I spent part of the day today in court. I was defending myself against the landlord of a friend of mine who has been unable to pay rent. I am the guarantor on the lease and the landlord has decided to come after me for the money. This is probably the fifth time that I've had debt collectors of various sorts come after me because of guarantees that I've made. I'm sure people wonder why the hell I keep guaranteeing things. The odd thing is that it is so common in Japan. It is as good as required for any significant transaction such as renting an apartment or borrowing money from a bank. Even government affiliated loans require personal guarantees by people other than the principles.

My first experience with these guarantees was back when I was just starting to work in Japan over 15 years ago. I signed a document that listed a transaction breakdown between two affiliated companies. I thought I was a witness. Later, when one of the companies closed down, the other company (owned by the same parent company) came after me as the guarantor of the transaction. I quickly learned what "to guarantee" means and ended up having to pay.

Since then, briefly as the headmaster of a small school, as the CEO of various companies and the friend of people starting companies, I've been asked to and have signed as guarantors for various contracts. The really horrible thing about this Meiji era practice is that it is so common. People seem to think nothing of asking for it and without it it is almost impossible to function. I've spoken with various people in government and business about the damage that this system causes and most people agree. However, I don't see any changes.

When Digital Garage was still not public, the bank required the two founders including myself to guarantee all loans. At one point I had millions of dollars of guarantees outstanding. The crazy thing was that the bank made me sign a "and all lines of credit in the future" form. Even after I left Digital Garage to be chairman of Infoseek Japan, I was still a guarantor for Digital Garage and was only released at the IPO.

One of my portfolio companies failed several years ago. As the lead investor, I went around to the other investors and explained the situation. Two of the other investors asked me to PERSONALLY cover their loss. Both of these companies were public Japanese companies. I didn't pay of course, but they seemed to think that it would have been nifty if I had. I've never heard of such a thing happening in the US.

As I blogged before, this is a major source of suicides since bankruptcies cause a cascading serious of bankruptcies to friends and family. The shame often drives entrepreneurs to suicide. It is no wonder that entrepreneurship isn't very popular in Japan.

Anyway, I was reflecting on this and remembered that this was on my list of "one of the things we need to change here" as I sat before the judge trying to defend a case that I know I have no chance of winning.

27 Comments

I had to have natives vouch for me in this way many times in my few years in Japan...However, it's no stranger to me than people swearing on a bible here. But I can't argue with the inability to change the status quo in Japan.

I think it also speaks to how closed-off and ethnically homogenous Japan still is, relatively, that there is an inherent trust among it's citizens... which causes it's citizens problems when they abroad because they are far too trustworthy...

How about the hanko then?

Well, I think it's sort of a mistrust of each other in a community where you can't run away. ;-)

The hanko is interesting. There is a "jitsuin" which is the hanko registered with the government. Then there is "sanmonban" which is unregistered chops. The legal precident is that if some contract has your jitsuin, you are fully liable regardless of whether you actually put the chop there yourself. With the sanmonban, you can have people chop stuff for you, but unless you have given them some sort of proxy, you can argue that you haven't agreed.

I wonder, did your friend inform you of the impending problem Joi? If so, then, from your point of view, is it the lesser of two evils to lend your friend the money to cover the debt over having to attend a court where you know you will lose anyway? In the UK, appearing in court for debts has fairly onerous consequences...

Obviously the above isn't ideal and has a potential to be abused by less-than-honourable people but in cases where you trust the person in question I wonder ifit would save you more 'official' hassle?

Very interesting. I too have a list of things that we should change, and I will be adding it in my personal wiki in the next days. Right now in Italy we are trying to self organise bottom up some primaries of objective we are then asking which parties are willing to sponsor them. A sort of bottom up program that is going from the citizen to the parties, instead of the other way around. (Unfortunately most of the talk about this is in italian, keytag:'primariedeicittadini', at least on my blog)

I was wandering if you keep your your list of things that should be changed public, and in case where.

Pietro

Pete: My friend didn't let me know, but he didn't think we'd end up in court. It was pretty sudden. I'm sure we will end up settling out of court, but it is part of a process.

Pietro: Good idea. I don't have a "things to change" tag or category...

I would like to add that the situation is compounded when you are a foreigner doing business in Japan. It is extremely diffciult to get a Japanese person to guarantee any large amounts, a situation that makes it very difficult to obtain bank loans or other credit. Some banks will accept a foreigner's self-guarantee, but as Joi pointed out the guarantee system means that the entrepreneur has little liability protection. On the plus side, lack of access to credit does hone one's cashflow management skills ;)

I don't really understand why the guarantor system isn't simply replaced by insurance.

