Controversial reforms may help Japan, even if they hurt lenders

AS A registered moneylender, Syouichi Kawamura has what, at first glance, looks like a cosy job. He spends his day cycling around bars and restaurants in the Ginza district of Tokyo, collecting money from
his clients. The hard part is keeping tabs on their creditworthiness, and ensuring discretion—many borrowers do not want even their families to know how much they are in debt. Until recently, the easy part was the business logic; moneylenders have been able to charge borrowers as much as 29.2%
while—this being Japan—paying little to fund their businesses.

With margins like these, it was hardly surprising that foreign financiers and hedge funds flocked into consumer lending in Japan at a speed notably faster than Mr Kawamura's wobbly bicycle. The country's top banks have also entered, through stakes in large consumer-loan companies. Though there are 13,700 small, registered lenders such as Mr Kawamura's, they account for just 2% of the ¥20 trillion ($174 billion) industry. Another 300 firms divide the rest of the pie. The biggest seven, including the consumer-finance arms of America's GE Capital and Citigroup, hold 70% between them.

From such big fish down to minnows like Mr Kawamura, there has therefore been general unease over proposed reforms that will be scrutinised by the government either this month or early next, and possibly voted on later this year. These are intended to put an end to confusion over how much interest lenders can
legally charge. At present there are two caps, one at 15-20%
and the other at 29.2%; most lending is at rates in the grey area in between. The reforms were triggered in part by a Supreme Court ruling in January against rates in excess of the
15-20% ceiling. This cost consumer-finance companies a lot of money. Shares of the top four have fallen by almost half since then (see chart).

But the complaints from Japanese lenders are nothing compared with those from their foreign-owned rivals. These companies say that lower rate caps would discourage lending to anyone but the most reliable borrowers, driving the rest towards loan sharks
who charge truly exorbitant interest rates. That, some add, would provoke a credit crunch just as Japan's economy is
getting back on its feet.

All of which the market regulator, the Financial Services Agency (FSA), takes with a pinch of salt. Both it and a subcommittee within the ruling Liberal Democratic Party (LDP) insist the system as it stands is unhealthy for borrowers. “We want a country where people don't overburden themselves with debts they cannot repay,” says a senior FSA official.

As well as unifying the rate caps, the reforms bring in new measures to crack down on illegal loan sharks. They also tighten restrictions on borrowing from several creditors and stiffen the rules on licensing
lenders. The LDP subcommittee disputes claims that lending will decline, hurting economic growth. Its research shows that many borrowers are simply rolling over loans, rather than borrowing for lavish spending sprees. Lower rates may encourage more sensible borrowing, even if they discourage reckless lending. Meanwhile, claims that 10m-15m borrowers would be forced to turn to loan sharks if they
cannot borrow elsewhere are nonsense, FSA officials say.
Mr Kawamura is philosophical. Like others, he says he might have to shut his company down, but he plans to look elsewhere for business opportunities. Foreign firms are less relaxed. They say it makes
more sense for Japanese authorities to amalgamate the three credit-history databases that banks, credit- card companies and consumer lenders hold, which is already a medium-term goal of the reforms, rather than lower the rate cap. Some foreign hedge funds threaten to quit Japan or curb their investment if the reforms pass.

But moneylenders have made handsome profits from Japanese consumers, and the FSA believes they
have no reason to moan if the cap is tightened. If anyone wants to leave Japan, an FSA official says with uncharacteristic bluntness, “by all means get out.”