Author: Kevin Rafferty
Elvis lives! Well, on closer examination, it is not the King himself, but several younger Asian reincarnations jiving up and down to the blaring music of Elvis Presley on a hot summer Sunday afternoon. Their eyes squint against the sun and sweat makes their trademark quiffs glisten with a shine the King would have envied. Elvis sightings have been reported all over the world, but none are as strange as these in Harajuku, not least because it is literally a stone’s throw from Omotesando, once of Tokyo’s swankiest shopping streets.
Just 50 metres away from the Elvis prince-lings, more than a hundred young girls are conducting their own anti-fashion parade. In the boiling heat, most of them are dressed in heavy black drapes and wearing thick white make-up. Their accessories are individually kitschy, including silver teardrop eyelashes, cutesy lacey parasols, clumpy platform shoes, Fishnet stockings, feather boas, bright red and orange hair, but together they are outrageously over the top and as far removed from the image of conformist dark-suited and booted Japan as it would be possible to devise.
These girls are mere teenagers, the oldest 15 or 16 and some of them only 12, the age when traditionally Japanese children spent their time with their heads buried in their schoolbooks.
“They demonstrate a profound sense of unhappiness with the established order,” says Kuniko Kurimura, senior consultant with the Centre for High Performance Development. “Japan has lost its way and is reeling from the loss of economic direction and political incompetence. However, in the past few weeks we have seen what may prove a deadly blow to the old order of Japan Inc. It is the disaster – maybe I should say debacle – of the bankruptcy of Sogo department store. It’s still early yet, but Sogo could be a milestone for 21st century Japan similar to the arrival of Commodore Matthew Perry’s black ships in leading to the Meiji Reformation [which was the start of Japan’s transformation to becoming a modern industrial power].”
The Sogo story is simple in outline but complicated in detail. The department store group had been founded in 1830 as a second-hand kimono shop, and was still a struggling three-store chain when Hiroo Mizushima left Industrial Bank of Japan (IBJ) after a 20-year career with the bank to join Sogo. He became its president in 1962 and embarked on an ambitious expansion programme. He was a commanding Figure who knew how to use his connections, and he was wont to boast: “The collateral is me”.
Mizushima had realized the importance of the railway station as a focal point for life in a rapidly prospering Japan. New Sogo shops began to appear, many of them close to railway stations, where the store stimulated a range of commercial business and helped Sogo to buy surrounding land, which could be used as collateral for further expansion.
By the mid-1990s, Sogo had 27 stores in Japan and another 14 dotted throughout Asia (even though the actual ownership is complicated and convoluted through a maze of cross-holdings).
Then Japan’s economic bubble burst and along with it Mizushima’s boast. Land prices dropped. This year, Sogo Finally had to admit it could not repay its debts, totalling about ¥2 trillion (almost $18 billion).
Old favours undermined
Initially, it seemed that Sogo’s powerful political connections would enable it to survive. IBJ led a consortium of 73 banks in putting together a package for forgiveness of ¥632 billion of Sogo’s debts. But this was scuppered when one of the leading banks, Shinsei Bank, which had risen phoenix-like from the ashes of the former Long-Term Credit Bank, refused to go along with the deal. Even then all was not lost, and the government prepared to lend a hand. However, the politicians did not count on an outcry about such use of public money. Shamefacedly, the ruling politicians of the Liberal Democratic Party, which had just been battered in lower house elections, decided they had better yield to popular opinion if they wanted to win the election next year, so they left the store to File for protection from its creditors.
One temptation is to dismiss Sogo as a mere department store that failed. Other businesses have suffered and disappeared since the bursting of Japan’s bubble, including some of the biggest banks. Sogo, by common consent, had been on life support for years, and a department store is hardly at the cutting edge of Japan’s modern economy to the extent that it was imperative to rescue it.
But, apart from the size of the Sogo bankruptcy – the second biggest and the largest by any non-Financial concern – there are gloomy implications for Japan’s Sisyphean struggle to get the economy moving again towards a respectable growth rate.
Government officials are still saying that growth is picking up. Haruhiko Kuroda, the vice-minister or senior international official at the ministry of Finance (MoF), admits that there are still problems, but says: “The economy is recovering, it is true. The household sector is still weak. The income situation is sluggish and personal consumption is almost Xat. The corporate sector is strong and companies are making good profits. Most economists are saying that perhaps the Japanese economy could grow by 1.5% to 2% even in the calendar year, although the government has not yet changed its forecast of 1%.