Joi: I've always been interested in how quickly a landlord will go to the guarantor upon non-payment of rent. I've always paid on time even if it meant paying ahead for trips abroad. Since the terms of the process to contact the guarantor aren't specifically outlined in my rental contract I've always wondered about this grey area.

Mark: I can't comment on business guarantor issues. Although, the insurance sector has turned its sights on the rental guarantor market. There are few companies that will offer insurance that acts as your guarantor for apartments. They have different profiles that you need to fit (for example: young adult without living relatives, recently divorced females, etc.) to be eligible. Some do not allow foreign applicants. This information is from a limited search I did while searching for a guarantor for my apartment.

I ended up with a guarantor company that just charges any overdue rent on my credit card. My Japanese realtor introduced me to this company and I like it because I become my own guarantor thus, hopefully, making my own contribution to the effort to eliminate the necessity of the guarantor.

Joi: Do you have any comments on the Japanese insurance industry?

Joi,
Is it true in Japan that if you guarantee somebody's or some company's debt, you are guaranteeing also potential debt in future? Banks and other creditors have no legal obligation to free you from the potential burden. I heard that if your family inherits any of your properties in the future, then they will inherit the potential debt obligation, potentially for ever, and over many generations. Is it true that there is no time limit nor limit of amount?
mi

mi: Yes. This is true. One of the biggest problems is when someone with many guarantees passes away without disclosing to the family their guarantees. The family can waive the liabilities by waiving their right to inheritance, but once the family accepts the inheritance after the debt, these "submarine" guarantees can come back to collect. As far as I know, there is no limit to the amount or the collection time. There are many tragic stories of families who have taken some minor inheritance from a father only to have a debt collector come and take everything as part as a guarantee. Since guarantees can include future debt, I assume that this amount could balloon. Also, as in my case, since they can wait a farily long period before calling the guarantee, it can come as quite a shock. Once you have accepted the inheritance and have passed some sort of time period (I think it was 6 months), you can no longer waive liaibilities. Very bad system for the families.

is this not the same concept of the "bonded labourers for life" as it happens in India and soem of the asian countries ??? Babies are born into "bonded" and pay for the debts of thier grandfather and their children too...

I think its the same, except with a different spin of cultural difference and naming conventions

Oy. Make that "one of the things we need to change in Japan and Korea". I wonder it's the same in China. Anyone?

It's worth noting that this same practice does exist in America, although its seems not to nearly the same extent as it does in Japan. A small business owner seeking a bank loan for a young company will need to personally guarantee the loan. A person with a bad credit rating (a rather American concept I believe) will need a guarantor (with a good credit rating) to sign a lease or take out a student loan. The difference seems to be in where the threshold where a guarantor is needed is located. In America a lender is willing to take risks on an individual with a proven track record of paying back loans, in Japan perhaps there is less trust of any borrower?

Joi, I'd like to add my name to the others requesting a list of things in Japan that need changing. Here are a few for your list:
(1)The way most murders are listed as "missing person"
(2)Waribashi and use-once umbrella covers in stores
(3)Organisations who won't accept a signature+gaikokujin card in place of a hanko.

btw, do you attend Tokyo 2600 meetings?
-Karamoon

Is there a secondary market for personal guarantees? If not, why?

I guess I'm just echoing Mark's comment: "I don't really understand why the guarantor system isn't simply replaced by insurance."

Karmoon: I'd love to attend a 2600 meeting here. I haven't yet. Maybe I should go...

Mike: Yeah, good question about insurance. I think one of the problems is that the ability to underwrite or issue insurance has a lot to do with the ability to analyse the problem. With this web of personal guarantees, it's very difficult to measure someone's credit/default risk. Having said that, the government has been pushing banks to deal with this and the mark to market acccounting and push on bad loans has probably make the market a bit easier to analyse. Also, I think the point is that if everyone is getting personal guarantees, there is no competition in the market. There is no reason to offer someone a loan without one.

In high school I had a law teacher that used to say “A guarantor is: a fool a pen with a an urge to sign foolish papers” (the correct translation is a bit stronger than the word fool or foolish), the problem is to vouch for someone that cares less for the person that supports him when needed, when it’s time to respond for his obligation.

good post Joi, thanks.

The lack of consumer credit ratings affects pretty much every aspect of life here since anything involving money requires either a guaranteur or cash up front. Even the idea of securitizing debt is VERY new here with mortgage backed securities only being legalized a few years ago.

Oh and for foreigners who think they might get decent treatment from Citibank Japan because they have a credit history with Citibank US? Forgetaboutit. Citibank Japan has no way of or no will to deal with the rest of Citigroup and it was my experience that they resent you asking in the first place.

File this whole damn mess (along with all the recent banking/securities scandals) under "Japan is still a feudal nation"

Well, consumer credit ratings don't really help the situation of new enterprises. Startup businesses are more about unquantified uncertainty than about known risk.

