The Japanese government's debt collecting agency has 20 officers trained in martial arts and small arms, a vital skill when much of the US$33 billion it aims to recover was lent to yakuza gangsters.
Japan's mafia isn't the only clique the Resolution and Collection Corp. is finding hard to crack. Foreign investors say the government and banks want to keep non-performing assets off the auction block, still hoping their value will rise 12 years after a property and stock market bubble burst.
"The deal flow is more shallow than most people would expect for an economy desperate in its need for restructuring." said Lee Daniels, president of Newbridge Capital Japan LLC, a US$1.6 billion fund which plans to invest in mostly financial institutions in Asia. "Companies are reticent about restructuring." In seven years, the agency barely dented bad loans, buying ?8.7 trillion (US$65.5 billion) in debt, 4 percent of the total amount of loans that Goldman Sachs Group Inc estimates are questionable.
Each purchase requires approval from Prime Minister Junichiro Koizumi, and banks aren't recognizing loans as non-performing, with official figures for such loans a sixth of Goldman's estimate. Almost 99 percent of the RCC's purchases are from banks that have failed.
"Imagine getting permission from the prime minister" to buy non-performing loans, said Cris Kurihara, head of the overseas business department at the RCC. "It's not easy in Japan even when we try to save the Japanese economy. There is always red tape." And the agency is often left with assets others won't touch -- like mob-linked debt. In August, an irate individual debtor tried to burn down the firm's offices.
Half of the agency's debts have been left uncollected and it hasn't sold one bad loan to foreign investors, despite their interest. Foreign companies such as Newbridge reckon Japan's approach to solving its burgeoning non-performing loan problem is wrong.
Investors waiting for opportunities to buy non-performing loans may be disappointed by a lack of deals because of a local perception foreign funds are capitalizing on distressed companies by buying assets at cheap prices.
Lone Star Funds, a group of private investment funds, said it has completed raising money for two funds that will have about US$4.2 billion to invest in non-performing loans and real estate, mostly in Japan. Randy Work, president of Lone Star Japan Acquisitions LLC, declined comment.
The need for action is getting more urgent, investors say.
This year, an average of 55 companies are going bankrupt each day, defaulting on loans whose collateral is often backed by real estate. Last year, land prices fell an average 5.9 percent, the fastest pace in nine years.
Still, Japan's ruling Liberal Democratic Party, which has been in power for all but 10 months of the past 50 years, doesn't seem to want to expand the agency's role. It's betting eventual recovery of the economy will help creditors meet payments and reduce the level of non-performing loans, which Goldman estimates to total ?237 trillion, or 39 percent of all bank lending.
"There is no need to rush the disposal of non-performing loans as any gain in land prices or the stock market would help clear a significant portion of Japan's bad debt problem," LDP policy chief Taro Aso said last month.
The banks aren't disposing of their bad debts because to do so on a significant basis would bankrupt them, the RCC said.
Banks "don't want to realize losses because they will become insolvent," said Kurihara. "There would have to be an injection of public money" to keep lenders solvent.
Hiroshi Takahashi, the spokesman for the Japanese Bankers Association, wouldn't comment.
The RCC, started five years ago and now with about 2,400 workers, has so far got creditors to pay about ?4.6 trillion, or half the value of the loans it has bought. Ninety-nine percent of the agency's assets are from failed financial institutions.
"If the debtor is generating cash or making a profit we get them to pay," Kurihara said. "If it isn't, we liquidate the collateral." The RCC has bought the non-performing loans at a price that in nine out of 10 cases is higher than their market value. It was the only bidder on loans and bought the debt, on average, at a third of its face value.
And collection is getting more difficult.
"There are lots of mob loans," said Kurihara. "The yakuza bought real estate. The mortgage is with the failed financial institution and we have bought the mortgage from them. The private sector doesn't want to collect the money." That's where the debt squad comes in. The 20-person unit -- seconded from Japan's police force -- specializes in collecting loans from potentially violent customers.
The agency's troubles aren't confined to gangsters.
Kurihara said last summer a man who had to pay back several million yen in loans came to the sixth floor of the agency's offices last year arguing against his obligations. The man, about 40 years of age, set fire to a small section of the building.
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