Japanese Charging Into Debt

TOKYO â€”  At 24, Miyuki, a sweet-faced bookworm, has just applied for bankruptcy protection.

Say sayonara to the stereotype of Japan as a nation of compulsive savers. An estimated 10% of the population--mostly young people--is deeply in debt.

Japan, where people once saved up for big purchases and then paid cash, has become a credit card society. A new generation of hard-charging Japanese, raised in one of the world’s most affluent societies, is borrowing like never before--and some have a debt habit of dangerous proportions.

Miyuki will have plenty of company in bankruptcy court, a place where the Japanese traditionally have felt ashamed to set foot. Personal bankruptcies have tripled in the past decade, hitting a record of 43,946 last year.

She insists that she is not extravagant. Unlike the young Japanese women nicknamed “Chanel-ites� for their penchant for pricey designer clothes, she arrived at work recently in a baggy seersucker shirt worn untucked over khaki pants and scruffy black athletic shoes. Lately, she has been skipping lunch to save money.

Three years ago, however, she borrowed about $4,700 to pay for a move--then borrowed more to repay the creditors she could not appease on her meager wages as a waitress in a noodle shop.

Borrowing too much was easy: She had a fistful of credit cards that allowed her to make withdrawals from cash machines at any time of the day or night. She says the lenders knew she was borrowing new cash to pay off old debts and kept on lending. Her debts compounded at Japan’s maximum legal interest rate of 40% a year. Now she owes more than $28,000.

In the early 1990s, most people who declared bankruptcy were real estate speculators who went bust when the Japanese “bubble economy� popped, sending stock and property prices plunging.

Lately, these victims of asset deflation have been joined by other unfortunates: office workers who haven’t trimmed their spending to match incomes squeezed by the nation’s worst postwar recession; gamblers caught up in the pachinko (pinball) craze; and an increasing number of young people who now have unparalleled access to easy credit at interest rates that are anything but forgiving.

“Young people have much less resistance to borrowing money� than their Confucian-influenced elders, said economist Masaki Masuda of the Fujitsu Research Institute. “ ‘Play now, pay later’ is the new philosophy.�

Homemakers once fed their families fish and tofu, kept careful logs of every yen they spent and waited until the weather grew bitter before turning up the heat. Some older people retain these habits.

But consumer borrowing, to finance anything from designer clothes to restaurant bills, vacations abroad or even groceries, has tripled since 1985.

“A decade ago, credit cards were for people who traveled overseas a lot and for very rich people,� said Kichizo Sakamoto, executive director of the Japan Credit Counseling Assn., which has fielded more than 40,000 calls from consumers in financial trouble.

Topping the U.S.

Not anymore. By 1994, the Japanese were carrying more than $6,000 per capita in consumer debt--even more than the average American, who owed $3,700, according to the Japan Credit Industry Assn. Japanese still save at three times the U.S. rate, although the savings rate has been steadily dropping, from 23.2% of disposable income in 1974 to 12.8% in 1994.

In industry surveys, 68% of those over 50 say they have never borrowed except for a housing mortgage. But overall, the percentage of non-borrowers has declined from 64% in 1990 to 56% this year.

As of 1994, the 124 million Japanese had more than 230 million credit cards, quadruple the number a decade earlier. Credit card purchases increased 7% last year despite the recession; spokespersons say it’s because customers now whip out the plastic to pay small bills they would have used cash to settle a few years back. Even though most Japanese pay off their balances immediately, too many do so by borrowing from other sources--then borrowing again to meet the new debts.

In the postwar period, the government exhorted people to save more; thrift was not just a necessity but a national virtue. The legendary Japanese frugality helped build record trade surpluses, but with those came irritation from the rest of the world.

Some economists argue that increased spending benefits the country by pushing the domestic economy out of recession and boosting imports, thereby easing trade frictions. The credit card explosion has, therefore, not been viewed with much alarm here. The only worry is how the relatively small younger generation will support a huge group of retirees--estimated to hit 25% of the population in 2021--without a giant cushion of savings to fall back on.

Credit cards are only part of the debt problem. Credit card growth pales in comparison with the performance of Japan’s consumer loan companies, which have shed their seamy, loan-sharking image to emerge as financial superstars.

