Joi Ito's Web

Joi Ito's conversation with the living web.

Japanese banks have a tradition of taking personal guarantees for corporate loans from the businessmen as well as their families. For instance, I was personally on the hook for millions of dollars at one of my first companies, Digital Garage, until we secured enough outside financing to pay off our debt, which in Japan is often the only financing available to new companies.

The Japan Times reports that this is a significant cause for the high suicide rate in Japan that I often write about. There are over 30,000 suicides a year in Japan, mostly be older men. It is more than three times the number of annual traffic accident deaths. The article describes people whose businesses go bankrupt or are unable to pay their debts and how this destroys the lives of loved ones and friends around them as banks run to collect from the guarantors. The people commit suicide in shame. Also, most people in Japan buy life insurance to cover most of their outstanding loans. The suicide, if executed properly will relieve these unintentional victims of the burden of paying off liabilities.

I have personal guarantees on many loans and have actually had to cover several payments for friends and others that have defaulted on their loans. The fact that it is such common practice in Japan makes it a real sleeping problem that faces society here as the economy continues to get worse. Another big problem with these guarantees is that they are difficult to assess and make quantifying default risk for banks difficult. Credit assessments for individuals who are exposed to such guarantees is also very difficult.


The article fails to mention that banks, especially local banks outside of the big cities, use gangsters to threaten and intimidate debtors, who may actually think that they aned their family are going to be killed if they don't pay up.

The situation in Germany is nearly the same. loans from banks to small and medium enterprises (the German Mittelstand) are only given against personal guarantees. almost all of these enterprises are since several years in a very bad condition. they are nearly bankrupt. Germany is driving fast into a big depression. not only economic but also psychologic. i would not wonder if the suicide rate would rise here in Germany. as tax rates and living costs are high and unemployment rising rapidly ... there is no short outcome. In short: Germany is in a desparate situation then ever.

This brings up the issue of moral capitalism. The tradition of standing by one's debt is something that pre-dates the Meiji period or Japan in general.

When is it "OK" to blow off your debts? If you're a business is it any different than if you're an individual? Once credit cards were invented, so too were bankruptcy lawyers.

I really like the tradition of using personal references to build a business and jumpstart capitalism. But what should happen if that business goes broke?

Well for one - I don't necessarily go broke! But if you DO end-up owing people money - THEY SHOULD GET PAID BACK! PERIOD! It's one clear feature of what I call 'moral' capitalism.

Moral capitalism also treats women and minorities equally, doesn't practice nepotism or country club, old-boy networks and makes accountability and performance the most important factor of judging someone. What's killing this world - is the cult of the CEO - who's making sure his son gets to take over for him. That's what's behind the idiocy of the telcos, the arrogance of Hollywood and the downward spiral of the dot bomb. Greed and nepotism.

Despite my concerns, my former company is doing pretty good - running on our old models and products. But what depresses me beyond belief is how universally hated Macromedia is - as they are apparently real schmucks - just ask someone who wokred there. They certainly have been schmucks - to me.

Marc Canter wrote: "if you DO end-up owing people money - THEY SHOULD GET PAID BACK! PERIOD!"

I respectfully disagree. Banks are -- or at least, should be -- in the business of taking risk, unless you are willing to posit that it's normal for banks to reap rewards -- the loan's interest payments -- without taking the risk -- i.e. bad loans.
The personal loan guarantees required of company presidents in Japan and Germany are antiquated and pernicious regimes which IMHO put up yet another obstacle before much needed entrepreneurship.

One big problem is/was the lack of venture capital or equity investors. Almost EVERYONE went to banks as the only source of funding. Even very high risk ventures were financed by bank debt instead of capital.

Another problem is shifting expectations and practices. In the past, banks usually continued to extend loans to troubled companies and most companies were protected and personal guarantees were rarely triggered. This got the banks into a lot of trouble and now they are collapsing under these bad loans. As the banks get squeezed, they squeeze the companies. Many small companies function on a base of credit from banks and a failure to refinance can cause them to collapse.

