AFTER three decades of ultra-loose monetary policy, even small hikes in interest rates by the Bank of Japan (BOJ) are poised to fuel an increase in the number of zombie companies that could be tipped into insolvency.
Bankruptcies topped 5,000 cases for the first time in a decade between April and September, a report by Tokyo Shoko Research showed earlier this month. Those 5,095 firms collectively account for almost 1.4 trillion yen (S$1.8 trillion) yen in debt, with the largest slice coming from the service industry.
Defined as businesses that struggle to pay the interest on debt from operating profit alone, zombie companies have survived for years in Japan thanks to low rates and government support. Unable to invest or hire, they are stifling the emergence of new enterprises and preventing job mobility. Clearing them out may not be such a bad thing, and make way for new, healthier enterprises, according to Nicholas Smith, strategist at CLSA Securities Japan.
“None of them will be missed,” Smith said. “We have got to a situation where we are not concerned about unemployment in Japan. In fact, what we are most concerned about is a severe labour shortage.”
A 0.1 percentage point rise in the benchmark rate could boost the number of these corporate zombies, which spend most of their profit paying down debt, to around 632,000 from around 565,000, according to a report earlier this year by the research firm.
One of them is HIS, one of the country’s largest travel agencies. The Tokyo-based company posted 1.4 billion yen in operating profit in its latest fiscal year, which ends in October, but spent 1.5 billion yen on net interest expenses.
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Known for its low-cost package tours, HIS has been struggling due to the dearth of post-pandemic outbound travel from Japan, in contrast to the flood of tourists visiting the country. That’s partly due to the weak yen, another legacy of decades of low interest rates. HIS took on more liabilities after 2020 and now holds 30 billion yen in debt, according to data compiled by Bloomberg.
The company declined to comment.
The term “zombie company” was coined in 2008 by three professors, including University of Tokyo professor Takeo Hoshi. He defines a zombie as a company that has not addressed operational concerns but has avoided bankruptcy thanks to the financial support of the government or creditors.
The Bank for International Settlements, on the other hand, defines one as a firm founded more than 10 years ago that has logged an interest coverage ratio lower than one for more than three years.
One of the biggest bankruptcies this year was MSJ Asset Management, which held 641.3 billion yen when it was liquidated by Mitsubishi Heavy Industries after its failure to enter the domestic jetliner business.
Others include the plastics recycling company Eco Research Institute, medical device supplier Hokushin Medical and Asahi Food Create, which sold pre-prepared food.
Besides banking and insurance, every sector and region in Japan saw an increase in bankruptcies during those six months. As interest rates are hiked and major industries such as transportation, artificial intelligence and software see aggressive competition from global players, that number is set to keep growing.
Even Japan’s larger companies are not immune to the prospect of insolvency anymore. Panasonic Liquid Crystal Display (LCD) topped the nation’s list of bankruptcies in 2023. Competition made the LCD panel business shift its focus to the automotive and industrial sectors, but trade tensions between the US and China led its parent company to shutter the business.
Panasonic Holdings decided to liquidate the unit’s assets and waive the 583.6 billion yen it owed in loans to another one of its subsidiaries. The electronics maker’s move in 2021 to adopt a holding company structure sought to improve the accountability and profitability of each division. In May, chief executive officer Yuki Kusumi said he will seek to improve underperforming units by finding their “best owner”.
Debt-laden companies in Japan are rapidly growing in number, in some measures even faster than in 1992 after the collapse of its asset price bubble. Zombie companies accounted for 14 per cent of listed firms in Japan, according to Tokyo Shoko Research.
Zombies are found concentrated in Japan’s sectors where the labour shortage is most prominent, namely restaurants, hotels, transportation and tourism.
An unproductive company cannot maintain employment or competitiveness, it cannot buy or sell and it surely cannot turn a profit. Especially outside of metropolitan population centres, persistently struggling companies make investment difficult.
But decades of cheap credit and generous handouts have bred a generation of unproductive companies with teetering balance sheets. During the pandemic, the Japanese government funnelled trillions into these kinds of businesses – some experts believe those “no interest, no collateral” loans may have been a major catalyst for the recent spike in bankruptcies.
When a small or mid-sized firm goes under, their employees are let loose, free to find work elsewhere, hopefully at a company that’s more profitable, productive and better at balancing its books. If anything, it’s a natural if not intended byproduct of the BOJ’s rate hikes, one could that help counteract an ongoing labour shortage as the country’s population ages and shrinks.
“Japan’s economy is reaching a turning point and we need a change in mindset,” said Naoki Hattori, senior economist at Mizuho Research & Technologies.
An increase in bankruptcies is inevitable, Hattori said, but that does not mean all of these companies should be left to their demise. The challenge is deciding which companies can be helped, and how, he added. Each one is a unique operation that needs a tailored approach, and some experts argue that local financial institutions are in the best position to do it.
“The goal is not to increase bankruptcies. The goal is to reduce debt,” said Mitsuhiro Harada, director of research at Tokyo Shoko Research. “To a large extent, this is about protecting our way of life.”
So far, it does not appear likely that the BOJ will be in a hurry to hike interest rates. Although the BOJ kept monetary policy in place last month, Hattori expects the BOJ to raise rates to as high as 0.5 per cent sometime between January and March. That would be its highest since the early 1990s and could push many companies further into debt or into bankruptcy.
As rates go up, the yen strengthens and brings down inflation to give consumers some respite, CLSA’s Smith said.
“Of course, it’s stressful, but the rest of the world has to deal with it,” Smith said. “The economy, as a whole, does a lot better with higher interest rates.” BLOOMBERG
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