Japan: Selected Issues
Author: International Monetary Fund
Publication Date:
05 Sep 2003
eISBN:
9781451820560
Language:
English
Keywords:
ISCR; CR; firm; unemployment benefit; worker; debt-asset range; indebted firm; bank asset quality; firm size; number of firm; Corporate sector; Wages; Stress testing; Nonperforming loans; Financial statements
Download PDF (762.6 KB)

The Selected Issues paper analyzes the health of the corporate sector, areas of vulnerability, and the effect of corporate restructuring in Japan. It reviews the deflation and associated economic problems of Japan, demonstrates the impact of fiscal policies on public debt, and estimates the expenditure and revenue adjustments needed to restrain the growth of debt. It also analyzes the issues in the Japanese labor market, structural developments, changes in the behavior of stakeholders, policy issues on employment insurance, and the social safety net.

Abstract

The Selected Issues paper analyzes the health of the corporate sector, areas of vulnerability, and the effect of corporate restructuring in Japan. It reviews the deflation and associated economic problems of Japan, demonstrates the impact of fiscal policies on public debt, and estimates the expenditure and revenue adjustments needed to restrain the growth of debt. It also analyzes the issues in the Japanese labor market, structural developments, changes in the behavior of stakeholders, policy issues on employment insurance, and the social safety net.

I. Health and Vulnerability of the Corporate Sector in Japan1

A. Introduction

1. Following the bursting of the bubble in the early 1990s, the corporate sector in Japan has entered a period of significant adjustment. The sector has experienced important changes, including the “Big Bang” financial reforms beginning in 1996, the financial crisis of 1998/99, the decade-long economic slump, and continued deflation. In response to the decline in asset prices and economic slowdown, corporations have been repairing their balance sheets and consolidating their operations in an effort to strengthen their profitability. However, despite some progress, the pace of corporate restructuring has been slow as the sector remains highly leveraged and profitability low while corporate bankruptcies and unemployment rates have reached historic highs. The weak corporate sector has in turn hurt the asset quality and earnings of the financial sector and held back prospects for a sustained recovery.

2. The purpose of this paper is to analyze the health of the corporate sector, identify areas of vulnerability, and assess the progress made so far in restructuring. The paper relies both on aggregate survey and firm-level data to examine not only general trends but also differences across sectors and firms. The paper also examines the exposure of the financial sector to weaknesses in the corporate sector and conducts some basic stress tests to assess the potential impact of negative shocks on the sector.

3. The Japanese corporate sector has made significant progress in deleveraging, but leverage still remains high and core profitability weak. Survey figures show that although debt-equity ratios continue to fall and liquidity remains strong, leverage is still high relative to other industrial countries and profitability is weak. Using financial statement data for 3,374 nonfinancial listed corporations, we find that weak companies account for a significant portion of the total debt and continue to make losses. In 2002, despite the low interest rates, companies with an interest coverage ratio (ICR) of less than one (here defined as “nonperforming”) accounted for 16 percent of total debt while those with negative operating profits accounted for 10 percent of total debt. Moreover, close to 25 percent of these weak companies recorded negative operating profits for 2 years in a row. The persistence of these weak borrowers highlights the need for further restructuring and the exit of nonviable firms and the difficulties in detecting corporate distress in a low nominal interest rate environment. A stress test of the corporate sector shows that many of these weak companies are also vulnerable to an increase in interest rates and/or a sharp slowdown in earnings.

B. Background and Aggregate-level Analysis of the Corporate Sector

4. Although the Japanese corporate sector has made significant progress in deleveraging, leverage still remains high compared to other major economies. According to the Ministry of Finance (MoF) corporate survey data, the aggregate debt-equity ratios for the nonfinancial corporate sector has been on a trend decline since the late 1970s (Figure).2 Debt-equity ratios have fallen from a peak of 287 percent in 1975 to 155 percent in 2002 with the pace of deleveraging having accelerated in the late 1990s. However, leverage is still high relative to other industrial countries such as Germany (80 percent), U.K. (45 percent), and the U.S. (70 percent) (Table).3 The debt-to-sales ratio, another measures of leverage which is less subject to lags in asset valuation, shows that leverage peaked in 1993 and has since come down only slightly. The nominal stock of corporate debt has fallen by about 10 percent from 1995 to 2002; however, after accounting for deflation, the real stock of debt has come down only slightly (Figure). As a share of GDP, corporate debt has fallen from 116 percent in 1995 to 102 percent in 2002—the same level as in 1989 before the bursting of the bubble (Figure).

uA01fig01

Japan: Leverage Indicators, 1970 - 2002

Citation: IMF Staff Country Reports 2003, 282; 10.5089/9781451820560.002.A001

Source: MOF Corporate Survey
uA01fig02

Japan: Nominal vs. Real Stock of Corporate Debt

(1995 = 100; GDP deflator-based)

Citation: IMF Staff Country Reports 2003, 282; 10.5089/9781451820560.002.A001

Source: MOF Corporate Survey.