In the case of smaller companies it's sometimes easy to forget, but corporations are different "persons" than their owners, legally speaking. This is not some sort of recent, Emron-like legal scam. It dates from centuries ago. The concepts of limited liability and transferability of shares are key to making corporations work, and there are considerable social and economic benefits derived from the existence of corporations.

Of course there can be abuse of corporations, and this is most common in small corporations consisting of an individual or a family. This should not be solved by banks equating the corporation with the individual and requiring personal guarantees. This should be solved by enforcing the rules that are already there: separating of the activities and funds of the corporation and owner, strictly accurate accounting, documentation of all corporate actions, oversight by the board and documtation of their decisions, etc. Banks can then look at this data and make informed decisions on lending. If these requirements are not met, corporate law will determine the corporation to be a sham and will pierce the corporate veil, giving the banks access to the individual's funds.

The news yesterday of plans by major universities to establish graduate accounting schools and increase the number and skill level of accountants in Japan is one step in the right direction. Another step should be the reining in of banks and the limiting of personal guarantees.

It is more of the same in Korea. Friends and family guaranteeing loans and then losing their houses when the friend or family member's company bankrupts. Head of the company frequently goes to jail too. It was the worst during Korea's recent IMF years. Economy is looking better but the system is still there.

Gangsters and loansharks have been there for ages also. Typically they break your legs, but sometimes body parts are chopped off to expedite payment from concerned family and friends. Ultimately, lives are taken as last resort to prevent others from doing the same. They also threaten people to sell body parts. You can see anonymous phone numbers on public bathroom walls for that sort of transactions.

When competition among creditcard companies were fierce, gangsters would force the lender to get as many creditcards as possible and then borrow on it to get their money.

While I agree with Marc on the moral issue, one often have little option but personally guaranteed loans or loansharks in Korea. During venture-crazy days things were a little better, but now that it's over, it's back to the old fashion way.


I don't think it is true that big companies abuse limited liability more than small companies. Large companies certainly use the Chapter 11 procedures a lot in the US, and Chapter 11 is basically a procedure that allows you to write off your debt but still stay open for business. It's not always a rip-off, but it often is.

Since junk bonds, there is no longer any moral difference between a 'loan' and a minority equity investment. Both amount to pretty much the same thing, taking a share in the risk and reward of a venture. If you don't like the risk, then you shouldn't give them the money.

Courts in Germany have started about ten years ago to nullify personal guarantees requested from spouses and children, under certain conditions. They say some of these personal guarantees are immoral contracts.

Before that, all courts just pointed to the ability of any adult to conclude valid contracts. "If that guarantee contract isn't very favorable to you, too bad. Nobody forced you to sign." That was the old idea.

Now at least the family of someone failing at a business venture has a good chance to walk away without having to declare bankruptcy.

In Ireland and the UK too, guarantees are treated a lot more candidly by the courts (although the letter of the law has not yet followed suit). Basically, if a big bank loses out by lending money to a small guy who defaults, that's the bank's problem, not the small guy's.

Actually, I'm more interested in what someone like Joi could/does do to cover his exposure. It sounds like an invitation to ulcers, early grey hair, and other maladies.

During Meiji era, Kanekashi(bank) went after persons in debt very viciouly and when they were unable to pay, banks took their daughters and sold to whore houses. It was common practice.
The personal guarantees for companies are very dangerous in Japan. My understanding is that the guarantees may be cancelled only by banks and the decisions are totally discretionary. There is no time limit for the personal guarantees. Quite often, there is no limit for the amount. The guarantee covers potential financial problems of the company in future. This is very scarely because even if the company is doing very well at present, the individual, who signed the guarantee paper is responsible for the potential future problems. The pesonal guaratees even survives the death of the person, who guarateed. His sons and daughters, or even grand childrens can not get out from the obligations once they inherit some portions of his properties. There is no law to limit bank's power.
Be careful.
Please let me know if my understanding is not correct or outdated.
Masat Izu

Correction for the previous post.
Meiji era should be replaced by Edo era.