Surely there must be some way to monitor court actions to build up a list of past defaulters in the consumer sphere?

It looks to me like the weakness of the banks might be a big source of these problems. I am guessing that medium-value consumer loans and overdrafts (500,000-5m yen) aren't common transactions in Japan.

The post office lends money, right? Do they demand guarantees too?

Going through the installation of a gaikokujin in Japan these days, I had already to give a guarantor for renting my apartment in shimokitazawa. :)

Another interesting thing, the guarantor MUST be japanese. For example, it can't be the bank in your country of origin even if you have the money to cover the rent for one year.

Each country have their own subtleties and requirements. In Japan, it costs a lot to start renting an apartment, but it's quite easy in terms of papers. In France, it's a hell to get all papers and requirements to be able to start renting, specifically Paris. In Canada, visit, sign, it's done. (For the 3 countries, I had to find an apartment).


Please dont think that a credit rating system is the sollution either. We have that here in the UK and it is a total drag. The data is held by a few companies, if the data is incorrect it can take many months to restore and even then a lot of companies can hold copies of the wrong data.

It also meant that when I moved to this country with trippled wages I still could not get a normal bank account because I had no credit history.

Going to be fun to start from scratch when I move to Japan.

Joi, I'm impressed with your "things that must go" attitude. As frustrating as your experience may be, this reveals a healthy sense of optimism on your part where others might simply shrug their shoulders and say "shoganai."

I haven't lived in Japan for several years, but this conversation brings back all sorts of memories (good and bad.) I tend to idealize my time in Tokyo, but this reminds me of some of the difficulties. Thanks for continuing to provide a window into life in Japan (and a venue for discussion.)


Wow. This is both amazing and ridiculous. You probably are aware of the situation in the US, but for those who aren't, I'll summarize.

In any corporation or limited liability partnership in the US, generally speaking, investors' liabilities are limited to what they invest. Sometimes, banks may require personal liability on loans to small businesses or entrepreneurs, but generally, if the corporation develops some credit, these can be avoided.

Limited liability promotes entrepreneurship, investment, and risk-taking, which are good (although it also leads to a few problems). But this I think is clearly at least one reason Japan has trouble getting people to start new businesses. Who wants to take on personal liability of that magnitude? I'm surprised it ever happens at all!

I would much rather give the other side a better price than give a personal guarantee.

Guaranteeing really seems to be a structural problem there.

But how does the Japanese society deal with failure ? Let´s say you actually manage to get all your guarantees sorted out, how is society treating you afterwards ? I believe there is a lot of shame attached to failing from what I hear and it is similar, yet not so intense, in Germany. If you fail as an entrepreneur, people tend not to give you a second chance. Unlike in the US, you´re regarded as a "failure". Germany has no "culture of failing", no "pleitekultur", as we say. Another US-advantage regarding entrepreneurship.

I better get back to work.

Personal guarantees? With all of the financial entanglements envolved in running a business people are probably better off just being a ordinary taxi driver, train conductor, or something.

It looks to me like the biggest problem is this whole idea of guaranteeing future debts. That makes it impossible for the guarantor to limit their liability, or sometimes even to know what their liability is. I can see why insurance companies aren't interested in being guarantors!

And of course for individuals it's even worse. It sounds like giving guarantees is an essential part of doing business in Japan, but giving guarantees means risking some kind of financially ruinous bolt from the blue in the future. (Which will of course arrive at the worst possible time.) And if you've inflicted financial ruin on your backers, I'm sure you can pretty much forget about starting another business anytime soon.

I agree with the poster who said it's surprising that anyone still tries to start a business in that environment.

That just f*ing blows! I feel for ya...


SEVERAL credit card companies have introduced programs over the last year allowing homeowners and renters to pay their monthly housing bills with a credit card. For the cash savvy, the program is a potential windfall, allowing users to rack up rewards points that qualify them for free trips and other perks. Though some of us are working, we probably know how much money you made last month but you do not know how much money you spent. Or do you know how much money you have left to spend this month. If you do not, you’re not alone. Most people have no idea. The fact is most of us spend 10% more per month than we make. That comes out to $431 per month based on the Average American income. How about the bonuses!!?? And if you come out short in money, how are you going to manage your debt relief ? This has led some critics to charge that credit counseling is just a tool of the lending industry. The payment system, known as "fair share," has certainly encouraged the growth of credit counseling services. And some agencies, driven by competition, are now openly courting consumers who haven't fallen behind on their debts by promising lower interest rates. This development has angered credit-card companies and often hurts consumers, who may find out too late that such plans can hurt their credit ratings and are often unnecessary.

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