Focus: Industrial Revitalization

Japan's increasingly aggressive efforts to maintain the rapid pace of Prime Minister Junichiro Koizumi’s ongoing comprehensive economic, corporate and financial sector reform program met with domestic resistance last year due to the social dislocation and pain that is an inevitable part of these efforts. Simply put, as Japan continues to move toward a new system that is designed to reduce its high cost structure and to promote efficient and flexible market-based competition, dramatic adjustments need to be made. This is essential -- not only to restructure troubled Japanese financial institutions and resolve the mistakes of the past – but also to help fundamentally sound companies that are burdened with bad debt to rationalize their human and physical resources and to adjust themselves to the demands of a credit-oriented financial system. It is also needed to make better use of assets within firms that are suffering from excess capacity and over-investment in their respective industrial sectors.

Resolution of Japan’s non-performing loan problem is difficult under any circumstances – both from the perspective of the need to ensure the health and stability of the Japanese banking system as well as the standpoint of troubled borrowers whose ability to succeed is compromised by this essential transition. In recognition of this fact, the Japanese Government has moved to form a new corporation, which will make maximum use of market-based mechanisms. It will be organized as a joint-stock company and staffed by public and private sector personnel. The primary objective of this body will be to facilitate the reorganization and revitalization of fundamentally sound Japanese corporations that are suffering due to excess debt or capacity problems and to help maximize the utility of their underlying assets.

This Corporation, which has been provisionally named the Industrial Revitalization Corporation (IRC), will seek to complement the reform efforts of Japan’s Financial Services Agency (FSA). It will move to purchase the nonperforming debt of, and to provide support to, struggling companies that meet established criteria that demonstrates an ability to reorganize themselves within three years or less. In this manner, Japan seeks to identify, and provide support to, viable companies who are in a position to overcome their problems, while allowing the unsalvageable “zombies” to proceed into bankruptcy and liquidation.

In an effort to launch IRC activities during the next fiscal year, a comprehensive series of guidelines was adopted on December 19th by the Strategic Headquarters for Industrial Revival and Employment Measures. The Japanese government does not, however, intend the IRC to be an ongoing operation. Rather the IRC will conduct its activities over a five-year period. During the first two years it plans to aggressively procure troubled loans. DEach company will then work vigorously with the IRC and its main bank to implement a workout plan, which will last no longer than three years. Their objective will be to make sure that all assets are reorganized, revitalized and ready to be transferred back into the private sector at the earliest opportunity according to market-based valuations.

The Japan External Trade Organization (JETRO) provides the following information examining these issues in greater detail.