Well, after the dot-com crash of 2000 ... you pretty much had to self-fund a startup. I actually won a venture competition in June '2000 (iBreakfast) ... but never got funded. Instead I pretty much used up all my assets to get the company off the ground.

Luckily the economy started to rebound and I managed to get work in mobile game ... our company (ZipProof) chugs along ... but I have to use creativity as opposed to cash to market it.

I came close to finanical bottom by the middle of 2002. Not fun at all.

The only good news out of this is that (I believe) companies that have been built like this are very efficent affairs. We're cash-flow positive and we'll stay that way ... because there is no alternative.

In fact, the CEO believes that if we had been funded in 2000 ... the VC's would have driven us out of business by now.

I am always glad to see when you blog about social-business problems that plague this country. As a person who one day hopes to start up a business here in Tokyo, I hope I never have to ask anyone to guarantee a loan for me. That pressure alone scares the 'crap out of me' and keeps me rethinking and redoing my business plans.

kyle, you still need to put up a shield to prevent others from asking you to guarantee their loans.

The most basic shield is to inform your friends and relatives well ahead of time how you would answer such queries using one or more excuses. This way, embarrasing refusals can be avoided.

As for myself, I tell everyone I am totally against having monetary concerns come between friends or relatives. So far, no one has asked me to guarantee their loans.

as JIM said the situation in germany is nearly the same as in japan. but i think that the suicide rate will not increase because of the "german way of thinking".
an average german man, maybe he is a businessman or member of the middle-class, would not choose the suicide to get his debt paid. he would try to get a new job and pay his dept, even if this means to live in poorness and shame.

Note that personal guarantees aren't that unusual in the US, either. Most small businesses don't have growth models that support VC funding, even when that market is hot. At the last startup I was in, they had a few million of VC money in the bank. But to get an office lease, the founder with lots of personal assets had to guarantee the lease. And when they decided they wanted to lease new servers instead of buy, the same thing.

Even with SBA involvement, banks want lots of personal financial risk to come with theirs.

Another factor, I suspect, is differing patterns of home ownership/financing. Am I correct that fewer Japanese own their own homes? And that those who do have 99-year mortgages? I would think that someone who "bought" decades ago would have lots of appreciation-based equity in their homes - is that available via home equity loans? Or does this market not exist, given that the banks know there's still a bogus bubble in real estate?


Simply not guaranteeing the loan is not sufficient, at least in the case of immediate family. When the thugs come calling, the family will be calling you in panic asking for money. The only way to avoid this is to not have any liquid funds, if at all possible; hard to do in Japan where everyone's savings are in cash and real estate investment is not practical (see below).

BillSeitz: You have a fundamental misunderstanding of the Japanese real estate market. In the U.S., real estate appreciates, maybe 3% a year over the long haul. In Japan, real estate depreciates, maybe 3% per year over the foreseeable future. Therefore the idea of accumulating equity or getting a second mortgage is laughable. Your first mortgage, at any given time, will have a higher outstanding balance than the worth of your property. This is from day one of ownership, since a house (or in Tokyo more likely a condo) that is not absolutely brand new is worth a good 20% less than it was the day before. Sort of like cars in the U.S. One of the results of this situation is that relocating, buying a new home, moving into a larger place when you have kids or a smaller place when they go off to college--all these are impossible. You will die in the house you buy. Period. You'd better like it.

Loan terms are maybe up to 35 years generally. Interest rates are realy cheap, usually adjustable rate, fixed for a few years, currently 2% or less. Interest on savings accounts is about 0.0x%, nearly zero.

A late comment but apt. Not only does the personal guarantee of loans lead to suicides, it leads to nudity as well.

According to this page:

Anna Umemiya's boyfriend defaulted on a loan she had guaranteed, and she was forced to pose naked to get the hundreds of millions of yen needed to pay the loan back.