Here I Am Ranting at Yet Another “The Atlantic” Report, This Time on Superannuated Japanese Businesses

I judge a publication by what they write about things that I know something about or have a feel for. If they get it right, I give it the benefit of the doubt regarding things that I do not know and have no feel for. The Atlantic? People who have been reading my blog for some time may remember my take down of a piece on the Japanese Tea Party. If that called for a big fat F, this one…  

This Atlantic report states that Japan “is currently home to more than 50,000 businesses that are over 100 years old. Of those, 3,886 have been around for more than 200 years... But in the past decade, some of Japan’s oldest businesses have finally shut their doors. Last month, the roughly 465-year-old seafood seller Minoya Kichibee filed for bankruptcy, which came after the news last year that the 533-year-old confectioner Surugaya met a similar fate. In 2007—after 1,429 years in business—the temple-construction company Kongo Gumi ran out of money and was absorbed by a larger company. Three companies going bust doesn’t quite make a trend…”

They sure don’t. At this rate, it will take the last of the companies more than 200 years old another 13,000 years or so to fold. But then, this should be no surprise if between “1955 and 1990, only something like 72 Japanese companies went bankrupt.” Let me quote at more length.

“So if they made it 500 or even 1,500 years, why would any of these companies collapse now? The most compelling explanation has to do with how the Japanese government has changed the way it treats struggling companies, according to Ulrike Schaede, a professor of Japanese business at U.C. San Diego. Historically, Schaede says, Japanese banks helped out even the most hopeless businesses without a second thought. “Between 1955 and 1990, only something like 72 Japanese companies went bankrupt. The reason was that the banks were supposed to bail them out,” Schaede says.

                                                                                                                                                

Then, in 2000, Japan passed its first Chapter-11-like bankruptcy law, and four years later, rewrote 1922 laws concerning corporate liquidation. This changed the default fate of troubled businesses. “Non-performing companies no longer receive help from lenders unless they have a solid plan for change,” Schaede says.

Something must have lost in transcription, because 6,468 businesses with 10,000,000 yen or more in total debt went bankrupt in 1990 alone, according to Tokyo Shoko Research. Coming at the end of the bubble economy years, this actually marked a 24-year low, down from the post-WW II peak of 20,841 in 1984. The figure jumped to 10,723 in 1991 and largely kept climbing through the (first) lost decade to 18,769 in 2000, peaking at 19,164 the following year.

It is also only a half-truth that “in 2000, Japan passed its first Chapter-11-like bankruptcy law.” The 2000 Civil Rehabilitation Act replaced the Composition Act, which, its defects notwithstanding, had long provided non-liquidation options for bankrupt businesses and their creditors, together with the still very much in use Corporate Reorganization Act. More damning to the point being made in the article, Kongo Gumi never went through formal bankruptcy procedures. Instead, its business was bought outright by the Takamatsu Corporation, where it apparently thrives as a subsidiary, building and repairing temples and the like the old-fashioned way.

The conventional wisdom that banks kept zombie companies on the prowl during the first lost decade appears to have considerable truth to it, but bankruptcy numbers and the legislative record that the article relies on do not support it. To be fair to the writer, that is not the only reason that he gives for the (three) old companies folding. Let me quote at length again.

Even if bankruptcy legislation is the most logical theory of why these companies finally folded, it’s not the only plausible one. It’s also worth noting that Japan’s cultural norms have eroded quite a bit in recent decades, which turns out to be a problem for a company selling traditionally-prepared squid guts. “Japanese Millennials are not that interested in really traditional Japanese culture as compared to their grandparents or parents,” says William Rapp, a professor business at the New Jersey Institute of Technology. “As the old population dies off, there is just not enough demand that is able to sustain such firms.”

Japan has also started to take a different stance toward marriage, adoption, and inheritance. “It's also likely become harder to recruit young men to enter a small firm under the presumption that they will marry the president's daughter,” says Mike Smitka.

There’s plenty of truth to the first point, but does it hold true in the cases cited above? The article makes much of Minoya Kichibee’s “salted squid guts using a 350-year-old recipe,” but Minoya Kichibee is even better known to the discerning Japanese gourmet for its high-end fish paste products. In fact, it is the high-end nature of its preserved food product lineup that forced it to seek protection under the Civil Rehabilitation Act, as routine corporate gift-giving (where, incidentally, fish paste products were the safe choice over the not-so-universally-popular salted squid guts) dwindled in the post-bubble years. Meanwhile, cheaper fish paste products, salted squid guts and other aquatic animal body parts as well as pickled plums (another item in Minoya Kichibee’s product lineup) continue to line the shelves of supermarkets.

As for building and repairing temples (and shrines, don’t forget them), most of the new edifices that have been going up are steel-and-concrete, faux-traditional contraptions, where conventional construction companies have a cost advantage. But Kongo Gumi probably could have continued in its original form if it had not been lured into real estate speculation during the bubble years, particularly if it had decided to downsize and return to its traditional construction roots, as it was ultimately forced to do in 2007.

I cannot find enough information on Surugaya to judge one way or other, but in two out of three, it is at best only a half-truth that “there is just not enough demand that is able to sustain such firms.”

As for the other point, I have no argument with the statement that it has “also likely become harder to recruit young men to enter a small firm under the presumption that they will marry the president's daughter.” Suffice to say, though, that this was irrelevant in the cases of Kongo Gumi and Minoya Kichibee, since they were both being headed by the family scion at the time of their fall. Again, I could not find the relevant information on Surugaya.

So there you are. The general points that the article makes may very well be true. But the three examples it employs do not make the case for them. Moral of the story: When you write about something that you do not understand, do your homework. Otherwise, a straightforward update of the Bloomberg piece that the article links to (and refers to, bizarrely as a Businessweek item) would have been of more utility.