Focus: Industrial Revitalization
JETRO, 1221 Avenue of the Americas, NYC, NY 10020January 15, 2003
New Japanese Corporation to Expedite Corporate and Industrial Reorganization
Japan's increasingly aggressive efforts to maintain the rapid pace of Prime Minister Junichiro Koizumi’s ongoing comprehensive economic, corporate and financial sector reform program met with domestic resistance last year due to the social dislocation and pain that is an inevitable part of these efforts. Simply put, as Japan continues to move toward a new system that is designed to reduce its high cost structure and to promote efficient and flexible market-based competition, dramatic adjustments need to be made. This is essential -- not only to restructure troubled Japanese financial institutions and resolve the mistakes of the past – but also to help fundamentally sound companies that are burdened with bad debt to rationalize their human and physical resources and to adjust themselves to the demands of a credit-oriented financial system. It is also needed to make better use of assets within firms that are suffering from excess capacity and over-investment in their respective industrial sectors. Resolution of Japan’s non-performing loan problem is difficult under any circumstances – both from the perspective of the need to ensure the health and stability of the Japanese banking system as well as the standpoint of troubled borrowers whose ability to succeed is compromised by this essential transition. In recognition of this fact, the Japanese Government has moved to form a new corporation, which will make maximum use of market-based mechanisms. It will be organized as a joint-stock company and staffed by public and private sector personnel. The primary objective of this body will be to facilitate the reorganization and revitalization of fundamentally sound Japanese corporations that are suffering due to excess debt or capacity problems and to help maximize the utility of their underlying assets. This Corporation, which has been provisionally named the Industrial Revitalization Corporation (IRC), will seek to complement the reform efforts of Japan’s Financial Services Agency (FSA). It will move to purchase the nonperforming debt of, and to provide support to, struggling companies that meet established criteria that demonstrates an ability to reorganize themselves within three years or less. In this manner, Japan seeks to identify, and provide support to, viable companies who are in a position to overcome their problems, while allowing the unsalvageable “zombies” to proceed into bankruptcy and liquidation. In an effort to launch IRC activities during the next fiscal year, a comprehensive series of guidelines was adopted on December 19th by the Strategic Headquarters for Industrial Revival and Employment Measures. The Japanese government does not, however, intend the IRC to be an ongoing operation. Rather the IRC will conduct its activities over a five-year period. During the first two years it plans to aggressively procure troubled loans. DEach company will then work vigorously with the IRC and its main bank to implement a workout plan, which will last no longer than three years. Their objective will be to make sure that all assets are reorganized, revitalized and ready to be transferred back into the private sector at the earliest opportunity according to market-based valuations. The Japan External Trade Organization (JETRO) provides the following information examining these issues in greater detail.
Japan’s IRC Moves to Resolve Excess Corporate Debt over a Period of Five Years
	As Japan continues to initiate a comprehensive effort to dispose of non-performing loans to strengthen its financial system, many fundamentally sound companies - which took on excessive debt - need to formulate reorganization plans that will enable them to maintain access to the capital needed to fund, and maintain, their ongoing competitiveness. In cases where revitalization is possible, but difficult for private-sector entities to resolve by themselves, Japan’s newly formed IRC will act as a neutral coordinating body. It will take care that it does not simply prolong the existence of terminally troubled firms and its operation will be conducted with maximum support from the private sector in human and financial terms. Personnel will include experts from the financial, industrial, and other communities, while the Japanese government will also provide human and financial support including funding guarantees. To ensure that the revitalization process is conducted smoothly, the institution's operational structure will be flexible and based on actual market conditions, organized according to, and making optimal use of, the characteristics of a joint-stock company. The IRC will purchase the obligations of companies it judges capable of being revived. Determinations will be based upon reorganization plans developed by these firms and their main banks. Purchases will be made at fair market value with the understanding that these companies will be reorganized. The IRC and the main banks will hold considerable proportions of the companies' obligations and vigorously help these companies' to pursue their restructuring and rehabilitation goals. Financing by government-related financial institutions will make use of debt-equity swaps, and the transfer of obligations, shares, and other instruments. As necessary and appropriate, the IRC will also provide companies who have demonstrated an ability to revive themselves with supplementary financings, capital and guarantees. This accelerated disposal of non-performing loans will be conducted over a period of approximately two years and the IRC itself will remain active for a period of five years. The institution will then be dissolved and efforts will be made to minimize the final burden that will be borne by the citizens of Japan. IRC Develops Mechanism to Maintain the Integrity of Asset Purchases Asset purchases by the IRC will be made in accordance with standards that assure objectivity and transparency. A committee composed of experts will be established within the IRC. It will seek to make judgments in a comprehensive, integrated manner, evaluating purchases from the standpoint of both corporate and industrial revitalization, including the appropriateness of corporate rehabilitation plans and purchase prices. Decisions by this committee will be a prerequisite for IRC purchases as well as the disposal of its obligations. Specifically, a precondition for most IRC purchases will be the achievement, at the conclusion of a revitalization plan of up to three years, of the productivity increases and financial improvement criteria set forth in the revised Law on Special Measures for Industrial Revitalization highlighted below. In addition, purchase prices are to be determined in a manner where it is expected that the recovery value will be greater than the liquidation value, so that it will become possible for participating companies to initiate successful refinancings as they emerge from the reorganization process. IRC to Make Use of the Law on Special Measures for Industrial Revitalization During the next ordinary session of the Diet, the Law on Special Measures for Industrial Revitalization will be radically revised. Specifically, if a company can achieve one or more of the following criteria at the conclusion of a reorganization plan lasting up to three years, it shall be eligible for policy-support measures based on a Business Restructuring Plan. Criteria for productivity increases a) Increase of at least 2 percentage points in return on equity (ROE); b) Increase of at least 5 percentage points in tangible fixed assets turnover ratio; or c) Increase of at least 6 percentage points in average value added per employee. Criteria for financial improvement a) Ratio of interest-bearing liabilities to cash flow of no more than ten; or b) Higher amount of current income than current expenditure. For the revitalization of companies in fields that suffer from excess capacity, a precondition for support is that the rehabilitation plans of those companies do not bring about increases in supply or in any other way hinder the elimination of the excess supply structures in those business fields. Flexibility will be shown, however, where necessary with respect to the criteria highlighted above, bearing in mind factors including industry characteristics and special circumstances. IRC Formulates Guidelines and Measures to Promote Prompt Business Revival Japan’s Ministry of Economy, Trade and Industry (METI), in cooperation with other government organizations, plans to release a series of Guidelines on Prompt Business Revival by the end of this month. This will help to motivate companies to take swift action to revitalize their businesses and to assist firms that are already encumbered with excess debt. These Guidelines will identify issues that should be addressed by both the government and the private sector. This includes the enhancement of information disclosure, the establishment of new financing practices, the strategic use of business rehabilitation laws, and the enhancement of the personnel, expertise and capabilities needed to take charge of the business revitalization process. In addition to promoting the disposal of non-performing loans, efforts will be made to prevent future increases in debt that cannot be serviced by other firms. For this purpose active use is to be made of policy-based finance, including an increase in the investment limit for the Development Bank of Japan's investment funds and a broadening of its mandate. Here too, appropriate consideration shall be given to ensuring that maximum consideration is given to the proper functioning of the market and Japan’s financial system.
Japan’s IRC Also Addresses Problems Relating to Overcapacity and Excess Supply
	In Japan there are a number of business sectors that are facing a systemic decline in operating, plant and equipment turnover and profit ratios, which indicate a marked disparity between demand and potential supply capacity over a considerable length of time. One notable example includes Japan’s construction industry. The IRC will review these cases and when there is no expectation that the situation will be resolved in the near term, then that field shall be designated as being eligible for policy support measures pursuant to the revised Law on Special Measures for Industrial Revitalization. Approval Criteria Established to Identify Enterprises Eligible for Policy Support With respect to actions to be taken by enterprises operating in businesses that suffer from an excess supply structure, it will be important to initiate measures that can restore profitability and operating performance through a sustained capacity reduction of this sector. Accordingly, pursuant to the revised Law on Special Measures for Industrial Revitalization, enterprises that meet the following conditions and criteria will become eligible for policy support. These include instances where: a) Two or more enterprises in a business field that is deemed to suffer from a sustained state of excess capacity undertake a joint business reorganization; b) There is an improvement in an excess supply structure. This can include an increase of at least 2% in cash flow or adjusted ROA and/or an increase of at least 5 percentage points in the tangible fixed asset or plant and equipment turnover, or another ratio indicating an equivalent reduction in supply capacity; and c) Appropriate competition in the relevant business field is ensured. As excess supply structures are formed at the industry rather than the firm level, the formation of alliances between individual business divisions will serve as an important means to eradicate this troubling condition. The above criteria shall therefore be measured and approved not in relation to entire companies but to individual business divisions that are the subject of approved joint business reorganizations. Competent ministers may, in addition to the basic guidelines highlighted above, formulate field-specific guidelines for business fields in which there is an excess supply structure. Their actions may include support measures that lay down additional guidelines relating to industrial revitalization in specific fields through the inclusion of matters that are considered necessary, such as the imposition of conditions that reflect the characteristics of these particular industries. In addition, to encourage industrial reorganization that leads to the elimination of excess supply structures, active use is to be made of policy-based finance. In these cases maximum consideration shall be given to ensuring the proper functioning of market-oriented mechanisms.
Japan’s IRC to Promote the Revitalization of Small and Medium Enterprises
	The number of small and medium enterprises (SMEs) is extremely large in Japan, totaling approximately4.85 million businesses. They encompass an extremely broad range of business categories and segments. SMEs are also highly regional in nature, and their revitalization is largely shaped by local circumstances. Supporting the revitalization of these SMEs will require a flexible approach. For this reason, measures will be taken not only to address excess debt and capacity but also a broad range of support functions, including but not limited to new business and market development, safety net loans, and bankruptcy measures.

