As the coronavirus recession deepens, is Japan on the precipice of a wave a corporate defaults?
The answer could be “yes” if the Bank of Japan’s latest financial system report is any guide.
“If the economic downturn was prolonged, firms could continue to see a decline in their debt-servicing capacity,” the BOJ warns. “In particular, close attention should be paid to the impact on lending to areas where vulnerabilities accumulated before the Covid-19 outbreak.”
Grim? Maybe. But the real story is why a feared surge in corporate bankruptcies has so far not transpired. In fact, even as growth craters and deflationary forces return, Japanese bankruptcies from April to September actually declined to 1990 levels.
What gives? Assertive and proactive government and central bank efforts to save troubled firms from failure, that’s what.
During the April-September period, bankruptcies fell 9.4% to 3,858 cases in that six-month period, according to Tokyo Shoko Research released today. The government’s debt furlough scheme runs at least through the end of the year; the BOJ’s loan facility efforts run at least through the end of March.
Moreover, it is not just Japan. It is an Asia-wide phenomenon – and so far an impressive one.
Asia holds steady
In China, Hong Kong, India, Indonesia and Singapore, low bankruptcy tallies have confounded the naysayers – even as the pandemic slams growth and profits. That’s largely thanks to the roughly $12 trillion in stimulus the International Monetary Fund reckons governments around the globe have thrown at Covid-19.
All this spending pushed budget deficits to an average 9 percentage points of gross domestic product. It also put public debt globally on a path to top an unprecedented 100% of GDP by 2022.
There’s more where that came from as the IMF drops its traditional aversion to huge deficits. In the new report, it said IOUs internationally will “make an unprecedented jump” in 2020. Yet that’s “not the most immediate risk,” the IMF says. “The near-term priority, instead, is to avoid premature withdrawal of support.”
Asia’s stability, generally speaking, is all the more impressive considering what’s afoot elsewhere.
Corporate bankruptcies in the US are at their highest since 2010, says S&P Global Market Intelligence. In Europe, analyst Cedric Gemehl of Gavekal Research says a “significant increase in bankruptcy numbers is likely.”
Look no further than giant bankruptcies including household names Hertz Global Holdings, Brooks Brothers Group and Virgin Atlantic Holdings. It’s a reminder that Covid-19 trauma could lead to a “protracted” period of financial strain and economic weakness, notes Ryan Niladri Banerjee of the Bank for International Settlements. Runaway bankruptcies, the economist warns, will “weigh heavily” on labor markets.
Regional round up
Yet Asia’s impressive trajectory raises two questions. One, is this borrowing binge sustainable? Two, how might all this throwing caution to the wind on an overwhelming scale alter the nature of international economics?
The first answer is an obvious no. It is, however, a necessary evil as the rebound in global growth shows signs of losing momentum.
For now, all that stimulus is serving Asia well. Japan’s largess, both from the government and the BOJ, is keeping corporate bankruptcies at a near-unthinkable 31-year low.
In China, meantime, missed debt payments domestically are down almost 18% in 2020. This trend owes much to interest-rate cuts by the People’s Bank of China, as well as central bank liquidity programs. Regulators have been prodding distressed borrowers to forego bond repayments and delay debt swap arrangements to avoid default.
Much wobbly focus is on a cash crunch at China Evergrande Group, the globe’s most indebted developer: It owes creditors – wait for it – more than $120 billion. That could, indeed, pose systemic risks. Yet taking a broader view of where China Inc is as Covid-19 devastates the US, Beijing is maintaining calm in ways the bears didn’t expect.
Hong Kong is getting reasonable traction from the government’s $40 billion relief package, which is aimed at staving off recession. Of course, extreme pain in the retail, hospitality and other service-dependent sectors is spreading the financial trauma far and wide. More stimulus may be in the cards.
The number of petitions for stuttering companies stood at 275 as of August, the most since 2016. Still, given the political turmoil there this year – driven by Beijing’s steps to curb Hong Kong’s autonomy – the city’s 2020 is thus far beating the odds.