Taking advantage of Japan’s low interest rates, these companies can borrow money at less than 4% a year and charge customers roughly 27% annually--or more--for unsecured loans. The consumer interest rate can shoot up to 40% a year if a customer is late making payments.

Not surprisingly, the loan companies have posted astronomical profits in the last five years. Yasuo Takei, founder of the industry leader, Takefuji, has been estimated to be worth $2.5 billion. At Acom, Takefuji’s archrival, net profit rose 24% last year.

Acom is the proud pioneer of the world’s first robotic loan officer, Mujin-kun, or Mr. Unmanned. This savvy application of high-tech gadgetry to basic human psychology looks like an automated teller machine but allows customers to apply for loans that can top $25,000 without the applicant having to fidget under the scrutiny of another human being. Best of all, there is no loss of face if one is deemed a poor credit risk.

“It used to be that it was shameful to borrow money, but that is no longer the case,� Acom spokesman Hiroshi Ibuki said. “Now people are very ashamed if they are turned down.�

To get a loan, customers enter a tiny, private booth that in some locations is open round-the-clock. They fill out an application and follow the instructions given on an interactive video screen. (Despite Mr. Unmanned’s masculine name, a sweet-voiced young woman appears on screen to soothe the customer through the transaction.)

The booth isn’t really unstaffed; Acom employees monitor customers’ demeanor via discreetly placed video cameras. If the loan is approved, Mujin-kun spits out a nice warm card that can be used to borrow money at any of 6,600 cash machines across Japan.

With the advent of the loan cards, consumer access to cash has been made even easier. Young Japanese already had wallets full of plastic: ordinary bank ATM cards; bank and retail store credit cards, some of which allow the consumer to borrow cash. But the loan company cards, which look deceptively like the others, allow much larger cash withdrawals and charge higher interest.

Japanese consumers are not well educated about interest rates, and most don’t shop around for a good deal, economist Masuda said. They tend to pick a company based on convenient locations of cash machines--and whether the transaction feels pleasant.

The Mujin-kun booths soon attracted three times as many borrowers as human loan officers did. Acom’s competitors rushed to introduce their own automated loan outlets, with names like Yen Shop and Welcome Machine, at strategic locations near karaoke bars, train stations and hip hangouts. Acom alone has 550 Mujin-kuns.

“It only takes 30 minutes,� Ibuki boasted. He recited, in English, the mantra of Mujin-kun’s success: “Speedy, simple, secret!�

Actually, it turns out to be not so secret. The Asahi Shimbun newspaper reported in August that confidential credit histories of about 11 million borrowers were surreptitiously taken from the databank used by the industry and sold to detective agencies and other illicit users. Police began investigating after an Osaka salaryman complained that his boss had threatened to fire him after finding out he had been borrowing heavily.

The resulting scandal demonstrates that debt may still be cause for opprobrium--but the sheer convenience of the loan machines can make it seem irresistible.

Customers note that Japanese bank cash-dispensing machines are closed nights and weekends. Several said they keep loan cards in case they want to go drinking unexpectedly or get caught out late without taxi fare.

$28,000 in Credit

“I can use it tonight!� a 27-year-old insurance company worker said as he emerged from a booth with his new card and a $28,000 credit limit. He said he had just bought a used car with the money he should have used to repay a student loan and was borrowing $1,300 to make the loan payment. “What a bad person I am!� he said, laughing.

Like the other customers, the man did not want his name used for fear his co-workers or relatives might find out--although he thought many of his colleagues were also frequenting the cash machines.

“Life in Japan is expensive,� he said. “The old Japanese attitude--put up with anything, deny oneself everything, save money no matter what--is becoming less common.�

In fact, the Japanese salary system encourages credit use. Most workers get a relatively small monthly salary and two big bonuses annually, sometimes equal to four or six months’ pay.

Lately, workers who may be earning less use loans to cover living expenses--or luxuries--and plan to pay off the loans at bonus time. But if a company does poorly, the bonus may be smaller than expected.

Moreover, Japanese have little financial incentive to save, because ordinary bank accounts pay less than 1% annual interest. But borrowers can drown in interest payments at frightening speed.

The media have been running cautionary tales of overspending. Spa! magazine, which caters to men in their 20s, recently ran a feature on young women who have racked up debts of up to $75,000 in the last three to four years. These “Debt Daughters� spent thousands on everything from diamonds to English lessons and no-good boyfriends.

