expect that how to regulate advertising (of lawyers) will become a major issue. For example, prime time TV commercial messages by law firms (that try to obtain clients who would sue consumer finance companies) have drawn strong criticism. How do you think such advertising should be regulated?

    A. I do not know whether such advertising by lawyers is a crowd-pulling ploy for commercial gain or whether it reflects a conscientious intention to provide support for people saddled with a heavy burden of interest payments on multiple debts and for people seeking a refund of overcharged interest. We should not unilaterally prejudge that lawyers are evil.

    I am of the view that humans are inherently good. Unlike your company, I do not take the view that humans are inherently evil.

  2. As much as I agree that badly managed companies should not be supported by the whole community, I have to say the perspective of hundreds of thousands of local companies failing does not look good for the already bleak future of the Japanese “countryside”.

    Considering there is next to no incentive for new companies to start up outside big cities, that sounds like more fodder for rural-urban migration.

  3. François, given the choice between using taxpayer money to support local businesses that are fairing well, and local businesses that are failing, which would you choose?

  4. Hmm, I’m not sure Mr Eric Jackson from The Street knows anything much about Japan at all, and is merely jumping on the bandwagon of assuming Japan is next for a crisis. Not that I’m an expert either, mind you.

    There is some interesting info around though on this, which I’ve been meaning to send to Adam (sorry mate). Check out Alicia Ogawa for what I consider an opinion from someone who knows what is going on, coz they directly work in the field.

    So from what I’ve been reading (I’ve been reading alot) I dont think Japan is in for a crisis shortly. So I guess perhaps in light of that I may not agree with the statement “this is one of the worst policies that could be put in place”. That said, I tend to think of myself more on the side of Austrian Eco than Keynesian, so I cant say that I like this move very much at all. I do realise the social economic impacts arent always as simple as Austrian Eco might assume though…I guess it’s something I’d have to take an in-depth look at before deciding what I think.

    Sorry for the ramble.

  5. Kamei’s proposal is misguided but I don’t think it helps to throw around a term like “deadbeat”. If bankruptcy is a welcome part of economic development then it surely works best when the stigma attached to failure is relatively low, as we tend to see in the US.

    Japan’s financial system is already very poor at providing credit to individuals and sole traders. Those who do make it through screening face being cut off quickly when times get tough, driving them to lenders of last resort, often illegal ones. It is a fear of being thought of as “deadbeats” that leads many to take on more onerous debt obligations which can end in disaster. The stigma also has particular consequences in Japan when suicide is so prevalent.

  6. I wonder how many companies are actually needing the guarantees, and how many companies are just saying thanks very much for the interest-free loans for a couple of years. I know if I was running a business I’d have been straight on the phone to my accountant asking if he could be a bit creative with my bank balance.

  7. @Shawn, it’s not a question of whether Japan is headed for a “crisis”, so much as one of whether Japan consigns itself to another decade (or, dare I say, generation?) of a stagnant economy in which the market is not allowed to allocate limited resources efficiently.

    Preach on, Brother Curzon!


  8. Thanks to “Ishihara Bank”, I’m now quite used to throwing my tax money down the toilet to try and save the SMEs.

    Speaking of failed JGB auctions, has anyone here read Main Koda’s 「日本国債」? It’s a kind of “financial thriller meets shōjo manga” novel.

  9. Justin,

    After the sermon is over …

    Maybe the question is whether Japan can outrace the US into oblivion. The political market in the US has to allocate more and more money to the squids like Goldman, and the rest will just have to face brutal austerity, if they are lucky. In Japan, maybe industrial capitalism hasn’t been totally destroyed by finance capitalism yet, so there’s still some hope. At least it’s a hope worth having.

  10. One way of looking at the economic crisis is that having economic growth each year is the norm, but sometimes the economy will get into trouble, and maybe it makes sense to come up with some way to get companies and individuals though the temporary economic problems until the normal economic growth resumes. When economic growth resumes the government will recoup all the money though higher tax revenue that it spent managing the crisis.

    Another way is that we have hit the “limits to growth”, due to peak fossil fuel, other environmental problems, or some other reason, and we really should be figuring out how to manage an economy that doesn’t grow every year and still manage an OK standard of living for most people. This means looking for places to cut fat, and making sure the pain is distributed fairly evenly. Lots of government debt and government spending designed to get through the crisis until normal times resume just means governments will start to go bankrupt itself, once it is clear normal times aren’t coming back.

    I guess its predictable that governments around the world have doubled down that the first description is correct. After all, they did the same thing in the 1970s and 1980s and things worked out in the end.

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