Singapore’s efforts to prod lenders to offer payment deferrals for small-to-midsize businesses appear to be working. Debt-relief efforts are being extended beyond December 31 and then further allowances are being granted based on need. As of August, the number of applications for corporate liquidations is the lowest since 2015.
Indonesia, meantime, has Southeast Asia’s worst Covid-19 problem. Even so, bankruptcy filings haven’t yet spiked above 2019 levels. President Joko Widodo’s $10 billion package unveiled in May seems to be working. The effort prioritized about a dozen state-owned enterprises. There’s another $2.5 billion where that came from for other companies.
At the same time, Bank Indonesia is actively monetizing debt – buying government IOUs directly from the Finance Ministry. So far, the central bank pledged to buy $28 billion of bonds and relinquish interest payments. It’s part of a $40 billion fiscal “burden sharing” deal with Jakarta to contain fallout from the pandemic. So far, the efforts appear to be lowering Indonesia’s financial blood pressure.
South Korea has managed to keep bankruptcies in 2020 near year-earlier levels. That owes much to President Moon Jae-in’s $35 billion corporate support scheme for key industries from aviation to shipbuilding.
And the Bank of Korea has been plenty generous with the monetary stimulus. Thus far, BOK Governor Lee Ju-yeol has avoided quantitative easing. The odds of more assertive easing is growing, though, as consumer prices trend negative.
Yet count the ways these efforts across Asia may come back to haunt the region. And look at the cautionary tale presented by Japan.
Japan’s dire model
For 20 years now, Tokyo has been churning more and more fiscal and monetary stimulus into an aging, uncompetitive economy. All along, though, it’s been treating the symptoms of its malaise, not the underlying causes. Twenty years of pump-priming has done little to increase competitiveness, catalyze innovation or boost productivity.
Alan Greenspan knows as well as anyone how that turned out for Japan. As Federal Reserve chairman from 1987 to 2006, Greenspan had a front-row seat for the implosion of Japan’s 1980s “bubble economy.” In 1996, when Greenspan warned of “irrational exuberance” in markets, the most impactful comments of his 19 years at the helm, he was referring to the Nikkei Stock Average.
In recent interviews, the 94-year-old raised timely questions about the wisdom of so-called helicopter money. The worry is that all that liquidity enables governments in their borrowing efforts, but does nothing to increase economic muscle or efficiency.
“Productivity in the most recent data is at 1% a year,” Greenspan tells CNBC. “That is down very significantly from earlier periods and it’s beginning to show up in ways which suggest the intermediate period ahead of us is going to be a period of slow economic growth.”
Greenspan didn’t directly slam current Fed Chairman Jerome Powell for expanding the central bank’s balance sheet to Japan-like levels. Twenty years on, the BOJ is yet to find an exit strategy from dominating the bond and stock markets. Or from warping a corporate system that long ago forgot how to price risk or incentivize innovation.
Helicopter money, in other words, papers over troubles now, but does nothing to increase governments’ ability to repay debt. To do that, more investment is needed. And investment is in short supply.
The East-West divide
Japan is mired in QE territory but so far, many parts of East Asia have swerved this dismal cycle. Nations from Korea to Singapore have avoided going down the monetary rabbit hole which the West might spend a decade trying to extricate itself from.
This may be widening the East-West divide among the Covid-19 crisis. That could translate into a longer-term economy gap that increases Asia’s appeal as an investment destination relative to the west.
Economist Emre Tiftik at the Institute for International Finance worries about “corporate zombification,” particularly in Europe.
“If insolvency waivers introduced during the pandemic are extended,” Tiftik says, “Low interest rates could enable fragile businesses to accumulate more debt, thus increasing the risks that these unprofitable businesses become ‘zombie’ firms’.”
Asia needs to avoid this trajectory. But on any list of silver linings from the Covid-19 crisis, the ways in which it’s highlighting Asia’s outperformance relative to the West warrants attention – and applause.