Prepared by Kenneth Kang (ext. 38911).
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.
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.
With the flattening of the yield curve, firms have also found it less costly to lengthen the maturity of their debt structure.
For example, if the data is highly heterogeneous, it may not be appropriate to use Honda’s profits to offset Daiei’s losses.
Following the “Big Bang” financial reforms in 1996, the number of listed companies in Japan increased sharply.
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.
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.
194 companies (8 percent of the total) managed to reduce their debt-equity ratios by more than 100 percentage points between 1993 and 2002.
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.
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.
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.
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.
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.
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.
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.