Turning around Japan Inc.

Tomohiko Taniguchi (Editor at Large, Nikkei Business Publications)

The Industrial Revitalisation Corporation of Japan (IRCJ) came into being in May last year with much fanfare. Present at its launch ceremony were a plethora of dignitaries including Jay Alix, an acclaimed pioneer in corporate turnaround in the US, Heizo Takenaka, Economic and Fiscal Policy Minister, Toshihiko Fukui, Governor of the Bank of Japan, and the then Minister with a special portfolio for the IRCJ Sadakazu Tanigaki (now Finance Minister).

Yes, the organization is a government affiliate and hence has its own Cabinet Minister. Though it is a registered company whose shares are held by the Deposit Insurance Corporation of Japan and Norinchukin Bank (one of the nation's largest institutional investors), the IRCJ's mandate is based on a set of legislations.

The widespread view at the time of its launch was that at long last, the government of Japan had come to shift its attention, previously concentrated solely on fixing banks, to the crux of the problem: it is the corporate sector that is key for Japan's growth. If it were not for their turnaround, it was argued, there would be no point in remedying the banking sector. And government intervention of a sort in accordance with market principles would be of urgent need given that Japan's industrial decay has gathered pace lately, while a large number of banks simply could not help corporations to recover as they are still busy offloading non-performing loans (NPLs).

The IRCJ was supposed to purchase corporate distressed assets from the banks and restructure their balance sheets, either by conducting debt equity swaps or by putting equity capital outright into the corporations. For these purposes the Law empowers the IRCJ to raise funds up to 10 trillion yen (approximately 95 billion dollars), a huge war chest indeed, with government backing. The IRCJ was to purge the management, putting in place new executives to turn the businesses around and, if all went well, sell out the corporations to the market by 2008, the year in which the IRCJ is scheduled to cease operation.

Nearly ten months have passed; the IRCJ has so far managed to pick up only 11 distressed corporations to turn around. This despite the fact that IRCJ officials openly said in the beginning that they would have dealt with, and succeeded in turning around, "at least" 100 companies by the year 2008. It now appears obvious that this target is far from achievable.

What is more, with the possible exception of Mitsui Mining, which carries a traditional brand name, all the other companies that the IRCJ has purchased are either too small or too regional to be known nationwide - or, more to the point, to be regarded as worthy of rescuing.

Many question whether there is any point in the IRCJ reviving such obscure companies whose demise would have little, if any, impact on the overall Japanese economy. The allegation is not groundless since at the outset many people expected that the IRCJ would be able to engage itself in Nissan-like dramas of corporate turnarounds. The ailing retail chain of Daiei and the one-time computer giant Fujitsu were widely rumoured to be lining up as would-be candidates.

So what has gone wrong with the IRCJ and its managing team that includes its COO Kazuhiko Toyama (who, like the colleagues he hired, gave up the huge salary he was earning as a corporate consultant to do service for the good of the nation).

Maybe it was a case of too little too late. Alternatively, it may also have come up on stage too early, while the audience are still on their way to the theatre.

Too late, because the banks are suffering significantly less from their non-performing loans now than a year previously. This is due to the steady growth of the Nikkei stock index, which has enabled them to unload the NPLs to a greater degree than was perceived possible. Some have even declared that for them the issue of the NPLs is passé: The Bank of Tokyo Mitsubishi for one recently announced that it would seek a place within the top ten global banking groups measured in terms of market capitalisations.

Yet on the other hand the IRCJ was born a little too early, for what its struggles over the last ten months have shown is one simple fact: this country is yet to have a market for corporate distressed assets. However odd it may sound to the Americans or British, this is a fact of life in Japan. Banks cannot simply market their distressed assets as they can discount the assets only to the extent that they have left aside as allowances for bad debts: they cannot go lower. Consequently the price the banks offer tends to be still too expensive for private buy-out funds to purchase. What is worse, the IRCJ can work only reactively: they must wait for the banks to come knocking on their door as that is the arrangement the IRCJ Law stipulates.

There is no rule without exception, however. The rules that supplement the IRCJ Law stipulate, as an exception to the general principle, that "parent companies" in so far as they have either loaned money or invested into their "child companies", can bring the distressed child companies to the IRCJ. Nippon Oil Corporation (Shin Nihon Sekiyu), one of the largest home-grown petroleum companies, is apparently using the IRCJ to restructure some of its affiliate companies. "We can even invest tens of billions of yen as equity capital into whatever companies, so long as they are likely to recover as Nissan has done with the capital Renault put into it", Kazuhiko Toyama maintains, "We are extremely useful for the parent companies should they wish to reorganise their affiliates". "Besides", Toyama goes on, "unlike private equity funds that must typically gain 20 % of return annually, we have to make no profits, if not losses, while the purchased assets are within our portfolio".

The last point he made may prove crucial as it implies that the IRCJ could go up the valuation ladder rather than having banks come down too many rungs for a further discount to make a deal. Indeed, Toyama and Company are eagerly flexing their muscles to mobilise their huge war chest so as to help rescue "big ones".

The irony remains, however, that as Japan's economy improves, as seems increasingly the case, their chances of getting the big ones will become ever scarcer. One note of caution may be in order here. One of the major banking groups called the UFJ Bank appears increasingly under pressure from Japan's Financial Services Agency to leave aside much more allowances for bad debts. If in fact the bank is nationalised, the IRCJ will surely come acquire a big one or two that have connections with the UFJ. Daiei could be the one.