To show how easy it is to borrow, the magazine assigned a writer to see how much she could get, over the phone with no collateral, in a day. The answer: $10,280.

“These were all reputable places,� said Masaho Adachi, the editor of Spa! “If you go to the really lowlife moneylenders, you could probably get even more, but we didn’t want her to get into trouble.�

The writer paid the money back in three days, plus $16 in interest.

Like most other popular Japanese magazines, newspapers and TV shows, Spa! is filled with loan company advertisements, and Adachi said he was told to tone down the article so as not to alienate the magazine’s sponsors.

He was told, for example, not to use sarakin, the common term for the loan companies that were notorious for charging up to 109.5% interest until the practice was banned as loan-sharking by the parliament in 1983.

None of Adachi’s subjects was near bankruptcy, but some were working the hostess bars, pouring drinks and chatting up drunken salarymen, to meet loan payments.

On the Brink

Japan’s leading bankruptcy attorney, Kenji Utsunomiya, claims the declared bankruptcies are only the tip of the iceberg. He calculates that a million more debtors are teetering on the brink but have not filed for protection because of lack of education, the social stigma and fear of losing their jobs.

Each year, about 80,000 people, hounded by creditors, abandon their homes and jobs and start over using new identities--a process known as “fleeing in the middle of the night,� Utsunomiya said, brandishing two thick files of letters from such clients. “They haven’t declared bankruptcy only because they don’t know how,� he said.

He has formed a debtors group that is pushing for lower interest rates and bankruptcy reforms.

Some dispute Utsunomiya’s figures, but a Finance Ministry spokesman said the agency is worried about the growing number of personal bankruptcies.

“We have warned the money-lending industry against over-loaning,� said Yoshimasa Ishizu of the ministry’s credit company department. “Unfortunately, we cannot force the industry to stop.�

The bankrupt once were treated as pariahs in Japan, but Miyuki said that is changing. When creditors began calling her at work, she confessed her troubles to her boss, who, instead of firing her, helped her file for bankruptcy. In the old Japan, it was bad form to blame anyone but oneself for one’s troubles, but Miyuki said the lenders have profited from her woes.

“At first, I was so grateful that they lent me money,� she said. “But later, I realized they were getting a great deal.�

Megumi Shimizu of The Times’ Tokyo Bureau contributed to this report.

* IN THE MAIL: Late payments on credit cards in U.S. reach record high. D1

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Borrowing Binge

Consumer debt: Japan vs. America

Per capita Japanese consumer debt has nearly tripled between 1985 and 1994, surpassing U.S. levels. Credit industry sources say debt repayment is considered problem when debt level reaches 20% disposable income; in Japan it is now about 23%.

*--*

Income per capita Consumer dept Debt as percentage per capita of disposable income JAPAN 1985 1,839,000 yen 228,000 yen 12.4% ($9,168) ($1,137) 1994 2,600,000 yen 603,000 yen 23.0% U.S. ($26,0440) ($6,040) 1985 $12,339 $2,479 20.1% 1994 $19,002 $3,655 19.2%

*--*

The yen was worth about $200 in 1985 and $100 in 1994.

Note: Figures do not including housing loans.

Sources: Japan Credit Industry Assn., Bank of Japan

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Personal Bankruptcies

The personal bankruptcy rate spiked in the early ‘90s when Japan’s “bubble economy� burst and many speculators in stocks and real estate were caught short. Since then, however, more overextended consumers have sought bankruptcy protection.

‘95: 43,946

Source: Japanese Supreme Court

Note: Figures may not add up to 100% because of rounding

Source: 1996 survey of 1,500 Japanese adults by Acom loan company

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How much they owe

Japan’s consumer debt is now roughly as much as its national budget.

Total outstanding consumer loans, excluding housing mortgages (1994): 74.9 trillion yen

Japan’s national budget (fiscal year 1996): 75.1 trillion yen

Sources: Japan Credit Industry Assn., Ministry of Finance

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Causes of credit trouble (In descending order of frequency):

Entertainment, restaurant and bar bills

Daily living expenses

Luxury items, overpurchasing

Gambling

Unemployment

Changing jobs

Source: 1995 survey by the Japan Credit Counseling Assn. of consumers who approached the organization for debt counseling.