The bankruptcies of large Japanese companies have plummeted. So it’s curious that risk-averse mom and pop outfits, sitting on cash, fall victim more quickly everywhere, not just where they make up the majority of businesses, like restaurants and small retailers.
Years of low investment and poor growth in equity have made them more vulnerable. Analysis by Goldman Sachs Group Inc. shows that while large companies have been able to build their capital buffers, smaller ones have not. Companies with capital greater than 1 billion yen ($ 9.3 million) have equity ratios of around 30% and have generally shown an upward trend; they can bear to absorb the losses. The ratios of those with less than 10 million yen are close to 15% and have remained stable over the past two decades. The moment revenues are hit, they face a write-off. Low tolerance for losses means that micro-enterprises throw in the towel at any semblance of a prolonged downturn. In slightly larger companies, acceptance of taking a hit even with insufficient working capital “has increased dramatically,” they say, helping to avoid bankruptcy.
What about the crate cushions? These are currently a strategic asset and will keep Japanese companies in good stead. After going through previous financial crises, they turned to cash hoarding and began to divert their preferred debt financing. As a percentage of gross domestic product, corporate liquidity fell from 103 percent in 2003 to 136 percent last year, according to Capital Economics. This gave them more discretion over where and when to invest. If things were uncertain, like now, they might hold back; if money came in, use it for capital expenditures. Much of the growth momentum has been lost. As Goldman Sachs’ Tomohiro Ota says, the root of the problem for microenterprises is low productivity and low profitability. A survey in April showed that Japanese companies were reducing their investments because “the future cannot be predicted.”
Of course, the size of bankrupt businesses is small, as are the total liabilities that creditors hold. The impact on the macro economy may not seem so bad at first. But if the numbers rise sharply, things could soon turn sour – and exacerbate the challenges for micro-businesses, where some 24% of employees in Japan work.
This situation highlights a more persistent problem: access to credit for micro-enterprises. Japanese banks, even with their low loan-to-deposit ratios, tend to rely on fixed and hard assets as collateral. This is a setback for small businesses and it means that growing their assets or businesses is not as easy. Small remains small.
Since February, the government has distributed trillions of yen in aid, including tax breaks and repayments, job grants, cash grants, and interest-free and unsecured loans. Yet despite these largesse, when things go wrong, they do it quickly. Bankruptcies are expected to increase. Large companies generally have much better access to the commercial paper and bond markets and find ways to take advantage of stimulus loan programs. The little ones find themselves caught in bureaucratic and costly paperwork trying to claim benefits.
A crisis puts the future at the center of its concerns. Many of these businesses are family-owned, and succession planning – whether it’s selling, divesting or closing – is more difficult in the midst of Covid-19. Much like in the United States, where the process of reorganizing businesses and their Chapter 11 balance sheets works for large companies, shutting down is simply the cheapest and least burdensome option. The incentive increases as the Japanese population ages and companies do not have a successor. Over the past decade, about 95% of bankruptcies were liquidations.
The problem of Japanese small businesses has become structural. Even if government support helps contain bankruptcies, it can ultimately lead to the preservation of low-margin companies without increasing their profitability or productivity, as Goldman’s Ota puts it. “Capital strengthening measures could prove to be a double-edged sword in the long run,” the report notes.
At the end of Covid-19, the inequalities between large and small companies will only be more pronounced.
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Anjani Trivedi is a Bloomberg opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.
