The stock rout portends great upheaval within Japan Inc. Investors are dumping zombie shares because they’ve lost confidence that the banks, and by extension the government, will continue to coddle half-dead companies in crowded sectors like retail, trading and construction. Officially, Japanese banks already carry some $420 billion in bad loans on their books. Foreign analysts say the real tally could be as high as $1.9 trillion. Sooner or later, banks will have to cut off life-support lending to their worst clients in order to save themselves. Takenaka roiled markets further last week when he told NEWSWEEK that he did not believe any company is too big to fail, suggesting that the day of reckoning may be coming sooner than many people had expected.
He didn’t name names. But likely targets include scores of companies big and small. NEWSWEEK examined seven that investors fear are on the chopping block (chart). They top the Nikkei Financial Daily’s ranking of worst stock-market performers during the first week of Takenaka’s tenure. Their share prices have plunged a quarter or more this month. Each carries at least ¥400 billion ($3.2 billion) in debt and closed last Friday at ¥143 ($1.15) a share or less. And some of them may not have long to live.
Vegetables: Until now Daiei Inc. has defined the phrase “too big to fail” in Japan. The retail conglomerate, once a housewife’s best source for soap powder and green vegetables, carries more debt ($17.3 billion) than many countries. For years, following “guidance” from the government, banks forestalled Daiei’s collapse with new loans. Why? The establishment feared that a megabankruptcy would send shock waves through Japan’s distribution chain, costing 100,000 jobs. With bubble-era resorts, hotels and a professional baseball team (the Hawks) still weighing down Daiei’s balance sheet, the company requires periodic cash infusions to stay afloat. Banks comply because borrowers as big as Daiei have been known to bring their bankers down with them when they fail. So at predictable intervals they write new loans at near-zero interest while simultaneously forgiving past debt, a feat ratings expert Akio Mikuni calls “reverse-credit-risk pricing.” This year alone banks in Japan have bailed out Daiei to the tune of $4 billion. Will they ever stop? Worries that the government might now pull the plug have made Daiei the market’s biggest loser of late–down some 52 percent this month.
Lipstick: Cosmetics giant Kanebo Ltd. finds itself in similar straits. It carries $4 billion in debt and employs nearly 15,000 people. Its share price sank nearly 30 percent to ¥137 this month. Founded 115 years ago as a textile mill, Kanebo transitioned into cosmetics to become Japan’s second largest maker of lipstick, skin treatments and toiletries. But its loss-making textile operation and debts from dumb real-estate deals (including a lavish resort complex near Mount Fuji) have rendered the company nearly insolvent. “The current stock price is not reflective of our company’s actual condition,” says spokesman Hoji Muranishi. Still, investors will likely demand a makeover before they return.
Bricks: Construction is Japan’s fattest industry. With 500,000 companies employing about a tenth of the national work force, competition can be deadly for firms with huge debts. Daikyo Inc., Japan’s largest condominium builder, and Kumagai Gumi, a midsize general contractor, top the endangered list. Each took a massive $3.7 billion bailout from its banks. Both have failed to hit performance targets. Both would be in jeopardy should regulators force banks to implement more stringent lending policies and charge interest rates linked to credit quality, says Junko Miyakawa, a credit analyst at Standard & Poor’s in Tokyo. “The market is trying to incorporate the potential risk that such weak companies might be forced to exit.”
Daikyo has pledged to shed $3 billion in real estate, including hotels and golf courses, in an effort to halve its debt of $8.6 billion by 2005. But sluggishness in the condominium market has sunk its share price by more than half since late May. Likewise, Kumagai, which now trades at just ¥15 per share, touts a restructuring scheme that won’t be completed until 2012. Last Friday, Kumagai unveiled plans to sell a Manhattan office tower it owns for $40 million to shave its debt. “We are satisfied with our efforts thus far,” says a company spokesman, trying to sound upbeat. “But honestly, we don’t know what the banks might ask us to do.”
Middlemen: In the good old days trading companies rode the vanguard as Japan Inc. gobbled global market share. Today all but the biggest struggle to survive. With outstanding debt totaling $16 billion, Nissho Iwai is hawking assets including real estate and stocks in an effort to work off half what it owes within three years. Next year alone, according to Bloomberg, the company must repay bonds worth more than twice its market value. Shares slid to a low of ¥44 at one point last week as the trading house sought ¥100 billion in new funding from a consortium led by its main bank, UFJ Holdings. In May, Nissho Iwai posted 2001 net profits of just $9.6 million, down 94 percent from the previous year.
Rival Kanematsu nearly went bust in 1999 before its banks forgave ¥155 billion in loans. It has since trimmed its work force by two thirds, ceased far-flung dealing (like its 1996 mediation to sell Russian-made combines to the Kazakh government) and focused on boutique trading in goods like optics and pharmaceuticals. Yet despite bond-rating upgrades this summer, it remains Japan’s most leveraged trading company, with debts of $3.3 billion, more than 20 times shareholder equity. Last week the company reported first-half losses of ¥3.5 billion. “Yes, we were sick and had major surgery,” says a company spokesman. “But we came out of the hospital and we’re strengthening our muscles. We do not understand why we have to be on this list.”
Trucks: Once upon a time Isuzu Motors was all the rage in the SUV trade. But last year it sold just 52,000 light trucks in the United States, barely a blip compared with top-tier Japanese automakers Toyota and Honda. Isuzu has since closed its American production line and shifted focus to diesel engines. At home, meanwhile, sales have fallen 12 percent this year. In August, stakeholder General Motors injected ¥60 billion to keep Isuzu afloat. The truck maker hopes to raise an additional ¥100 billion by the year-end in a debt-for-equity swap with its main bank, Mizuho. Isuzu’s debt: $5.9 billion and rising. Says Steve Usher, senior auto analyst at JPMorgan in Tokyo: “People are starting to see that the credit risk is real.”
The pattern is the same for most of Japan’s fallen giants: banks and regulators alike have been masters at bolstering bad companies but failures at killing them. “We consider it brutal to pull on the legs of a man as he hangs himself,” says a local credit analyst. The question now is whether the politicians, bureaucrats and bankers are ready to see this as necessary triage. If they are, Japan faces a “hard landing” marked by a surge in bankruptcies, massive unemployment and a host of painful social problems that inevitably arise at the bottom of any business cycle–avoiding which has been the government’s primary goal since Japan’s economy went into decline 12 years ago. If they’re not, the number of Japanese companies with shares that sell for pocket change will only grow.