“The impact of Sogo itself will not be so serious. It is a department store and it is not concentrated in one particular part of Japan. It is diversified. So the direct impact will not be so serious. The indirect impact may be more damaging, on psychology, through the stock market and through the banking sector, on the small and medium-sized banks which have not yet built up enough reserves for bad loans.”
Other leading players of Japan Inc have also sought to downplay the damage from Sogo.
Indeed, bank chiefs have for years asked: “What Financial crisis?”, just as government officials denied for years that Japan was suffering from recession even as the country propped up the bottom of the industrial growth league. Yoshiyuki Fujisawa, the chairman of Industrial Bank of Japan – which has the heaviest exposure with almost ¥370 billion in total – insists that his bank will not suffer harm from Sogo.
“IBJ has set up sufficient provisions and will not lose any more money,” Fujisawa says. “Some of the smaller banks may face difficulties in producing good Figures, but this will be for only one year. If [the Sogo bankruptcy] had happened a year or so ago, it would have been more serious. But people in the wider world are recovering their confidence.
We expect growth of 2% or more and feel the economy has a favourable following wind.”
Fujisawa denies that there is any special connection between IBJ and Sogo through Mizushima. “He was not seconded from IBJ and in fact joined the department store because of family connections, not because he was from our bank.” Indeed, Mizushima, who is now retired and in his late 80s, joined the department store because his wife’s family were the main owners. He added that Long-Term Credit Bank, not IBJ, used to be Sogo’s main bank.
The IBJ chairman also predicts that Sogo can be pulled round, now that “Shigeaki Wada, former chairman of Seibu Department Stores and the most famous person in terms of restructuring of department stores, has joined Sogo. Sogo’s case will be settling down in due course”.
Outside economists doubt that Sogo’s or Japan’s future will be such plain sailing and predict that Sogo’s bankruptcy will generate painful waves throughout the economy. The optimists see this as the nasty medicine that will eventually bring about the economic reconstruction of Japan. Osamu Ebihara, administrator of Nippon Asset Management, points out that shoppers have drifted away from the conventional department stores, “believing that there is nothing to buy there, but shops that have new marketing ideas are successful. Even though land prices have fallen for many years, in some areas of Tokyo, notably Aoyama and Harajuku, rents are now higher than at the peak.”
Robert Feldman, economist with Morgan Stanley Dean Witter, forecasts that Japan’s growth this year will be only 0.8% and next year it will fall by 0.4%. He says that “There has been a lot of complacency about the state of the Financial system” and that in effect Japan Inc got together to sweep many problems under the carpet. Even though banks have made provisions, there are still issues of when losses will be realized and who will take the hit. Goldman Sachs in Japan estimates that the biggest 19 banks have another ¥16 trillion in bad debts that have yet to surface. The decision of the Bank of Japan on 11 August to defy the government and raise interest rates, albeit by only a quarter of a percentage point, may tip some troubled companies over the edge.
Brian Waterhouse, banking analyst with HSBC, also asserts that there is risk of further damage. He agrees that banks have made provisions, but says that there is still something rotten about the way the Japanese banks assess loans, which renders them still vulnerable. “A New York loan examiner would have a Weld day in regarding the Japanese banks,” he says, pointing out that Sogo loans were only listed as grade two, only reduced to grade three under pressure, and now of course were listed as grade four.
He points to several major companies that look vulnerable, particularly in the construction, real estate and non-bank Financial sectors. Following Sogo, Seiyu Corporation, the troubled property developer of the Saison Group, Filed for special liquidation with the Tokyo district court with liabilities of ¥517.5 billion, much of it in the form of bank debt. Well-known construction companies may be the next big debtors to be placed in the Wring line. Together the three sectors of construction, real estate and the non-banks account for 30% of banks’ lending portfolios, Waterhouse notes.
Gaps in the convoy
But the Sogo affair was noteworthy in other ways than just size. The refusal of one of the major banks to go along with the so-called “convoy” system in participating in a bail-out also made headlines. As Waterhouse explains, what usually happens is that the banks got together “under the leadership of the main bank, which told all the rest what to do and, having got all the ducks in a row like this, it was a smooth way of doing business”.
This time it was no accident that Shinsei Bank broke with Japanese practice and refused to travel in the convoy deal. Shinsei – which means “new birth” – had previously been the Long-Term Credit Bank of Japan, one of the country’s three long-term credit banks that (along with IBJ and Nippon Credit Bank) had fuelled rapid post-war growth. LTCB had been nationalized when it got into trouble and then sold to US investment group Ripplewood Holdings. The new owners were clearly not part of Japan Inc, and put in the former head of Citibank Japan, Masamoto Yashiro as the new bank’s CEO.
