Bankruptcies on the rise

Corporate bankruptcies in Japan have significantly increased during November 2024. The number of bankruptcies has risen for the third consecutive month, and total debt is sharply higher compared to the same month last year. This trend is driven by a combination of factors including rising costs, labor shortages, and lingering effects of the COVID-19 pandemic. The data indicates a potential return to pre-pandemic levels of bankruptcies, possibly exceeding 10,000 cases annually.

From an overall economic perspective, there are many "zombie companies" that can hardly generate sufficient returns to pay the interest on their loans, even at the historically depressed levels. The small steps that the Bank of Japan has taken this year in policy normalization already put an additional burden on these companies. There is a need, however, to weed out these zombie companies to make space for new, more productive enterprises in a process of "creative destruction". For Japan to achieve its targets for the startup ecosystem, there is no alternative.

Rising Bankruptcy Numbers and Debt

• There were 841 corporate bankruptcies in November 2024, a 4.21% increase compared to November 2023 (807 cases).
• Total debt from these bankruptcies reached 160,223 million yen, a 68.88% surge compared to 94,871 million yen in November 2023.
• This increase in debt is partly due to a few large bankruptcies, including two cases with debts exceeding 10 billion yen and three cases between 5 billion and 10 billion yen, a stark contrast to zero such cases in November 2023.
• Cumulative bankruptcies from January to November 2024 reached 9,164, a 16.29% increase from the same period in 2023.
• The cumulative total debt from Jan-Nov is 2,149,508 million yen, a decrease of 6.51% from 2023.
• Cumulative bankruptcies from April to November 2024 reached 6,845, a 15.54% increase from the same period in 2023.
• The cumulative total debt from April-November is 1,788,537 million yen, a decrease of 10.52% from 2023.

Breakdown of Bankruptcies

• Size of Companies: While smaller bankruptcies (under 100 million yen in debt) were down 1.7% year-on-year they still accounted for 72.8% of cases. Bankruptcies of mid-sized companies, with debts between 100 million and 1 billion yen, increased substantially.
• Listed Companies: A notable bankruptcy was that of Nippon Denkai (debt 14.761 billion yen), a company listed on the Tokyo Stock Exchange Growth Market, which filed for the Civil Rehabilitation Act.
• Geographic Distribution: Most regions, except for Hokkaido and Chubu, saw an increase in bankruptcies. The trend of increased bankruptcies appears to be spreading nationally.
• Industry Breakdown: Seven out of ten industries saw increases in bankruptcies compared to November 2023.
• The service industry had the highest number of bankruptcies (304 cases).
• Other sectors experiencing significant increases include wholesale (98 cases, 13.9% increase), information and communications (30 cases, 15.3% increase), and transportation (38 cases, 35.7% increase)
• The real estate and retail industries saw decreases in bankruptcies.
• Employment: 88.9% of bankruptcies were in companies with fewer than 10 employees.

Factors Driving Bankruptcies

• Economic Pressures: Delays in the resolution of excessive debt, rising prices, labor shortages, rising labor costs, and the expansion of social insurance premiums are they key contributing factors.
• COVID-19 Aftermath: Companies are struggling to recover from the pandemic, facing sluggish performance and difficulties meeting funding demands.
• Rising Interest Rates: Rising interest rates will further pressure profits in the future.
• Labor Shortages: Labor shortages are a contributing factor in 266 bankruptcies in Jan-Nov, and that the number is on track to surpass 300 by end of the year. This figure is a 83.4% increase compared to last year.
• Coronavirus-Related Bankruptcies: While the number of bankruptcies related to the new coronavirus is down from the same period last year, they still contributed to 198 cases in November and a total of 2,606 cases in 2024 YTD.

Projected Trends

• If the current pace continues, all nine regions nationwide are expected to exceed the previous year's number for the second consecutive year.
• The number of bankruptcies has risen for three consecutive months, and there is the possibility of reaching 10,000 bankruptcies by the end of the year for the first time in 11 years
• The year-end and New Year period, traditionally a peak season, is expected to be particularly challenging for struggling companies.

Implications

• There is an increasingly challenging economic environment for Japanese businesses, particularly small and medium-sized enterprises (SMEs).
• The significant increase in corporate debt suggests that even when companies are forced to close, they are going down owing more money than in the past.
• The rise in bankruptcies across various industries indicates a widespread struggle, not limited to specific sectors.
• The projected continuation of this trend suggests that businesses need to be prepared for potentially difficult conditions in the near future.

Conclusion

There is a clear indication of the rising tide of corporate bankruptcies in Japan. The combination of lingering pandemic impacts, rising costs, and other economic pressures is taking a toll on businesses. The need for companies to manage risks carefully and for policymakers to address the underlying economic factors contributing to these financial difficulties are essential. A return to pre-pandemic bankruptcy levels is likely, warranting close monitoring of the situation in the coming months.

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