_50_

**Country**

|**Country**||**Gov**|**ernmentResolutionApp**|**roach**||
|---|---|---|---|---|---|
|J|AMCmechanism used<br>YAhii|Decentralized Mechanisms<br>|Growth<br>|OtherImpedimentstoCorporate<br>Restructuring<br> <br>|Results|
|apan<br>(1991-<br>ongoing)|es.utortessetup three<br>entities.<br>_CooperativeCreditPurchase_<br>_Company_Wassetupin<br>1993asamechanismfor<br>bankstotransfer loansata<br>discount,thus satisfying<br>requirementsinthetaxlaw<br>whileavoidingthe<br>bankruptcyofdebtors(loan<br>lossprovisions are<br>automaticallytaxdeductible<br>onlywhentheyfollow<br>foreclosureofcollateralor<br>saleofloanataloss).Loan.<br>amounttransferredYen15<br>trillion.<br>_HousingLoans_<br>_AdministrationCorporation,_<br>Createdin1996**to**resolve<br>withina10year period the<br>loansofthe7housing<br>companiesthatwereclosedin<br>1995.<br>_TheResolutionand_<br>_CollectionBank_Wascreated<br>_in_1995todealwiththe_assets_<br>offailedcreditcooperatives<br>andhadreceivedloansofface<br>valueofY1.5trillioninthe<br>firsthalfof1998.<br>Allthreeagencieshave been<br>veryslowinsellingthe<br>assets.|_Accountingframework_<br>*****<br>Until1998,theloanclassificationandloan<br>lossprovisioningframeworkclearlyfavored<br>the hidingoflossesratherthanthe<br>recognitionoflosses.Moreover,banks<br>heavily usedamechanismofshiftingtheir<br>lossesoff-balancebycreating related<br>companieswhichwereneithersubsidiaries<br>noraffiliatesandtowhich theynon-<br>performingloansatabovemarketvalue.<br>_Legalfrumework_<br>*****<br>Japan'spresentbankruptcylawis<br>cumbesonmeandemphasizesprotecttonof<br>creditorrightsthroughliquidation and alack<br>ofothermechanismsthat enabledebtorsto<br>engagecreditorsinnegotiations.Whilea<br>varietyofmechanismexistforcoUrt-<br>supervised reorganization,thesehavenot<br>provedtobeeffective tools forcorporate<br>rehabilitationwhichmay have contributedto<br>unnecessaryliquidations. Moreover,thelegal<br>infrastructureinJapanisnotsuitedfor<br>dealingwithrecoveryanddebt restsuctunng<br>in anexpeditiousfashion.Foreclosureand<br>bankruptcyproceduresarecumbersonmeand<br>canbetimeconsuming. Moreover,allloans<br>areextendedon afullrecoursebasis,<br>implying thatforeclosureofoneloanwould<br>threatenthewholecomnpany.<br>*<br>Compoundingthelegalftameworkissuesis<br>thefactthat thecapacityofbankruptcycourtS<br>inJapanislimitedasthereareonlytwo<br>bankruptcycourts,<br>*<br>Beforethecrisis,thelackofeffectiveformal<br>proceduresmightnothave causeda major<br>problem becausebankswerenotfinancially<br>constrainedand thuscould initiate work-outs.<br>*<br>In1999,thegovemmentpresentedlegislation<br>toParliamentattempting**to**facilitatethe<br>formal corporaterestructuringframework.<br>_Ownershipstrciure:_<br>*<br>Limitedchangesinownership structurehave<br>taken<br>placeandthe<br>complex<br>webof<br>relationshipsbetweenbankshareholdersand<br>main customrnsreducedtheincentives for<br>bankstoaddressbaddebtproblem.|Thegovernmentputinplace<br>repeatedfiscalstimulus<br>packagesthatboostedthe<br>budget deficitfrom70percent<br>ofGDPto120percentanda<br>loosemonetary policywith<br>ovemightratesatzero percent<br>which reducedthecostto<br>banksofcarryingNPLs<br>tremiendouslyandthusalso<br>reducedbanks'incentives**to**<br>restnucturetheloans.|*****<br>Withprospectsforloanrecovery<br>limited,bankshadlittleincentiveto<br>liquidate questionable partsoftheir<br>portfolios, asthecostofcarrying<br>badloanswasinsignificant dueto<br>lowinterestrates, and potentialfor<br>upswinginvalueofassetis greater<br>thanthatofafurtherloss.<br>*****<br>Multipleliensattachedtomostreal<br>estateusedascollateralproved<br>difficulttorank, consolidateand<br>cleir.<br>*****<br>Inorderforthegovernmentto<br>forcebankstorestructure balance<br>sheets(disposeoftheloans),the<br>construction industrywouldhave<br>hadtomarkitsassetstomarketas<br>taxregulationsdonotfavorbanks'<br>unilateralactions.Intheprocess,<br>nianyfirmnsintheconstructionand<br>propertyrelatedindustry would<br>likelyhavebeendeclaredinsolvent<br>with adverseimplicationson<br>employment<br>*****<br>Corporaterestructuring hasfaced<br>significant institutional<br>ignedifentssuchasthehighcost<br>to fismsofreducing<br>untrmsploynentCourt<br>n<br>lingg in the<br>late1970smadedismissals<br>cumnbersomTewhichledfirmsto<br>offervoluntryearlyretirement<br>programs.In1999,theauthorities<br>nxovedtointroducemeasuresto<br>facilitate labormobilityandthe<br>serppingofexcesscapaciry.|*****<br>Theauthorities' strategyfor<br>banking sector recoverywas<br>predicated on aresumpbonof<br>growth that wouldrestorebanks<br>and borrowers to financial strength<br>*****<br>Yet,despitelargeandrepeated<br>fiscal stimulus packagesand loose<br>monetarypolicy, sustained growth<br>hasnotoccurred.<br>*****<br>Only recently didtheauthorities<br>takeamoreaggressive approach to<br>strengtheningtheframework for<br>decentralizedrestructuringby<br>strengtheningthebalancesheetsof<br>bankswithpublicmoney,moving<br>towardconsolidatedaccounting<br>and increasing supervisorypressure<br>onbankstorecognizeproblem<br>loans.<br>*****<br>Whilethesemeasureshaveledto<br>anaccelerationofcorporate<br>restructuringin1999,muchstill<br>remainedto bedone.|