Once famous Japanese brands are foundering like never before. Since the beginning of 2002, the casualty list has included Secaicho, maker of the Panther running shoes popular during the ‘64 Tokyo Olympics; Tsukuda, a toy wholesaler that turned products like Dakko-chan dolls and the Rubik’s Cube into national sensations; Tohato, a confectionery famed for its caramel corn and raisin tarts, and Toh Toh Shu Honpo, a distillery established in 1690. While such failures evoke a sense of loss among tradition-minded Japanese consumers, they are more important for what they say about the hollowness of the nation’s widely touted economic recovery.
A world desperate for economic health is eager to find signs that Japan is back, but the optimism is premature. Japan may be “the fastest-growing large economy in the world last quarter,” as one Morgan Stanley currency analyst wrote last week, but that doesn’t necessarily mean it is “on the mend.” True, Japan has now enjoyed six straight quarters of growth, but the recovery story is based mainly on robust exports and a 30 percent bump at Tokyo’s lowly Stock Exchange. It ignores persistent deflation (Japan’s consumer price index slumped 0.4 percent in June, year on year), falling domestic consumption (supermarket sales shrank 5 percent in July) and vast overcapacity in virtually every industry.
The roll call of bankrupt companies is convincing proof of the deep disrepair in Japan’s economy. Established businesses are failing at an unprecedented rate in Japan, according to new statistics from Teikoku Databank, which found that companies in business for more than 30 years now account for more than a quarter of all bankruptcies, up from just 5 percent in the late 1980s. Japan remains far more hostile to mergers and acquisitions than the United States or Europe, so there is no cycle of corporate death and rebirth. While Secaicho has folded its doors in Japan, a comparable American sneaker company, 80-year-old Converse, is being acquired by Nike for $305 million. “The collapse of time-honored companies,” argues Kan Tsutagawa, economic news editor for the Yomiuri Shimbun, “is of symbolic significance to the gridlock facing the Japanese economic system as a whole.”
The death rate for venerable Japanese brands is rising for a number of reasons: inability to follow trends, debt overhangs from the 1980s, competition from China and other emerging markets and, perhaps most important, the fact that most of them served a domestic market ravaged by years of recession. The bulk of the fallen elders were based outside major cities, and thus were vulnerable to anemic regional economies: Fukusuke was based in Sakai in western Japan, for example. None was large enough to fall in the infamous class of Japanese “zombie” companies: debt-laden major manufacturers or national retailers of the sort deemed “too big to fail” by creditors or the government.
None of the bankrupt brands is a mere victim of circumstance, though. At Tohato Inc., a second-generation president borrowed heavily to expand into golf-course development before his otherwise viable company collapsed in March with unpaid loans totaling 46 billion yen. The problem is not that the system lets these companies fail: it’s the way they fail. Japan lacks the network of buyout specialists, M&A lawyers, deal making bankers, and other vulture capitalists who in most modern economies help companies devour struggling rivals while they are still viable–if only to buy the brand name and poach loyal customers. “I don’t recall a single example of a competitor buying a famous brand in Japan,” says Shiro Abe of Teikoku Databank. With no buyout industry, struggling firms end up as bankrupt wards of their bankers.
The outlook for these golden oldies remains poor. New tax data show that seven in 10 Japanese companies are losing money. Small and medium companies are particularly hard hit because they cater to Japanese consumers, who have shown no sign of changing their miserly spending habits of late. “Looking at the corporate universe, I don’t see any marked improvement, especially in the lower-rated categories,” says credit-ratings expert Akio Mikuni. His forecast: “more nonperforming loans, more bills picked up by the government and increased indebtedness. As far as we are concerned, the picture hasn’t brightened at all.”
Even as Japan tosses out venerable brands, it’s still less likely than other nations to let companies die, or to create new ones. According to numerous surveys, Japan ranks at the bottom of all industrialized states for the rates of both corporate failure and new company creation. High entry costs, tax rules that penalize venture capital and excessive regulation make launching new businesses a riskier affair in Japan than almost anywhere else in the industrialized world. Masaaki Kanno, chief economist for JP Morgan in Tokyo, calls the low corporate birthrate “one of Japan’s biggest structural problems. We don’t have a long tradition of being independent or taking risk.”
There’s one gargantuan exception to this rule: the government. Many economists now warn of creeping “financial socialism,” whereby Tokyo is taking control of all major banks and their weakest clients. In this view, the government’s recent 2 trillion yen bailout of Resona Bank, Japan’s fifth largest lender, signaled a willingness to pass risk onto taxpayers. The result: Resona has kept up lending to the small and medium enterprises that most creditors now shun. Now, another major bailout looms. Last week Japanese media reported that Mitsui Mining, with a negative net worth of some 35 billion yen, would be the first to seek protection from the Industrial Revitalization Corp. of Japan, established in May 2003 to rehabilitate heavily indebted companies. “It’s as if ‘Too Big to Fail’ has become our national doctrine,” says Kanno.
Prime Minister Junichiro Koizumi has challenged this doctrine, but, up to now, he has been fighting a losing battle to slow its advance. That could change after ruling-party elections later this month, and national elections that will follow. Polls suggest Koizumi will win easily, bolstering his power to reform a system that allows beloved old brands to die, creates few new ones and shifts economic power into government hands. So even the weak signs of recovery may have one profound effect: they are getting a lot of positive press, which can only raise Koizumi’s chances of making real change.
