Japanese reluctantly turn to bankruptcy to survive
Ken Belson
New York Times
>>One of Japan's most profitable industries is the business of lending money to those with little or no collateral. While Americans have lived with easy credit for decades, most Japanese pay off their credit card bills each month. Increasingly, though, the lure of quick cash has turned the nation's loan companies into financial lifelines, particularly for those who do not understand the risks involved.<<
Published Jan. 2, 2003 RUPT02
OSAKA, JAPAN -- At the cramped offices of the Icho-no-kai credit counseling center in Osaka, about a dozen workers, housewives and other hard-luck cases are engaged in what has become an increasingly common ritual: They are declaring bankruptcy.
Once almost inconceivable in a nation that places such a high value on savings, Japanese are resorting to personal bankruptcy in record numbers in response to a punishing squeeze caused by five consecutive years of falling wages and rising unemployment.
As their financial woes have worsened, many have turned first to legal lenders but then often to loan sharks who charge rapidly compounding interest rates. To escape this trap, about 220,000 people are expected to seek protection from creditors this year, up more than a third from 2001.
"Out of pride, most Japanese don't want to declare bankruptcy," said Dean Perry, who follows the consumer finance industry for ING Baring Securities. "But stigma or no stigma, they will do what they need to do to get by."
Declaring bankruptcy in Japan still is relatively uncommon, and Americans are four times as likely as Japanese to seek bankruptcy protection. But as long as the stagnation of the Japanese economy continues, personal bankruptcies seem likely to continue growing sharply. According to some estimates, as many as 2 million Japanese are effectively bankrupt but haven't filed the paperwork, or can't.
Even that does not convey the full extent of the financial stress in Japan. Despite encouragement from a government that is committed to making it cheaper and easier to file for bankruptcy, every year thousands of people in distress commit suicide, police statistics show, rather than face their debt collectors, friends and families in shame.
For those who do file, bankruptcy can restore some financial breathing room. But it does not always end the harassment from those still in debt to illegal loan sharks. And few escape personal trauma of some sort.
Many debtors used their personal savings to keep their companies going before turning to loan sharks in hope of staving off ruin.
"People get desperate," said Yoshiaki Tanaka, the secretary-general of Icho-no-kai, which has experienced a sixfold increase in visitors in the past two years. "A drowning man will grasp at straws."
One of Japan's most profitable industries is the business of lending money to those with little or no collateral. While Americans have lived with easy credit for decades, most Japanese pay off their credit card bills each month. Increasingly, though, the lure of quick cash has turned the nation's loan companies into financial lifelines, particularly for those who do not understand the risks involved.
In this weak economy, low-wage workers and marginal business owners are being forced to dip deeply into their savings to pay their bills. The closing of a factory or a round of induced early retirements can push families to the brink.
Finding new work at similar pay is difficult because most workers devote their entire career to one job, leaving them unprepared to find another. To make the payroll at a family business, many Japanese seek short-term, high-interest loans to tide them over and avoid the embarrassment of having to ask friends or relatives for money.
In his 27 years as a credit counselor, Tanaka repeatedly has seen the dark side of this trend. Consumer finance companies lend money at rates up to 29.2 percent -- a ceiling set by the government -- and borrowing $4,000 is as easy as going to an automated teller machine.
Most borrowers repay their loans, but for those who cannot, the consequences can be frightful. Interest accumulates so quickly that debtors take out new loans to keep up with the previous payments due. When legitimate loan companies cut debtors off, loan sharks called yamikin can dole out fresh loans at rates up to 10 percent a day.
The police try to enforce the anti-usury laws. In the first half of 2002, 118 loan sharks who lent to more than 42,000 people were arrested. Estimates of the illegal loan market vary, but analysts say it easily exceeds 3 percent of the legal market in consumer loans, or about $3 billion.
Despite the outrageous rates, there is no shortage of takers for these loans -- a sign of how thin the line is between making ends meet and spiraling downward. It also illustrates the fuzzy border between the regulated loan companies, which cater to salaried workers, and the web of marginal operators who often have links to organized crime gangs. These illegal operators often employ brutal harassment techniques.
A government panel is deliberating over more ways to make it easier to declare bankruptcy, including speeding up the court process, easing some of the criteria and allowing people to refile for bankruptcy in less time. The government hopes that by helping ordinary workers to start over with fewer debts, they can spend more and help lift the economy.
Critics argue that this will create a moral hazard, with people borrowing excessively because they know they can escape their debts more easily. But this ignores an essential point: Most Japanese still feel a sense of obligation to repay their debts. Few would abuse the system, most experts say.
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