Japan's 'zombie' firms kept afloat by banks
By Tim Kelly
Bloomberg News Service
TOKYO — In the 45 years he has worked for Kumagai Gumi Co. and other Japanese building contractors, Koichi Sekine says, business has never been this bad.
"When the economy was good, there was always work," said the 62-year-old electrician, who is among the one in 10 Japanese workers employed by the construction industry.
"Now all I get is just low-paid jobs, and not many of them."
Kumagai, Hazama Corp. and rival contractors are mired in debt from a 1980s land-buying spree and hobbled by slumping demand. Seven listed construction companies filed for bankruptcy this year; Kumagai's debt is 80 times its market value.
More will fail or be forcibly merged, analysts say, as banks meet government demands to shed bad loans, curbing a half-century of ties between builders and banks. That means thousands of workers would lose their jobs in a nation unacquainted with mass unemployment even after a decade-long economic slump.
Two years after Prime Minister Junichiro Koizumi took office insisting "there is no gain without pain," construction workers may fall victim to his plans to revitalize the economy by reducing government spending. Even politicians opposed to Koizumi's policy say the construction industry, which has added jobs during a decade of falling demand, must pare payrolls.
"It's not really feasible to keep 6 million workers in construction," said Taro Aso, a Koizumi rival and policy council chief of the ruling Liberal Democratic Party. "Those who are qualified should move to other industries."
Japan spent $1.1 trillion on public works to shore up the economy in the 1990s, a decade in which the nation slid into three recessions. Contractors added half a million jobs, taking on workers dumped by manufacturers, retailers and other industries to build more roads, bridges and dams. Manufacturing jobs fell 15 percent in the same period.
The result: Construction companies, which employ a total of 6.32 million people in a nation of 127 million people, have become examples of what analysts term "zombie companies." They are kept afloat by bank credit and debt waivers instead of profit.
"Construction served as a kind of social welfare project," said Takehiro Sato, an economist at Morgan Stanley in Tokyo.
Koizumi's plan to cut public debt, already 140 percent of gross domestic product, comes as sinking demand for homes, offices and other private projects causes construction outlays to drop by 6 percent to 57.1 trillion yen ($466 billion) in the fiscal year through March, the government says.
That may push one or two large contractors out of business in the next six months and send a wave of failures rippling through their subcontractors, said Mark Brown, an analyst at ING Baring Securities.
Kumagai shares, down 35 percent this year, and Hazama, down 18 percent since January, both closed unchanged on the Tokyo Stock Exchange.
The most recent construction failure was Kokune Corp., a home- and school-builder, which joined six others this year, including 140-year-old Sato Kogyo Co.
"We wouldn't be surprised to see more bankruptcies and job losses," said Matsutoshi Taguchi, an official at the General Federation of Construction Workers Union, whose 710,000 members make it the industry's biggest labor group.
Japan's property bubble has been deflating since mid-1989, when the Bank of Japan began raising interest rates. Land prices dropped for an 11th year in the 12 months through July, with residential property down 4.3 percent and commercial land 7.2 percent lower.
Tumbling real estate prices would have led to construction bankruptcies long ago without shareholding ties between banks and contractors that date from the end of World War II.
As Japan rebuilt, contractors and companies in many other industries bound themselves to bankers with cross-shareholding relationships that gave companies easy access to loans and gave banks a say in management. When the economy began to slide, banks continued to lend, hoping to protect equity stakes that are now dwarfed by unpaid debt.
Take a look at Kumagai Gumi. Japan's fifth-largest contractor reported a first-half operating profit this week equivalent to $9.7 million on sales of $2 billion.
The company is afloat today only after a 430-billion-yen bailout two years ago, Japan's biggest at the time. Its biggest lender is Sumitomo Mitsui Banking Corp., which is also the company's second-biggest shareholder, Bloomberg Data shows.
"We will continue to support the company," Sumitomo Mitsui spokesman Takashi Morita said in an interview on Wednesday.
At Kajima Corp., Japan's biggest contractor, five of the top nine shareholders are banks. Sumitomo Mitsui is ranked third, with a 5 percent stake. At Hazama, Mizuho Holdings Inc. is the second- biggest shareholder, with 5 percent.
Some investors say bankruptcies will bolster stronger firms by reducing competition.
"Up to now many contractors have clung on, but the failure of zombie companies will help," said Akihide Kinugawa, who helps manage 20 billion yen at T&D Asset Management Co. "Industry-wide consolidation would make the sector more interesting for investors."