Financial Indicators for the Corporate Sector, 1990–2002

article image
Sources: MoF Corporate Survey; national sources.

Ratio of operating profits to interest expense.

Ratio of operating profits to total assets.

Ratio of current profits to shareholder equity.

5. Liquidity has declined from its peak in the 1990s but as a whole, remains high. Basic liquidity indicators, such as the current ratio (current assets divided by current liabilities), show that the corporate sector on an aggregate basis has sufficient liquid assets to meet short-term obligations (Figure). The current ratio fell by 10 percentage points in 2002, but is still above 100 percent. The quick ratio, a stricter measure of liquidity which excludes inventories—the least liquid among current assets—has showed some improvement since 1997. While corporations have held steady their level of cash and deposits, they have been drawing down their holdings of inventory and securities (Figure). The decline in security holdings is partly in response to the unwinding of cross-shareholdings. The maturity structure of corporate debt has also improved as the share of short-term debt in total debt has fallen from 46 percent in 1990 to 38 percent in 2002.4

uA01fig03

Japan: Liquidity Indicators, 1980 - 2002

Citation: IMF Staff Country Reports 2003, 282; 10.5089/9781451820560.002.A001

Source: MOF Corporate Survey.
uA01fig04

Japan: Stock of Liquid Assets and Cash and Deposits, 1990 - 2002

(In billions of yen)

Citation: IMF Staff Country Reports 2003, 282; 10.5089/9781451820560.002.A001

Source: MOF Corporate Survey.

6. Despite the improvement in their balance sheets, profitability of the sector as a whole remains weak. Investment returns, measured either with assets or shareholder equity, have declined steadily and remain at historic lows (Figure). On an operating income basis, return on assets (ROAs) in the corporate sector has remained flat since 1993. Compared to other G-7 countries, the ROA in Japan is about one-half to one-quarter that of Canada, the UK, and the US (above Table). After accounting for financial and other non-operating income and expenses, the return on equity (ROE) has also reached historic lows. The declining rates of returns highlight that despite the improvements their balance sheets, corporations in Japan have been unable to generate a recovery in profitability and thus remain a source of weakness for the economy.

uA01fig05

Japan: Profitability Indicators, 1980 - 2002

(in percent)

Citation: IMF Staff Country Reports 2003, 282; 10.5089/9781451820560.002.A001

Source: MOF Corporate Survey.

7. The decline in profitability is due in part to the persistent high level of excess capacity. Despite the progress in deleveraging, the corporate sector continues to suffer from excess capacity. Separating the calculations of “net” ROA into its two components—profit margin (net income/operating revenue) and asset turnover (operating revenue/total assets)—shows that the decline in profitability has been driven largely by a reduction in asset turnover (Figure). While profit margins are roughly at the same level as in the 1980s, asset turnover (i.e., the degree of utilization of assets) continued to fall, suggesting a significant amount of assets remain unused in the production process. Other indicators, such as capacity utilization rates, also point to a high degree of excess capacity in the sector.

uA01fig06

Japan: Factors Driving Profitability, 1980 - 2002

(In percent)

Citation: IMF Staff Country Reports 2003, 282; 10.5089/9781451820560.002.A001

Source: MOF Corporate Survey.

8. Despite the decline in profitability, companies have been able to remain current on their debt obligations, partly due to the decline in interest rates. Interest coverage ratios (operating profits divided by interest expense) have risen steadily, from 1.6 in 1990 to 3.4 in 2002 (Figure). A broader measure of coverage that includes debt service payments falling due within one year and liquid assets that are available to meet short-term payments shows a slight decline but the ratio still exceeds one, suggesting that the corporate sector as a whole has sufficient resources to remain current on both its interest and principal payments. Along with the sharp decline in long-term government yields, corporate borrowing rates have fallen sharply, from an average of 6.8 percent in 1991 to a record low of 2 percent in 2002 (Figure). Thus despite low profitability, the capacity of the corporate sector to service its interest payments has actually improved on account of the decline in interest rates.

uA01fig07

Japan: Indicators of Corporate Debt Sustainability, 1980 - 2002

Citation: IMF Staff Country Reports 2003, 282; 10.5089/9781451820560.002.A001

Source: MOF Corporate Survey.
uA01fig08

Japan: Interest Rate on Corporate Debt, 1990 - 2002

(in percent)

Citation: IMF Staff Country Reports 2003, 282; 10.5089/9781451820560.002.A001

Source: MOF Corporate Survey.

