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You see, consumer-finance players such as Nichiei and Shohkoh Fund have been the darlings of stock-pickers for the last two years. They have received glowing buy recommendations from virtually all the prestige Western investment houses. Small wonder, for these companies and other shoko lenders, as they're called here, have had a great thing going. Japan's short-term interest rates are at near-zero levels, thanks to the Bank of Japan's ultraloose monetary policy since late 1995. At the same time, Japan's big banks have cut off smaller borrowers left and right. The banks aren't in the mood to lend given their massive dud loans from the bubble era. MATCHMAKERS. So how do you match all that cheap money with all those cash-starved small businesses? That's where the Nichieis and Shohkohs of the world come in. As Takehito Yamanaka, who follows these creatures for Nikko Salomon Smith Barney explains, the shoko raise funds from Tokyo and foreign money-center banks at maybe 2% and then lend out yen at interest ranging from 30% to as high as 40%. Good work if you can get it. And until recently, it was also a smashing investment for foreign money pros who have snapped up stakes in these finance specialists. Starting in 1997, Nichiei's shares took off, more than doubled, and peaked in April at $109 a share. Shohkoh Fund shares nearly tripled this year and hit $895 in July. Listed shoko lenders tend to have foreign stock ownership ranging from 20% to 30% -- quite unusual in Corporate Japan. With those kinds of returns, it's not hard to fathom why. Well, now that these shares have sunk like a corpse with cement shoes, thanks to negative publicity, maybe their business practices do matter. Japan's long run of economic stagnation has meant that a lot of small companies are in way over their heads and often default on their loans. When that happens, the shoko loan collectors often get very nasty. KIDNEYS FOR SALE. Indeed, on Oct. 30, police arrested one former Nichiei employee after he allegedly told one guarantor of a loan that he could earn $28,000 by selling one of his kidneys and maybe $8,000 by selling one of eyes to repay his loan. Numerous lawsuits have cropped up against the shoko, charging all sorts of unsavory stuff to get their money back. Nichiei says it's reviewing its business practices, but it denies having done anything illegal. Its shares have fallen more than three-fold. Shohkoh, also accused of tax evasion by authorities, has seen its stock price fall more than 50%. It says the tax issue is the result of an honest misunderstanding. Masahiko Gotoh, an attorney representing shoko borrowers, has other horror stories to tell. He says one of his clients was told by a shoko loan collector that the Yakuza, or Japanese mob, would soon be paying a personal visit to discuss repayment of an $8,000 loan. Gotoh says others are being scammed by lenders enticing friends of the borrowers to sign on as guarantors to vouch for, say a $10,000 loan, when the reality is that they are on the hook for triple that amount. "Most foreign shareholders don't understand the reality of what's happening in Japan," he says. PERFECTLY LEGAL. So why would white-shoe investment firms in the West want to have any part of this? One reason: It's perfectly legal in Japan, which imposes no effective limit on consumer finance interest rates. The legal limit on nonbank lenders is a staggering 40%. Loan-retrieval guidelines are vague. And, to be fair, small-business borrowers should have read the fine print before taking out their loans. It's also true that foreign fund managers aren't Boy Scouts. They're judged and compensated by their stock-picking prowess and returns -- not for their moral compasses. What's more, the majority of Japan's consumer-finance players are reputable and don't harass borrowers who get into trouble. The real issue is why the Japanese government is letting some lenders get away with Gestapo tactics. For that matter, shouldn't somebody at the Finance Ministry be a little worried about the big spike in personal bankruptcies, up 45% in 1998? Consumer-finance outfits specializing in high-interest loans are enjoying the huge loan spreads as much as the shoko. There's a major debt build-up among small companies and individuals in Japan. At some point, that dam is going to burst and create a whole new dimension to Japan's economic funk. INSTANT LOANS. Companies such as Takefuji Corp., Promise Co., and Sanyo Shippan have set up ATMs all over Japan's major cities. After about a 40-minute credit check, in which you plug in your work history, income level, driver's license number, and so on, you can usually get about a $5,000 loan at an annual interest rate of 28%. For folks capable of paying back such loans quickly, this is very convenient. Trouble is, lots of hard-pressed consumers are taking out loans at the Takefuji, Promise, and Sanyo ATMs -- all at the same time. That's one reason personal bankruptcies have jumped. The government seems ready to crack down on the shoko. The Japanese Diet is expected to consider legislation setting limits on consumer-finance interest rates and rules of engagement for loan collection. In the meantime, should you have money invested in a Japan mutual fund, it might be time to ask you money manager if your portfolio took a nasty hit from exposure to the shoko lenders. If your manager's answer is "ouch," how about this followup: What the devil were you thinking of when you jumped into bed with these guys, anyway? Bremner is Tokyo bureau chief for Business Week. Follow his column every week, only on BW Online EDITED BY BETH BELTON |
