Activity of IRCJ and Banking Crisis in Japan

The Industrial Revitalization Corporation of Japan (IRCJ) began operations in 2003, since when it has provided support for 41 companies. The IRCJ was established as an emergency rescue and limited-period organization to promote concerted action by public and private sectors aimed at processing bad debts. This was an area that had not been progressing smoothly in the final phase of Japan's financial crisis. The total borrowings of the supported companies corresponded to just over a tenth of all bad debts existing at the time. In terms of the number of cases, half of the applications came from regional banks, but in terms of total borrowings the megabanks were overwhelmingly dominant users. The revitalization support activities of the IRCJ may be described as follows, in terms of their economic functions. (1) Company risk analysis (due diligence), (2) business and financial consultancy for companies (preparing revitalization plans), (3) adjusting rights and interests among company stakeholders, 4. taking over risks and monitoring in line with this, 5. roles and final selection of company management resources (proprietors, etc.) and sponsors (including business transferees) as inter-company markets, and 6. management consultancy functions (providing management knowhow). While these functions had been borne exclusively by the main banks in the past, this became impossible amid violent upheavals in the economic structure when the financial crisis became acute. Moreover, these functions are deeply intertwined with each other, and because the IRCJ can coordinate them as a coherent whole, its participation has led to greater efficiency. The greatest effect however, due to the "public sector" neutrality of the IRCJ, has been its role in adjusting rights and interests among company stakeholders, which had previously caused delay in processing bad debts. In view of its risk-bearing role, meanwhile, it was appropriate to establish the IRCJ as a 'sunset' organization. This was because, if the IRCJ were to remain in existence for a longer time, it could hinder participation by private-sector players or create moral hazard for private-sector players. The IRCJ has also made a number of new attempts at showing business models for revitalization as a catalyst to stimulate private-sector business. The characteristics of business revitalization by the IRCJ are that it converts the business models of supported businesses, ascertains the future potential of the businesses, and carries out financial restructuring compatible with this. Another characteristic is that it rigorously instills the principle of evaluation at market prices based on cash flow. Although the business revitalization carried out by the IRCJ has been accompanied by radical remedies for businesses similar to legal reorganization, it aims to maximize business value by implementing this more quickly than the latter. The main policy targets for the activities of the IRCJ were (1) to maximize the value of individual companies by rigorously applying market principles, and to increase efficiency in the distribution of resources. Other policy targets have been (2) to let the private sector do what the private sector can do, (3) to show business models for revitalization and accomplish some aspects of market improvement for business revitalization, and (4) to stimulate regions through business revitalization. Through the IRCJ's support activities, it became clear that problems of bad debts had arisen because many Japanese companies had made no attempt to change their economic structure amid major economic fluctuations in the growth and collapse of the bubble. In other words, they had done nothing to revise their previous sales-based business models. Other factors that aggravated corporate management over the long term were excessive investment during the bubble era, the absence of good management personnel (problems with the aptitudes of business proprietors), a lack of corporate governance and a lack of business management knowhow. Meanwhile, we can identify a number of factors to explain why these companies were not encouraged to carry out business revitalization (private reorganization) at an earlier stage. For example, (1) the public finance system (government financial institutions, the credit enhancement system, etc.) had formed a bottleneck, (2) private-sector loan practices, i.e. corporate loans with a bias towards real estate security not based on cash flow analysis, loans dependent on main banks made by banks other than main banks, and functional deficiencies in the main banks themselves, (3) various bottlenecks facing businesses in their procurement of equity, and 4. a shortage of private-sector players and human resources conversant with business revitalization (particularly in regional areas). Although moves are now seen to correct these problems through system amendments, etc., efforts will need to be continued in future. Since the IRCJ was established, private-sector activity has also become lively, the number of business revitalization funds has increased, and much progress has been made in solving the problem of bad debts. Seen in macro terms, the corporate sector as a whole is now rich in cash, and M&A are also thriving. Micro business revitalization is a powerful means of fluidizing human resources, money and other corporate management resources that are no longer being utilized effectively, and of optimizing the distribution of macro economy resources. The Industrial Revitalization Corporation of Japan temporarily complemented the functions of financial markets that had been impaired by the financial crisis. By pursuing possibilities for the revitalization of individual businesses on a micro level and creating competitive environments, it can be said to have made a certain contribution to the energization of financial systems and Japanese industry as a whole.