9. More recently, the corporate survey showed a modest recovery in corporate profits at the end of 2002 followed by a slight decline in Ql 2003. Operating profits and sales rebounded in the 3rd and 4th quarters of 2002 in line with the modest cyclical recovery. However, the improvement was mixed, as the gap between manufacturing and non-manufacturing firms and between small and large companies widened. Manufacturing operating profits rose for four straight quarters (s.a., q/q) while nonmanufacturing profits fell for three quarters. In addition, larger companies (those with a paid-in capital of ¥1 billion or more) showed strong growth in operating profits and sales while those for smaller firms (with a paid-in capital of between ¥10 million and ¥100 million) showed sharp declines. In Ql 2003, both operating and recurring profits fell, led by a decline in manufacturing profits (Jerram 2003; Matsuoka 2003).

C. Firm-Level Analysis of the Corporate Sector

10. While the aggregate figures are useful in showing overall trends, they may mask considerable differences across firms and sectors. Summary averages of key ratios may actually hide more than they show, particularly if the data are polarized between good and bad companies.5 Information at the firm-level would help to reveal changes in the distribution across firms and across sectors. In particular, weak companies may be a significant source of vulnerability if they account for a large share of corporate debt.

11. To analyze the distribution of companies, we use the Worldscope database containing financial statement data for Japanese listed corporations from 1993-2002. The dataset contains 3,680 nonfinancial corporations of which 3,374 were still active in 2002 (2,247 in 1993)6 and contains information on corporate balance sheet, income and cashflow statements. The dataset represents around 34 percent of nonfinancial corporate liabilities in Japan (based upon flow of fund statistics) and spans a ten year period during which the corporate sector has undertaken significant changes as a result of the weak economy, continued deflation, and restructuring.

12. The sample is mainly an industrial dataset. The dataset is dominated by manufacturing companies which account for the largest share in terms of number of firms (48 percent), debt (38 percent) and employment (64 percent) (Table).7 Following manufacturing in terms of debt size are transportation and public utilities and wholesale trade. The dataset also contains a significant number of companies in other sectors, such as construction (247), retail trade (360), and real estate (85).

Summary of Database for Nonfinancial Corporations, 2002

article image
Source: Worldscope.

13. Using firm-level data creates a bias in the analysis towards large companies. Since the dataset consists only of listed companies, the analysis will focus mainly on large companies with an average capital of around ¥60 billion. Consequently, small and medium-sized firms (SMEs) whose assets account for around 40 percent of the total for the corporate sector are largely excluded from the analysis.8

14. However, the inherent bias in using listed company data provides a useful upper bound on the progress in corporate restructuring and a lower bound on the degree of vulnerability. Although SMEs are excluded from the analysis, the MoF Corporate Survey clearly shows that the financial conditions of SMEs are significantly worse than for larger companies. The table shows financial indicators for the corporate by firm size. In terms of leverage (here measured as the ratio of liabilities to equity), small firms with a capital of less than ¥10 million have a significantly higher average leverage ratio than large firms—in 2002 by almost a factor of 5. The table also shows that while large and medium-sized firms have made progress in reducing their debt-equity ratios during 1998-2002, smaller firms have actually increased their leverage so that their average leverage ratio now exceeds 1,000 percent. Also in terms of profitability, smaller firms have significantly lower return on assets (ROA) than large firms. Since smaller firms are in financially worse shape than larger firms and have shown less progress in restructuring, our analysis will serve as an upper bound on the progress in corporate restructuring and a lower bound on the degree of vulnerability for the sector. In other words, we will show a better picture for the corporate sector than reality.

Financial Indicators for the Corporate Sector by Firm Size, 1997–2002

article image
Source: MoF Corporate Survey.

