Japan’s New Wave: Cash, Bankruptcies and Inequality
(Bloomberg Opinion) - Although trillions of dollars of incentives are floating around and loans are pouring into the global economy, the corona virus is forcing countless companies to go bankrupt. The weak become weaker and the great are thrown into the lifeline. This gap will only widen.
The case of Japan, in which the bankruptcies increase sharply, shows that regardless of your liquidity, size plays a bigger role: Small businesses in all sectors make up around 70% of the companies, although a large part has net cash. Almost 60% of the small companies in the Topix reference index are net cash, compared to around 40% of the larger ones. Overall, this is much higher than that of global competitors: 15.6% of the non-financial S&P 500 companies and around 23% of the MSCI euro.
The bankruptcies of large Japanese companies have decreased. So it is strange that risk-averse, cash-based mom and pop outfits fall victim faster everywhere, not just where they make up the majority of companies like restaurants and small retailers.
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Years of low investment and lack of equity have made them more vulnerable. An analysis by Goldman Sachs Group Inc. shows that while larger companies were able to build up their stock buffers, the smallest ones could not. Companies with capital in excess of 1 billion yen ($ 9.3 million) have an equity ratio of around 30% and are generally upward. You can make up for losses. The odds of those with less than 10 million yen are close to 15% and have remained unchanged in the past few decades. The moment the revenue is hit, they face extinction. Low loss tolerance means that micro-businesses throw in the towel in the face of an ongoing downturn. For somewhat larger companies, even if working capital is insufficient, acceptance of success has "increased significantly" to avert bankruptcy.
What about the money pillows? These are currently a strategic advantage and will benefit Japanese companies. After struggling through previous financial crises, they hoarded cash and began to avert their preferred debt financing. As a percentage of GDP, corporate cash and cash equivalents rose from 103% in 2003 to 136% last year, according to Capital Economics. Micro companies were the bigger savers and held more money. This gave them more discretion as to where and when to invest. If things were uncertain like now, they could hold back; If there was money, it was for property, plant and equipment. The growth impulse was largely lost. As Tomohiro Ota of Goldman Sachs says, the root of the problem for small businesses is low productivity and profitability. A survey in April found that Japanese companies invest less because "the future is not foreseeable".
Sure, the size of the companies that perish is small, as is the total debt that the creditors hold. The effects on the macroeconomy are not likely to be as serious at first. However, if the numbers rise sharply, things could soon become sour - and exacerbate the challenges for small businesses in which around 24% of the workforce in Japan works.
This situation points to a more persistent problem: access to credit for small businesses. Despite their low loan-to-deposit ratio, Japanese banks typically rely on hard assets as collateral. This is a setback for small businesses and means that it's not so easy to grow your asset base or business. Small stays small.
Since February, the government has spent trillion yen in grants, including tax breaks and refunds, employment grants, cash grants, and interest-free, unsecured loans. Despite this size, they do it quickly when things go bad. The bankruptcies are expected to increase. Larger companies tend to have much better access to commercial paper and bond markets and find ways to use stimulus programs. Smaller ones are involved in bureaucratic and expensive papers that try to take advantage.
A crisis brings the future into focus. Many of these companies are family-owned, and succession planning - whether selling, handing over, or closing - is more difficult in the midst of Covid-19. Similar to the U.S., where the process of reorganizing companies and their Chapter 11 balance sheets is appropriate for larger companies, shutting down is just the cheaper and less cumbersome option. The incentive increases as Japan's population ages and companies have no successor. In the past ten years, around 95% of bankruptcies have been liquidations.
Japan's problem with small businesses has become structural. Ultimately, even if government support helps curb bankruptcies, it can maintain low-margin businesses without increasing their profitability or productivity, as Ota von Goldman says. The "measures to strengthen capital could prove to be a double-edged sword in the long term," the report says.
Covid-19 shows that the inequalities between large and small companies will only be more pronounced.
This column does not necessarily reflect the opinion of the editors or Bloomberg LP and its owners.
Anjani Trivedi is a columnist for the Bloomberg Opinion and reports on industrial companies in Asia. Previously, she worked for the Wall Street Journal.
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