Shortage of funds drives firms into failure
A growing number of listed companies that had been in the black for the previous settlement term recently got stuck for funds and suddenly went under. Due to the economic downturn, the business performance of Japanese firms is rapidly worsening while financial institutions are increasingly cautious about lending. This negative cycle, whereby the economy further slows down with bankruptcies coupled with a contraction in bank lending, must be arrested. The number of corporate bankruptcies this year has topped 10,000, and the total number as of November had already exceeded last year's total. In particular, the number of bankruptcies of listed companies surpassed 30--a record postwar high. Sixty percent of such listed companies that recently failed were in the black for their previous settlement term. The bankruptcies have included not a few "sudden deaths" of companies such as a real estate firm that had been elated with recent rises in land prices in certain urban areas but had overoptimistic business plans and failed to guard against a downturn in the market. But, in addition to such "bubble" businesses, an increasing number of companies have been driven into a corner by sluggish sales in their core businesses and worsening cash-flow problems.
The government revised downward the nation's real gross domestic product from an annualized minus 0.4 percent in a preliminary report to minus 1.8 percent for the July-September period. Domestic demand also shifted from positive territory to negative. Due to the worsening economy, 80 percent of bankruptcies this year have been blamed on sluggish sales and other recession-related factors. Industries such as transport and wholesalers, which are closely related with domestic demand, saw a sharp rise in business failures. Major export-oriented companies such as automakers and electrical appliances firms have announced significant production cuts as their business performance worsened due to a slowdown in foreign economies. Smaller businesses, including subcontractors in the auto parts production sector, are being seriously affected by subsequent decreases in orders. During such bleak economic times financial institutions normally would be expected to extend lifelines to ailing companies until their businesses are able to get back on track. But the financial strength of such institutions also has been weakened as a result of the global financial crisis, falls in stock prices and increases in bad loans. Financial institutions, therefore, cannot meet the expectations of flagging companies in need of loans.
The number of failed companies that cited a shortage of operating funds as a major cause of their failure increased by 40 percent in November compared to a year earlier. Various surveys have shown a sharp rise in the ratio of small and midsize companies that say lending by financial institutions has become stricter. The government in its first supplementary budget for fiscal 2008 hammered out measures worth 9 trillion yen to help finances of smaller businesses, which will be administered through emergency loan guarantee systems and government-affiliated financial institutions. But the measures will have only a limited impact. The second extra budget, which includes additional measures worth a total of 21 trillion yen, should be passed as soon as possible so the chain reaction of corporate failures caused by a shortage of funds can be halted. But such measures serve only as an emergency stopgap. The finance sector exists in part for the purpose of extending loans to viable borrowers. It is necessary, therefore, to monitor the lending situation through inspections of lenders by financial authorities. Financial institutions, for their part, should beef up their capital so they can extend loans whenever necessary. This increase of their capital should not only be done by themselves, but also through injections of public funds when a revised law, expected to be passed soon, that aims at strengthening the functions of such entities is enacted.