D. Progress in Corporate Restructing

Leverage

15. The progress in deleveraging has varied across sectors. Consistent with the MoF data, the average debt-equity ratio for listed companies has declined steadily since the early 1990s. However, the progress has been uneven across sectors and across firms. The figure shows the debt-equity ratios in 1993 and 2002 by sector ranked according to their initial level of leverage in 1993. While sectors such as mining, wholesale and services recorded significant declines in debt-equity ratios during 1993-2002, other sectors such a construction, retail trade, and manufacturing have changed little, though they started from much lower bases.

uA01fig09

Japan: Debt-Equity Ratios by Sector, 1993 vs. 2002

Citation: IMF Staff Country Reports 2003, 282; 10.5089/9781451820560.002.A001

Source: Worldscope.

16. Although the average leverage for the overall corporate sector has declined, a significant share of corporations remain highly leveraged. Here, we plot the number of firms according to leverage and use debt-asset ratios instead of debt-equity ratio to avoid the problem of negative book value equity (Figure). The plots show that in 1993, the distribution in the number of firms was fairly even over the debt-asset range of 5-40 percent but then drops rapidly thereafter. The sample in 2002 shows that the distribution has shifted to the left as many companies have made progress in deleveraging.9 In particular, the concentration of firms at around 5 percent has increased sharply. However, the plot for 2002 also shows that heavily indebted firms still maintain a large presence at the right end of the distribution. For example, about 27 percent of listed companies in 2002 had a debt-asset ratio that exceeded 40 percent—a figure that has changed little since 1993.

uA01fig10

Japan: Profitability Distribution of Debt-Asset Ratios,

(1993 vs. 2002; Unweighted; By number of firms

Citation: IMF Staff Country Reports 2003, 282; 10.5089/9781451820560.002.A001

Source: Worldscope.

Profitability

17. Average profitability for listed companies has improved slightly over the period, though progress varied across sectors. The 3-year average ROA increased from 3.1 percent in 1995 to 3.9 percent in 2002. This is in contrast to the MoF Corporate Survey results which showed flat profitability over the period. The difference is likely due to the bias in the sample towards larger listed firms which have made relatively more progress than smaller firms in restructuring. Interest coverage ratios (ICR), measured as the ratio of earnings over interest expense, also improved during 1993-2002, but again the progress varied across sectors (Figure). The average ICR increase from 1.5 to 3.8 during the period. Most sectors recorded strong increases in ICR. For example, for manufacturing and services, ICRs increased by almost 3 times. Other sectors, such as construction and wholesale trade, recorded significantly less progress.

uA01fig11

Japan: Interest-Coverage Ratios by Sector, 1993 vs. 2002

Citation: IMF Staff Country Reports 2003, 282; 10.5089/9781451820560.002.A001

Source: Worldscope.

18. However, a closer examination reveals that the improvement in ICR is driven more by the sharp decline in funding costs than an increase in operating profitability. Average interest rate on outstanding debt fell from close to 5 percent in 1993 to slightly above 2 percent in 2002 as long-term yields have fallen to historic lows (Figure). All sectors recorded significant declines with mining and agriculture leading the pack. Interestingly, the sectors where NPLs are reported to be the highest—real estate, retail trade, and construction—had interest rates that were below the average, suggesting that credit risk may not have been a significant factor in determining borrowing costs to these sectors.

uA01fig12

Japan: Average Interest Rate on Debt, 1993 vs. 2002

Citation: IMF Staff Country Reports 2003, 282; 10.5089/9781451820560.002.A001

Source: Worldscope.

Financial vulnerability

19. To gauge the exposure of the financial sector to corporate weaknesses, we examine corporate debt according to degree of profitability. Profitability here is measured by the ratio of operating profits to total debt, i.e., the rate of return on borrowing. Debt includes both bank loans and bond obligations. The inverse of this ratio is equivalent to the number of years that a firm needs to pay off debt with its operating profits (excluding interest payments). For example, companies with a 1 percent rate of return would need 100 years of operating profits to pay back their principal obligations while companies with an operating profit ratio of 10 percent require only 10 years.10

uA01fig13

Distribution of Debt by Profitability, 2002

Citation: IMF Staff Country Reports 2003, 282; 10.5089/9781451820560.002.A001

Source: Worldscope.

