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Japan’s Distressed-Debt Market

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  • Kazunari Ohashi
  • Manmohan Singh

Abstract

Sizable risk capital from outside may be necessary to accelerate Japan's corporate restructuring to replace the stock of impaired bank loans. To attract risk capital, impaired loans must find market-clearing prices. However, the asymmetry in the bid-ask prices faced by banks and distressed-debt investors continues to stall efforts to create a liquid distressed-debt market. This paper asserts that the wedge between the prices faced by different participants is primarily a result of different valuation methods employed by banks and distressed-debt investors. On the one hand, banks do not recognize "maturity default" that results in banks rolling over impaired-loan accounts, effectively turning them into perpetual debt, which is expected to capture any upside potential for value. On the other hand, distressed-debt investors presently view their investments as equity stakes that require improved cash flows, unlike the buy-and-sell distressed-collateral market that existed in the mid-1990s. We suggest that bids from distressed-debt investors may not be as low as they are deemed by local banks and the asymmetry in prices may be reduced if banks value their claims as corporate equity.

Suggested Citation

  • Kazunari Ohashi & Manmohan Singh, 2004. "Japan’s Distressed-Debt Market," IMF Working Papers 04/86, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:04/86
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    References listed on IDEAS

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    1. Se-Jik Kim, 2003. "Macro Effects of Corporate Restructuring in Japan," IMF Working Papers 03/203, International Monetary Fund.
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    Cited by:

    1. Barros, Carlos Pestana & Managi, Shunsuke & Matousek, Roman, 2009. "Productivity growth and biased technological change: Credit banks in Japan," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(5), pages 924-936, December.
    2. Jérôme Sgard, 2006. "Do legal origins matter? The case of bankruptcy laws in Europe 1808–1914," Sciences Po publications info:hdl:2441/6824, Sciences Po.
    3. repec:spo:wpecon:info:hdl:2441/6824 is not listed on IDEAS
    4. Jérôme Sgard, 2006. "Do legal origins matter? The case of bankruptcy laws in Europe 1808-1914," Post-Print hal-01021354, HAL.

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