Chapter 2

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Rebuilding Finance and Enterprises(1)

A rising number of enterprises plunged into financial difficulties as their excessive debts emerged after the collapse of the bubble economy. In such situation, financial institutions are usually expected to closely monitor the financial conditions of customer enterprises and set interest rates at appropriate levels on loans to them. Unlike large enterprises that can raise funds in the securities market, small and medium-sized enterprises have no fund-raising alternatives to financial institution loans. Financial institutions are thus expected to play a key role in providing funds for SMEs.

Since the bursting of the bubble, however, financial institutions have reduced loans to enterprises, including SMEs. Their SME loans have declined relatively faster compared to those to other enterprises in recent years. This is because financial institutions have reduced their risk tolerance as a result of disposal of massive non-performing loans and have refrained from positively lending money to enterprises due to rising credit risks of heavily indebted borrowers. Enterprises for their part have put priority on repaying debts because of the slowdown in their demand for funds. Therefore, the comprehensive resolution of the non-performing financial institution loan problem and the excessive debt problem at enterprises is indispensable to the invigoration of the Japanese economy. In this respect, financial institutions must step up disposal of non-performing loans, shift from usual corporate loans to project finance and other loans focusing on the profitability of specific business projects, and promote the transfer of loans in order to rebuild finance.

On the other hand, heavily indebted enterprises must take advantage of emerging debt-reducing frameworks to focus on promising business areas and turn around their situations. As business conditions continue to change rapidly, enterprise managers are constantly required to review and reshuffle business resources in order to boost profitability. Based on such acknowledgement, this chapter discusses the present conditions and problems under the theme of rebuilding finance and enterprises. In Section 1, we specify the effects of problems at financial institutions and enterprises on corporate finance, by citing enterprises' business investment and SME finance. In Section 2, we show the present state of non-performing loan disposal and discuss the importance of structural incentives to dispose of non-performing loans and normalize financial functions. In Section 3, we look into the present state of out-of-court workout as part of efforts to turn around heavily indebted enterprises. We also analyze efforts to improve the profitability of enterprises, citing mergers and acquisitions. Rebuilding finance and enterprises could lead to readjustment costs with respect to employment and pay in particular. In Section 4, we consider such readjustment costs and how they should be addressed.

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