20. The data shows a strong polarization between good and bad performers weighted by their debt size. The figure shows that in 2002 there existed a cluster of good companies with an operating profit ratio equal to or above 7 percent.11 These “good” companies accounted for ¥109 trillion in debt or 47 percent of the total. However, at the same time, there was a large cluster of very weak companies with an operating profit ratio of below 3 percent (including those with negative profits). These companies accounted for ¥77 trillion or 33 percent of total debt. For these companies, it would take 33 years or more to repay their debt out of their operating profits.

21. These weak companies account for a significant portion of the total debt and have done so for a number of years. Using a panel data set allows us to examine not only the number of distressed companies in a given period but also the persistence of these weak firms in the sample. Looking back in time, we find:

  • In 2002, despite the low interest rates, companies with an ICR of less than one (here defined as “nonperforming”) numbered 760 out of 3,352 companies and accounted for 16 percent of the total debt. Of these, 299 companies recorded ICRs of below one for two consecutive years; 177 companies for three years in a row.

  • Companies with negative operating profits numbered 291 in 2002 and accounted for 10 percent of total debt; of these, 187 companies recorded negative operating profits for two years in a row. These companies were mainly in manufacturing and wholesale trade.

22. The persistence of these weak borrowers highlights the need for further restructuring and exit of nonviable firms. The large number of companies who remain active and listed despite making negative profits for two years in a row and having an ICR of below one suggests that further restructuring and exit is needed. Moreover their continued presence represents a significant source of vulnerability for the corporate sector. More proactive use of the insolvency system and of the out-of-court workout guidelines would allow creditors and debtors to work out their difficulties before they become intractable and help to limit potential losses. The exit of nonviable firms would also free up resources that could be more productively used elsewhere.12 In addition, tightening the delisting criteria to place distressed companies on the watch list for removal at an earlier stage would help send a signal to creditors (and to the market) to initiate workout or bankruptcy procedures.13

23. The results also suggest that low nominal interest rates have weakened the usefulness of the term “nonperforming loan” in detecting financial distress by easing the financing constraint on borrowers. Large companies with an ICR of less than one accounted for 16 percent of total debt in the sample which is significantly higher than the official NPL ratio for all banks of roughly 8 percent in September 2002.14 In Japan, NPLs are defined as those loans that are in nonaccrual status for 3 months or more and restructured loans for which the terms are modified in favor of the debtor. However, with nominal interest rates at historic lows, many companies are able to remain current on their interest payments despite being close to insolvency. Thus official NPL figures may not cover these so-called “impaired” loans which may be performing in the technical sense, but whose repayment capacity are in doubt. Low nominal interest rates have highlighted the need for strong supervisory oversight and regulatory pressure to ensure that creditors identify and take action against their problem borrowers.15

E. Stress Tests

24. One advantage to using firm-level data is that we can conduct basic stress test analysis to assess the vulnerability of the corporate sector to various adverse shocks. The purpose of the stress test would be to estimate the potential impact of different macroeconomic and financial shocks, such as a rise in nominal interest rates or a slowdown in earnings. The stress tests builds upon the analysis done in the previous sections which identified areas of vulnerability in the corporate sector. With information on the exposure of individual firms, we are able to estimate the sensitivity of the corporate sector to potential adverse shocks and their ability to remain current on their debt obligations. Significant declines in their debt service capacity could lead to an increase in the implied NPL ratio, and in some case result in solvency problems.

uA01fig14

Japan: Growth in Nominal GDP vs. Corporate Profits

(1985 - 2002; in percent)

Citation: IMF Staff Country Reports 2003, 282; 10.5089/9781451820560.002.A001

Source: MOF Corporate Survey.

25. Here, the stress test looks at the impact of an interest rate shock and a sharp slowdown in earnings. Since the early 1990s, corporate funding rates have fallen steadily, providing the corporate sector with a window to restructure their balance sheets at relatively low costs. With the flattening of the yield curve, corporations have been able to refinance and lengthen their debt maturity. However, at the same time, the risks of a potential sharp rise in borrowing rates have increased. A sharp sustained rise in nominal long-term rates could add to funding pressure on corporations, particularly those who have made less progress in deleveraging. Given its close links to the financial sector, corporate distress could quickly spill over, affecting asset quality and confidence in the banks. A significant decline in corporate earnings could also affect corporation’s ability to remain current on their debt service payments and to rebuild their capital base. The figure shows that earnings are very volatile and sensitive to the business cycle.