Employment Measures Enacted to Facilitate Corporate and Industrial Revitalization
	The Japanese government will also implement policies to support measures needed to stabilize employment, such as minimizing unemployment among workers of companies seeking to revitalize and reorganize themselves. For workers experiencing unavoidable terminations or transfers, the government will implement policies to develop an employment safety net that will help promote the smooth transfer of labor and early reemployment.
Additional Measures Enacted to Facilitate the Reorganization Process
	To accelerate the approval of mergers and to clarify procedures, the Japanese Fair Trade Commission will take steps that will enable merger approvals to conclude as quickly as possible. For merger plans that are covered by the Law on Special Measures for Industrial Revitalization, the commission will establish new operational guidelines. It will seek to accelerate approvals with the cooperation of relevant parties, and when necessary shorten the waiting period for mergers as specified by Article 15 and other sections of the Anti-Monopoly Law. To better anticipate the results of corporate merger approvals, all plans that require detailed examinations will be disclosed. Efforts will be made to further expand the specifics of such disclosures, including providing explanations of examination results.


For additional information, please contact Satoshi Miyamoto, Executive Director of JETRO NY at Tel: 212-997-0416, Fax: 212-997-0464, E-mail: Satoshi_Miyamoto@jetro.go.jp Focus: Foreign Investment Focus: Bush Visit Focus: Koizumi Visit Focus: Economic Rebirth Focus: Hiranuma Plan Focus: Foreign Direct Investment Focus: Emergency Economic Package Focus: Action Plan Focus: Economic Reform Focus: Okinawa Summit Focus: Small Business Development Focus: New Enterprise Development Focus: Industrial Revitalization Focus: Economic Recovery 4 Focus: Steel Focus: Economic Recovery 3 Focus: Economic Recovery 2 Focus: Economic Recovery
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