The Industrial Revitalization Corp. of Japan (IRCJ), a body created in 2003 to turn around failing corporations, completed part of its mission at the end of March after buying the loans owed by selected businesses. The remaining part of the mission of the semigovernmental agency, due to disband three years from now, is to find business partners for those businesses and put them on the recovery track.

If some of those loans decline in value by the time the agency is dissolved, the losses are to be covered by the agency, which is partly funded by the government. In other words, the bill will be passed on to taxpayers. The IRCJ, which started out with a buyback fund of 10 trillion yen, has so far spent about 1 trillion yen purchasing loans and supplying capital.

The IRCJ is right to try to avoid losses by selling the loans at higher prices than at what it bought them from creditor banks. Given tight market conditions, though, the agency’s ability to turn profits will be tested. At the very least, it should try to minimize taxpayers’ burden.

In its first two years of operation, the agency did a fairly good job: It selected up to 41 businesses for assistance, including household names such as the Daiei supermarket chain, cosmetics maker Kanebo, and Daikyo the condominium builder. This action raised its profile as a corporate turnaround agency.

The list also includes small and medium-size businesses, such as Matsuyadenki (electric equipment) and a range of regional companies, including Kyushu Sangyo Kotsu (transport) in Kumamoto Prefecture, Usui department stores in Fukushima Prefecture, Skynet Asia airline in Miyazaki Prefecture, and Kinugawa Grand Hotel in Tochigi Prefecture.

The IRCJ has already succeeded in turning around eight companies. It says other revival programs are “proceeding steadily,” suggesting that it has not incurred any losses to date. The question that remains is whether it will be able to rebuild other companies without causing losses.

Success may not be assured in every case. Most of the companies that sought the agency’s help in the first place had one problem in common: a large amount of nonperforming loans. They could have shed those loans rather quickly through bankruptcy filings, but such a drastic measure would have done serious damage to the regional economies that depended heavily on their presence. So they chose a less damaging method: “soft landing” with a public bailout.

Creditor banks, meanwhile, are playing a more positive role in the IRCJ’s revival programs. They are now willing to accept debt waivers for their beleaguered clients — a painful option that they initially refused to take. Indeed, there appears to be growing realization among regional lenders that they must share the pain with distressed clients. Some banks are keen to learn turnaround knowhow from the agency.

Still, finding business partners for ailing companies won’t be easy. Large companies with a nationwide network of operations are the exception rather than the rule. Two notable examples are Daiei, which has picked Marubeni trading group and others as its partners, and Misawa Home Holdings, which is set to receive help from Toyota Motor Corp.

By contrast, there is little likelihood that big companies with national reach or foreign investment funds will come to the aid of local businesses. Not only is their relatively small size a disadvantage, but also the business climate is generally more harsh in the countryside. So those businesses really have no choice other than to find partners in the communities or regions where they operate.

One encouraging development in this regard is the creation of revival funds by regional banks — proof that they are taking a more active role in local-level corporate rehabilitation. The “revival business” is attracting not only foreign funds but also major brokerages and leasing firms. Institutional investors are also interested in turnaround funds.

The fact remains, though, that the number of “turnaround experts” — those who have experience and expertise essential to corporate rehabilitation — is extremely limited in local areas. As an alternative, some of the specialists dispatched by the IRCJ to aid businesses in receivership are reportedly serving as their de facto chief executive officers or management advisers.

These specialists, however, normally return to the IRCJ head office in about a year. After their departure, the businesses involved will need to figure out ways to rebuild themselves largely on their own. With the IRCJ ending its mission in 2008, how to train such specialists is a vital question.

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