26. The shocks were calibrated using the historical record of movements in the corporate borrowing rates and earnings. Summary statistics for 1-year changes in interest charged on borrowing and in operating profits are shown in the table during the period 1980-2002. A one-standard deviation change in interest rates was 86 basis points; the maximum increase was 321 basis points in 1980. A one-standard deviation in the annual growth of corporate earnings was estimated at 16 percent. For the sake of simplicity, we use as a shock a 100 basis point increase in borrowing rates and a 15 percent decline in corporate earnings—both roughly corresponding to a one-standard deviation shock from the mean.16

Calibration of Stress Test Shocks

article image
Source: MoF corporate Survey; Worldscope.

27. The stress test results shows that weak corporations are relatively more vulnerable to an increase in interest rates than a slowdown in corporate earnings. An increase in interest rates by 100 basis points would increase the number of firms with an ICR of below 1 by 21 percent and roughly double the size of implied “NPLs” (Table; from the baseline scenario 0 to scenario 1). The NPL ratio would rise from 16 percent to 32 percent of total debt. Given its large presence in the data, the largest increase would take place in the manufacturing sector whose NPL ratio would rise from 22 percent to 33 percent. Although the average NPL ratio for the entire sample is 32 percent, for some sectors such as agriculture, mining, and wholesale, the implied NPL ratio would exceed 70 percent, though this is partly due to the small sample size for these sectors and the presence of several large firms whose interest coverage ratios are close to the borderline. The least affected would be the transportation and public utilities sectors.

Summary of Stress Test Results, 20021

article image
Source: Worldscope.

The total number of firms is 3,352; the total amount of debt is ¥233 trillion.

28. A 15 percent drop in earnings, which is the annual average decline in earnings over the past 2 years, would raise the implied “NPL” ratio to 20 percent. The number of companies with an ICR of below 1 would increase by only 6 percent, but the size of NPLs would rise by 24 percent (above Table; from the baseline 0 to scenario 2). The NPL ratio would rise from 16 percent to 20 percent of the total. While the impact of a one-standard deviation shock to earnings is less than in the interest rate scenario, the effect varies across sectors. Here, retail and wholesale trade would record the largest increase in their implied NPL ratios, to 21 percent and 51 percent respectively.

F. Conclusion

29. Although the corporate sector has made significant progress in deleveraging, leverage still remains high and profitability weak. Aggregate indicators of the corporate sector show that debt-equity ratios for the sector have been on a trend decline since the late 1970s, but still remain high relative to other industrial countries. Despite the improvement in balance sheets, the profitability of the sector remains weak, largely due to the persistent high level of excess capacity. Low nominal interest rates have helped companies to remain current on their debt service obligations despite weak profits, and highlighted the difficulties in detecting corporate distress based solely on indicators of historical payment record. Under these conditions, strong supervisory oversight and regulatory pressure is needed to ensure that creditors identify and take action against their problem borrowers.

30. Since corporate lending accounts for around % of bank loans, banks are directly exposed to weaknesses in the corporate sector, and without a sustained improvement in corporate profitability, bank asset quality will remain weak. Despite the improvement in balance sheets and the decline in interest rates, core profitability has remained stagnant. A closer analysis of the distribution of firms shows that weak firms account for a sizable portion of corporate debt and represent a significant source of vulnerability in the sector. Moreover, these weak companies are vulnerable to an increase in interest rates and/or a sharp slowdown in corporate earnings.

31. The persistence of these weak borrowers highlights the need for further restructuring and the exit of nonviable firms. Without further restructuring and a sustained recovery in profits, the sector will remain vulnerable to adverse shocks and be a drag on growth. More pro-active use of the insolvency system and of the out-of-court workout guidelines would facilitate restructuring and help limit potential losses. The exit of nonviable firms would also free up resources that could be more productively used elsewhere. A tightening of delisting criteria for troubled companies would also help send an early signal to creditors (and to the market) to initiate workout or bankruptcy procedures.

References

  • Atkinson, David, et al, “Japanese Bank Asset Quality: Banks,” Goldman Sachs Global Equity Research, October 31, 2001.

  • Jerram, Richard, “Profits Slip in 1Q03,” ING Financial Markets Economic News, June 5, 2003.

  • Kim, Se-Jik, “Macro-Effects of Corporate Restructuring in Japan,” Japan 2003 Selected Issues, 2003.

  • Matsuoka, Mikihiro, “MoF Corporate Survey: 1Q 2003,” Deutsche Bank Group Equity Research, Japan, June 5, 2003.

  • Ministry of Finance Japan, “Financial Statements Statistics of Corporations by Industry,” Annual.