Rights without duties
One of the conditions of the purchase of Shinsei was that if the value of any loan fell by 20% below its face value as at March 1 2000 over a three-year period from the date of the purchase of the bank, Shinsei could request that the government’s Deposit Insurance Corporation buy it back. Waterhouse of HSBC comments that the agreement was “an excellent achievement by the Ripplewood negotiators – and almost certainly a sine qua non for the purchase”.
Nevertheless, this clause brought plenty of grumbles. One senior bureaucrat not involved with the sale commented that it was an odd agreement that gave rights to Ripplewood-Shinsei without any corresponding duties.
But as the bank forgiveness convoy
prepared to roll, Shinsei invoked the clause. Nationalistic grumblers complained that foreigners were undermining the Japanese economy.
However, investors thought it likely that even though Shinsei had pulled the plug, Japan Inc would still ride to the rescue of the department store. The plan was there, the government had given its backing. Essentially, the Financial revitalization committee had approved the plan for the Deposit Insurance Corporation to take over the loans made by Shinsei to Sogo.
The deal was for Shinsei to sell ¥200 billion in Sogo loans to the DIC, which would write off ¥97 billion, the unsecured portion. The DIC would then use the ¥105 billion bad-debt reserve that Shinsei had set up against its loans to Sogo. In a neat twist the DIC would then “forgive” the ¥97 billion without incurring a loss itself.
Some of the pillars of Japan Inc contend that public hysteria about the planned bail-out was allowed to get the better of common sense and of the simple arithmetic of the deal. Takashi Imai, former head of Nippon Steel who is now head of the Keidanren, the most powerful business lobby, said bluntly that “public anger wiped out economic rationality”. Isao Kubota, who has just retired as vice-minister of the National Lands Agency, claims that it would have been cheaper to go ahead with the rescue of Sogo in terms of the government revenues.
But critics contend that it was a badly Flawed deal that would have done little to restore Sogo’s health. It might have produced a short-term saving, but the bail-out was too poor and costly.
The Financial revitalization committee has three basic guidelines for debt forgiveness: there must be a clear and logical plan to rehabilitate the company, with a high chance of success, where debt forgiveness forms only a part of the overall plan. Secondly, there must be clear accountability for the circumstances under which debt forgiveness became necessary. Thirdly, there should be due consideration to the social consequences of not forgiving a borrower’s debts.
Flawed plans
By these tests, the Sogo plan clearly left too many questions, Waterhouse says. Taking only the Financial terms, they would have spread repayment over 30 years and left “what is left of the Sogo group wallowing in bank debt of around ¥1 trillion. Is this a cogent reconstruction plan, or a desperate hope that the company can somehow ‘muddle through’, despite the odds against it?” the HSBC analyst asked. On grounds of accountability, he also questioned the plan, noting that “the shareholders, other than the Financial institutions that are involved in the debt forgiveness plan for Sogo, get away scot-free”.
As to the social consequences, yes, Sogo has 10,000 employees and as many as 19,000 suppliers, but another department store, Nagasakiya, with twice the sales of Sogo on a parent basis and a third more staff, was allowed to go bankrupt earlier in the year.
For all that, some conspiracy theorists believe that the hope of the government picking up the tab was all part of a Machiavellian plan by which the indebted companies and banks hoped to get off the hook.
Waterhouse is quick to point out: “Bankruptcies of large companies mean not only a potential loss of party contributions, but, more menacingly, they mean employees out of work. Employees out of work are voters out of work.”
This is the real key to the Sogo mess. Its importance lies in the area where politics and economics are interwoven, particularly involving the reconstruction of Japan’s economy. The best clue came in the way the decision to pull the plug on Sogo was reached.
Ostensibly, it was Sogo’s own decision to withdraw from the debt forgiveness plan. The store’s president Kyoichi Yamada went to IBJ president Nishimura to say that the board had made the “gut-wrenching decision” to go for bankruptcy because the public backlash represented a “mortal blow” to Sogo. However, this decision was only reached after one of the most powerful LDP politicians, the party policy chief Shizuka Kamei, had called on Yamada to say that he would be “grateful” if Sogo dropped its request for debt forgiveness from the government.
Feldman of Morgan Stanley Dean Witter says openly and almost triumphantly: “Democracy is still alive and vibrant in Japan,” applauding the fact that the public discontent about the Sogo bailout got through to the politicians.
