On Japan's Skid Row

DONALD MACINTYRE and SACHIKO SAKAMAKI TokyoKoshu had always scoffed at the ads for quick, no-fuss loans that regularly arrived in the mail. But a year-and-a-half ago, after his bank unexpectedly called in a big loan, the restaurateur and bookstore owner (who asks to be identified by an alias) decided to take a second look. There weren't many other sources of funding out there. Other banks refused to lend to him and visiting a small-business loan company was unthinkable: in his small town in northern Japan, word would quickly spread that he was on the outs with his bank, a clear sign of trouble. So as a stopgap measure--just until he could sell some property--he filled out a form for a quickie loan and faxed it off. Hours later, $8,500 landed in his bank account. The only catch was the sky-high charge: 49.5% interest for a month, about 15 times the legal limit. Koshu's short-term plan mushroomed into a nightmarish cycle of borrowing, repayment and more borrowing. When he couldn't pay back the lender, he got a call from a man offering more money--at the same exorbitant rate. Eventually, Koshu found himself writing 60 checks a month to repay creditors, and sinking deeper and deeper into debt. Last summer, he gave up, having shelled out a total of $100,000 in interest payments. His restaurants and bookstores were gone, along with his fancy home, his Mercedes and his wife, who left him. Today Koshu lives alone in an apartment outside of Tokyo, trying to piece his life back together: They sucked me dry.

They are the loan sharks operating a troubling new money-lending racket known as system finance. Like traditional usurious lenders, system-finance gangs are ruthless and sometimes brutal. And they have brought some high-tech twists to the game. Using computers, these modern loan sharks work out of back-room offices, combing through huge financial databases for companies in the red. When the computer spits out a candidate, they barrage him with direct mail, advertising speedy, no-questions-asked loans. They operate by cell phone and fax, never meeting their customers face-to-face. That, police say, makes it almost impossible to catch them.

PAGE 1||Japan's worsening credit crunch is fueling the problem. Hobbled with more than $600 billion in bad loans, Japan's banks are furiously slashing lending to shore up their finances--and the little guys are often the first to get cut off. Small-business bankruptcies are soaring, and company owners are increasingly desperate. A recent survey shows that almost one in five small-business owners has resorted to borrowing from high-interest lenders. There could be as many as 100,000 victims of system-finance schemes, according to freelance journalist Akiko Kitada, who first exposed the problem last year. Borrowers who turn to these loan sharks already have one foot in the grave, the writer says. This is what the recession has wrought.

Loan sharking isn't new to Japan. Banks traditionally have lent to companies, not consumers, so shady money lenders have thrived on the fringes of the financial sector for decades. In the '70s, loan sharking turned into a prominent social issue as stories emerged of debt-ridden salarymen committing suicide and gangsters hounding debtors for repayment. Following a public outcry, the government began regulating non-bank lenders and capped interest rates at 40%. But the industry hasn't shaken off its sleazy image or its underworld ties.

Sleazy or not, consumer and small-business lenders are flourishing amid Japan's worst recession in half a century. Running short of cash can be deadly for a small business--a company is considered bankrupt in Japan if it bounces two checks or promissory notes in three months. Some banks even pull the plug after a company bounces one. So small businesses, which typically operate with little capital, turn to other lenders when late payments from a customer create a cash-flow crunch. But many have tapped out even these credit lines. Despite steep interest rates, a system-finance loan can look like the only way to stave off ruin--and many grasp at the straw. The stigma surrounding bankruptcy in Japan adds to the pressure. In a society that places a premium on face, financial failure can mean estrangement from family, friends and community. And since small-company owners often use relatives to guarantee bank loans, the disgrace--and the economic loss--can encompass an entire clan. Most don't know that declaring personal bankruptcy is one way to get out from under a crippling debt load, says Kannosuke Ide, a former marketing-company owner who went bust and now advises small businessmen on bankruptcy. They all realize they were fools after it's all over, says Ide. But when they are in the middle of it, they want to avoid bankruptcy at any cost.

The stigma is so strong that many debtors flee--or choose suicide. Consider Hiro, a book publisher, who asks that his full name not be used. After interest payments on his debt spun out of control, he turned to system-finance operators. Soon, he was spending his days faxing loan requests and mailing payments to loan sharks. To save money, he and his wife ate only vegetables and unpolished rice. He considered taking his own life so his wife could collect on his $1.8 million insurance policy. After contemplating suicide while standing on a train-station platform, he canceled the policy, a move he thinks saved his life. I was so tempted, says Hiro. With that money I could have solved all of my debt problems. |2|Like Hiro, many businessmen have little idea of what they are getting into. System-finance mailings often advertise loans at single-digit rates: only over the phone does the would-be borrower discover that he will be charged a much higher rate because his financial situation is so bleak. And once you bite, it is hard to get out. A typical system-finance syndicate is organized into small groups of operators who work together to squeeze a debtor as long as possible, according to Masahiro Tsuji, a former truck driver who got into the business after answering an ad in a local newspaper in the southern port city of Kagoshima. When the computer pinpoints a target, one group will fax or mail offers for loans. Once the customer starts borrowing, data on the loans are shared with other groups through a central database. When the borrower runs into trouble paying the first debt, a second group calls up and offers to lend more. Since system financiers demand promissory notes to back up loans, the borrower can't afford to miss a payment, so he gets passed on down the line until he can't wring any more cash from his business.

Affable and well-groomed, Tsuji headed a system-finance group in Kagoshima for almost three years. Now working for a company that arranges weddings and funerals, Tsuji paints a relatively benevolent picture of his ex-group's practices. Sure, the interest rates are high, he says, but businessmen need the loans because banks treat them so badly. The banks will hold off on cashing a check issued by a big customer short of money, but they won't cut any slack for a small borrower. Says Tsuji: We help them. I know companies that have survived as a result. Still, system-finance gangs hardly qualify as public-service organizations. Tsuji calculates the survival rate for system-finance borrowers is probably only 1%. And while it is not clear what role, if any, organized crime plays in the racket, system-finance loan sharks sometimes hire muscle to seize inventory from a customer who runs out of cash. Tsuji says his group never used the mob, but he has collected from debtors everything from bicycles to toilet paper. It's sometimes necessary, he says, to visit a customer's parents to convince them that paying is better than having their son's name in the paper. Threatening people, that's the bad part, Tsuji concedes.

Police are only now starting to wake up to the problem. The first-ever arrests of system-finance loan sharks came last fall, and a crackdown last month netted 12 more. That may be just the tip of the iceberg. Kitada estimates there are 800 syndicates operating around the country. Police say their hands are tied unless company owners come forward. In Japan that rarely happens.

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