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JULY 28, 2000 VOL. 26 NO. 29 | SEARCH ASIAWEEK

Bankrupt Sogo
Short-term pain may lead to long-term gain

Normally, to cheer the demise of a major company and employer would be perverse. But the bankruptcy of Japanese department store Sogo is to be applauded — albeit with mixed feelings. The heavily indebted 170-year-old chain, with 27 stores in Japan and another dozen scattered around Asia, had asked creditors to forgive nearly $6 billion in loans. Most agreed. But one dissenter, Shinsei Bank, and a public outcry against a write-off of $900 million of the government's $1.86 billion in Sogo debt forced Tokyo to reverse course, driving the store to the court. With that decision, the government signaled it would no longer underwrite the bailouts of badly run companies. Japan Inc. is now on notice: Cut out the dead wood that has burdened the economy the past decade — or the market and the bankruptcy courts will be allowed to burn it out.

For too long, Japan's businessmen, bureaucrats and politicians have kept economic woes at bay by preserving everything — no layoffs, no bankruptcies — in the hope that things will turn around before the bills came due. That has only prolonged the nation's economic anemia and piled up an untenable amount of private and public IOUs. Also, too many deals to preserve the status quo have been cut in boardrooms and government offices far from the eyes of the public and the market, with no checks on vested interests or political considerations. Sogo bosses now must produce a plan to save or shutter their company in the more transparent arena of the bankruptcy court. And managers of other shaky enterprises — notaby in the politically important construction industry — have been sent a clear message that bankers and officials can no longer squeeze depositors and tax payers to support them.

Yet Sogo's failure also raises many concerns. First is the fate of the chain's staff and suppliers. Given Japan's near-record unemployment and fragile recovery, they will have trouble finding new jobs and clients. That could erode overall confidence in the economy and undermine the spending and investment needed to get it moving. Fewer rescues also mean more bankruptcies, which will further batter business and morale. And while the use of public funds to underwrite Sogo would not have been welcome, the decision to halt it was blatant political intervention into a deal reached by professional bankers and government experts. Now, Tokyo will probably have to write off almost all the Sogo debt that it holds, while banks must increase their loan-loss reserves.

Ultimately, though, all this will spur the resolution of bad debts, and on a much more transparent basis. Another plus from the Sogo saga could be less future intervention in the painful but necessary culling of unsalvageable companies. Corporate managers should take the debacle to heart and be honest with themselves and their creditors about their condition. Then they should take realistic steps to rehabilitate themselves. (Sogo's secretiveness and complex structure reportedly helped obscure the company's woes, even from its own executives.) Banks must get real about which loans on their books are hopeless. The public must also be aware that more blood is likely to flow in the short term and not let that destroy their confidence in Japan's recovery. If the lessons of Sogo are learned, in the long run, its demise could lead to the birth of a healthier Japanese economy.

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