The popular outcry about putting public money for a Sogo bailout was clear enough, but the political scene is muddied. The LDP holds an uneasy coalition majority in the more powerful lower house of parliament. But the party itself is split between an old guard, of which the gaVe-prone prime minister Yoshiro Mori is the nominal leader, and some younger Figures around Koichi Kato, who believe that reforms must be pushed faster. Kato declared that the decision to let Sogo go was “unavoidable”. He hoped that with the decision “the people’s feelings of unfairness and moral hazard will now go away.”
It may not be so easy. One difficulty even of approaching faster reform is that Japanese politics has been dominated by the pork barrel, in which a good member of parliament is expected to prove himself by bringing goodies, such as roads, schools, links to the Shinkansen bullet train, whatever the cost.
Constituencies are gerrymandered in favour of the countryside where the LDP old guard still rules the roost.
MoF on the wane
To a loose extent, the old ministry of Finance kept things together by its power over the purse-strings. But in the past Five years, the MoF has lost much of its clout. Eisuke Sakakibara, previously known as “Mr Yen” from his time as international vice minister, is now a professor at Keio University and he laments the fragmentation of power: “One tragedy of the Japanese economy is that we have lost the control tower and have suffered from ad hoc interventions by politicians, which should be avoided.”
His solution would be to strengthen the prime minister’s office. “That should be the place where the leadership should be located. I am not talking in terms of personalities but of the institutional question. The problem in Japan is that the party apparatus [of the LDP] is too strong. [Shizuka] Kamei [as the chairman of the party policy committee] has enormous power. The only comparison elsewhere in the world where the party is dominant is China.”
Sakakibara adds that “I am not arguing for the re-strengthening of the bureaucracy. Japan has become infected by what I call the PHD syndrome – pull him down. Whoever gets power is an immediate target.” In other industrialised countries the average tenure of the leader is Five or six years, he argues, but in Japan, “it has been two years. It is very difficult for anyone with only two years to create and pursue a sustained policy. Look at Clinton after two years.”
He adds that it is not only a question of the political leadership: “the quality of the politicians, the quality of bureaucrats and of management in general has deteriorated.”
Japan’s organization has become too rigid especially to cope with the volatile and changing world. Sakakibara jokes that the Japanese economy has been visited by “several Trojan horses, not containing Greeks but French and Americans.” It’s a reference to Ripplewood and Shinsei, as well as to Salomon Smith Barney’s stake in Nikko Securities and the French carmaker Renault’s stake in Nissan Motor Corp.
He says he is aware that economic restructuring involves much short-term pain, “but in the medium-term it will be less costly if the restructuring plans go through.
We are living in a somewhat different world now, the new internet age where transparency is important because of free information Flows. Banks, for example, can no longer get together and decide things.”
The former vice-minister claims to be “a born optimist. We have the capacity, the technology, the competent people. Look at Japanese companies in computers and game software. What we are lacking is leadership and management, both in the public and private sectors.”
But even a born optimist may underestimate the pain that Japan may have to undergo, especially if he is not at the sharp end of it. As Robert Feldman points out: “The IT revolution is a wonderful thing, but it is going to wipe out a lot of people.” He sees unemployment rising to “5 or 6% at least”. He also adds that the Japanese have traditionally been more focused on career building and on creation of teamwork than on acquisition of skills, in which they are poorly prepared. A government that is prepared, whether because of political obligations or fears of the social consequences, to use public money to bail out a bankrupt department store is hardly in good shape to face the really tough restructuring decisions.
Moreover, although Sakakibara expresses optimism that the prime minister’s office will become the focal point of decision-making, there are a lot of obstacles to overcome First. These include the structure of the bureaucracy, under which the primary loyalty is not merely to the particular ministry, but to the bureau to which the individual civil servant belongs. Then there is the gerrymandered political system, “which leaves power in the hands of conservative rural politicians with little understanding of change, let alone interest in it,” according to Kurimura. But she too expresses some optimism that Sogo oVers a start. There was a clear message from the public which the politicians and bankers had to heed.
This is a society which has too many problems. The jiving of the Elvis wannabes may be fun, but the parade of the young girls says there are major problems with the educational and social system. But the lesson of Japan’s history of the last century is that change can come rapidly. No-one thought that the arrival of the American ships would bring about the Meiji restoration or that that would inspire the industrial and economic revolution that made Japan a great power. The decisions over Sogo indicate a realisation that Japan needs more reform and change. It could be the First step.
