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The Honolulu Advertiser

Posted on: Tuesday, April 9, 2002

Japan's efforts to deal with bad debt stalling

By Brett Cole
Bloomberg News

TOKYO — The Japanese government's debt collecting agency has 20 officers trained in martial arts and small arms use, an important skill when much of the $33 billion of loans it aims to recover is owed by yakuza gangsters.

Japan's mafia isn't the only clique the Resolution and Collection Corp. is finding hard to crack. Foreign investors say the government and banks want to keep non-performing assets off the auction block, still hoping their value will rise 12 years after a property and stock market bubble burst.

"The deal flow is more shallow than most people would expect for an economy desperate in its need for restructuring." said Lee Daniels, president of Newbridge Capital Japan LLC, a $1.6 billion fund which plans to invest in mostly financial institutions in Asia. "Companies are reticent about restructuring."

In seven years, the agency barely dented bad loans, buying 8.7 trillion yen ($65.5 billion) in debt, 4 percent of the total amount of loans that Goldman Sachs Group Inc. estimates are questionable. In many cases, the loans were purchased for more than their market price.

Half of the agency's debts have been left uncollected. It also has yet to sell a bad loan to foreign investors although some, such as Newbridge and Lone Star Funds, have expressed interest.

Nearly 99 percent of the RCC's purchases are from banks that have failed, and banks aren't recognizing loans as non-performing.

Each purchase requires approval from Prime Minister Junichiro Koizumi.

"Imagine getting permission from the Prime Minister" to buy non-performing loans, said Cris Kurihara, head of the overseas business department at the Resolution and Collection Corp. "It's not easy in Japan even when we try to save the Japanese economy. There is always red tape."

The need for action is getting more urgent, investors say. An average of 55 companies are going bankrupt a day, defaulting on loans whose collateral is often backed by real estate. Last year, land prices fell an average 5.9 percent, their fastest pace in nine years.

Still, Japan's ruling Liberal Democratic Party doesn't seem to want to expand the agency's role. It's betting that an eventual economic recovery will help creditors meet payments and reduce the level of non-performing loans.

"There is no need to rush the disposal of non-performing loans as any gain in land prices or the stock market would help clear a significant portion of Japan's bad debt problem," said Taro Aso, policy chief for the party.

Goldman estimates that non-performing loans makes up 39 percent of all bank lending. According to Kurihara, this makes banks hesitant to dispose of bad debt because realizing losses would make them insolvent.

Kurihara also notes that much of the debt is linked to Japan's yakuza. "There are lots of mob loans," he said. "The yakuza bought real estate. The mortgage is with the failed financial institution and we have bought the mortgage from them. The private sector doesn't want to collect the money."

That's where the debt squad comes in. The 20-person unit specializes in collecting loans from potentially violent customers.

But the agency's troubles aren't confined to gangsters.

Kurihara said a man who owed several million yen in loans came to the agency's offices last year to protest his obligations. While there, the man set fire to a small section of the building.

Kurihara, 55, is so busy he has little time for his hobby, golf, or the Japanese version of slot machines, pachinko, even though his agency owns more than its fair share of facilities for both. It holds more than 50 golf courses, and, Kurihara said, is "the biggest pachinko owner if you count the number of pachinko mortgages we have."