  • Worldscope Database, Thomson Financial, 2002.

1

Prepared by Kenneth Kang (ext. 38911).

2

In Japan, the comprehensive source of corporate data is the MoF Corporate Survey which covers some 120,000 corporations across a broad range of sectors and firm sizes. It is released every quarter and contains basic financial statement information on corporate balance sheets, income statements, and financial ratios going back as far as 1954.

3

Although countries need not necessarily have the same corporate debt-equity ratios due to differences in financial structure, funding costs, and institutional arrangements, a comparison with other industrial countries nonetheless provides a useful benchmark for assessing corporate leverage in Japan.

4

With the flattening of the yield curve, firms have also found it less costly to lengthen the maturity of their debt structure.

5

For example, if the data is highly heterogeneous, it may not be appropriate to use Honda’s profits to offset Daiei’s losses.

6

Following the “Big Bang” financial reforms in 1996, the number of listed companies in Japan increased sharply.

7

According to the national income accounts, manufacturing accounts for around 22 percent of industrial GDP, roughly the same as services, the next largest sector in industrial GDP.

8

SMEs here are defined as firms with capital size of below ¥10 million. Lending to SMEs account for around 47 percent of total bank loans.

9

194 companies (8 percent of the total) managed to reduce their debt-equity ratios by more than 100 percentage points between 1993 and 2002.

10

The Industrial Revitalization Corporation of Japan (IRCJ) and the Industrial Revitalization Law (IRL) are reported to be using the ratio of operating profits to total debt as one of their criteria for judging the viability of firms for restructuring.

11

Some analysts have used this methodology to estimate the size of non-performing loans held by banks. For example, David Atkinson et. al. of Goldman Sachs use an operating profit ratio of 3.5 percent as the cutoff for measuring the amount of loans classified as “bankruptcy risk.” See Atkinson et. al., “Japanese Bank Asset Quality,” Goldman Sachs Global Equity Research, October 31, 2001.

12

Please see Japan 2003 Selected Issues chapter titled, “Macro-Effects of Corporate Restructuring in Japan” by Se-Jik Kim for a discussion of the estimated long-run benefits from corporate restructuring in Japan.

13

The Tokyo Stock Exchange (TSE) can delist companies that do not meet minimum requirements in four areas—the number of shares, percentage of shares held by major shareholders, number of shareholders, and turnover. Starting April 1, 2003, the TSE tightened the delisting criteria by calling for companies whose market capitalization was under ¥1 billion for nine straight months or that had a negative net worth for the past two years to be delisted.

14

A strict comparison between these two figures is not feasible and should be treated with caution given the difference in classification and the sample of companies.

15

The introduction starting in March 2003 of the discount cash flow methodology for provisioning against “need special attention” loans to large borrowers will help shift the attention away from historical payment record to more forward-looking indicators of payment capacity.

16

Assuming a normal distribution, this corresponds to roughly a 30 percent probability of an observation from the mean. However, looking forward, in light of the low level of interest rates, a 100 basis point increase in interest rates is not an unrealistic scenario.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Japan: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 2003: Issue 282
Publisher:
International Monetary Fund
ISBN:
9781451820560
ISSN:
1934-7685
Pages:
116
DOI:
https://doi.org/10.5089/9781451820560.002

Japan: Leverage Indicators, 1970 - 2002

Japan: Nominal vs. Real Stock of Corporate Debt

(1995 = 100; GDP deflator-based)

Japan: Liquidity Indicators, 1980 - 2002

Japan: Stock of Liquid Assets and Cash and Deposits, 1990 - 2002

(In billions of yen)

Japan: Profitability Indicators, 1980 - 2002

(in percent)

Japan: Factors Driving Profitability, 1980 - 2002

(In percent)

Japan: Indicators of Corporate Debt Sustainability, 1980 - 2002

Japan: Interest Rate on Corporate Debt, 1990 - 2002

(in percent)

Japan: Debt-Equity Ratios by Sector, 1993 vs. 2002

Japan: Profitability Distribution of Debt-Asset Ratios,

(1993 vs. 2002; Unweighted; By number of firms

Japan: Interest-Coverage Ratios by Sector, 1993 vs. 2002

Japan: Average Interest Rate on Debt, 1993 vs. 2002

Distribution of Debt by Profitability, 2002

Japan: Growth in Nominal GDP vs. Corporate Profits

(1985 - 2002; in percent)