Credit in Japan

By Sakamoto, Ken | Business Credit, July-August 1992 | Go to article overview

Credit in Japan


Sakamoto, Ken, Business Credit


The Japanese economy has slowed to a snail's pace since its high point in 1990. The stock market remains weak and volatiel. Trading volumes stay far below 500 million shares a day, and only a few brokerage houses posted profits at the end of March 1992.

Land prices went down about one-third, and the banking industry is still in trouble. Non-performance loan amounts are huge due to the collapse of the stock and real estate investment markets. Some financial institutions are undergoing debt restructuring, mostly at the sacrifice of the major banks.

The government has announced special measures to stimulate the economy by accelerating public investments. But the private sector still holds its fists tight, and there is no sign of upturn in equipment investments.

Despite all of the above, the Japanese economy is still strong compared to other nations. Even within the banking industry, which is heavy with potential bad debts and facing more regulation by the Bank for International Settlements, major failure is not a threat. There is no fear of country risk, nor the possibility of defaults in letters of credit opened by Japanese banks. The bullish commentators predict the Japanese economy will turn the corners sometime this summer, while the bearish say it will not show an upturn until the end of the year. Regardless, within the next 12 months, there should be signs of recovery.

Failures Stress Importance of Credit Management

Japan enjoyed good financial times for several years until 1989, when the Bank of Japan started to raise the discount rate. Due to the speculative hike of land prices, the Japanese government installed a special measure to control the flow of funds into the real estate investment market. According to Teikoku Data Bank, the prominent Japanese reporting agency, both the number and the liabilities of failures for the fiscal year, which ended March 31, 1992, increased tremendously. The number of failures was 11,767, 64.4 percent higher than the previous year,; the liabilities were 62.2 billion dollars, 122 percent higher than the previous year.

The failures continued to increase following the rise of discount rates and the effects of the control of funds to real estate investments. While it may look like Japan is suffering a heavy depression, that is not true. The performance of the Japanese economy is poor compared with preceding years, but still remains on a high standard, even among the industrial countries.

The causes for failure are heavy speculative investments in marketable securities and real estate. The bad debts are mostly born by financial institutions, and so far, chain reactions have not been seen. Normally, during recessionary periods, many failures are seen in manufacturing and distribution industries. Last fiscal year, we did not see the conventional failures, though in recent months, more casualties were seen among the non-speculative areas. The repeated cuts in discount rates have not shown visible improvement for the economy. It will take a few more months until the low interest policy will take effect on the fundamentals of business. So for the coming months, recession-type failures will increase among marginal businesses.

Special Features of Credit Management in Japan

The normal payment terms of trade credit are much longer in Japan than in the U.S. Again, Teikoku Data Bank's financial analysis shows the turnover of trade receivables averages to be 145 days for industry, 166 days for manufacturing, and 155 days for wholesale. While there are some differences between industries, turnovers average 150 to 200 days. At the Finance, Credit, and International Business (FCIB) Globl Conference in November 1991 in New York City, many participants seemed astonished by this turnover rate. But through 20 years experience as credit manager at a large Japanese trading firm, I learned its reality.

An example of conventional payment terms is closing on the 20th day of each month with promissory notes being payable within four months. …

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