Dark Side of Debt in Japan

The lender caught on tape confronted his client: “If you don’t have money, make money!” he screamed over the phone. “Sell your kidney. That’ll bring in $25,000. Sell your liver. Sell your eyeball for $8,000. Just get the money!”

The shakedown, played in court in a rare case against a lending company, provided an unusual glimpse into the excesses of Japan’s consumer finance industry.

Millions of Japanese are taking on short-term, high-interest debt as they struggle to maintain their standard of living during the current economic slump. Lenders -- legal and illegal -- lure customers in with promises of easy money. The most disreputable then send gangsters to collect when payments are late.

Although loan sharking exists in almost every country, in Japan it’s arguably systemic. For the last decade, authorities have allowed the practice to spread largely unchecked, partly because police look the other way and Japanese are reluctant to make waves.

As a result, growing numbers of people are becoming ensnared in the web.

But several recent incidents have put loan sharking under a harsh spotlight, forcing authorities to begin reckoning with the issue.

In June, an elderly Osaka couple and the woman’s brother jumped in front of a train, leaving behind a note detailing their desperation about making loan payments. And in Tokyo, a small businessman is awaiting trial after taking four bank employees hostage, saying their employer ruined his life with excessive interest rates.

Goaded by growing media scrutiny, legislators recently voted to double maximum penalties for loan sharking to five years in prison and $85,000 in fines. The country also cut the maximum legal interest rate on loans several years ago to 29.2% -- high by U.S. standards, but down from the 40% previously allowed.

Critics say these measures are little more than window dressing, noting that loan sharks still advertise freely on billboards across the country. They say the real problem isn’t the laws governing Japan’s $84-billion consumer finance market but lack of enforcement.

In Tokyo, only a handful of inspectors police 7,000 registered and thousands more unregistered finance companies. There were 238 arrests nationwide for loan sharking last year, but only 12 people received prison sentences. The number of victims, meanwhile, is estimated in the hundreds of thousands each year.

“Japan is just heaven for yamikin,” or loan sharks, said Nekojiro Yoshida, author of a book on the subject. (The writer doesn’t use his real name, fearing that his work in behalf of debtors makes him a target for organized crime.)

In theory, the industry is regulated and subject to various laws: no illegal interest rates, no verbal or physical intimidation, no calling homes late at night.

In practice, however, the police have all but ignored industry abuses, viewing them as “civil matters” caused by victims’ own irresponsibility. Police also say they’re doing all they can in the face of rising crime with limited resources.

Lawmaker Hidekatsu Yoshii, however, has his doubts.

“That’s their excuse,” he said. “They’ve simply avoided tackling this problem. In the Osaka triple-suicide case, for instance, the victims asked for help from local police three times and prefectural police four times” but were brushed off.

“If that’s not negligence, what is?” he said.

Japan has several tiers of legal lenders, and name-brand banks and financial institutions are quick to dissociate themselves from the hardball collection tactics at the shady end of the industry. But there’s arguably a symbiosis that ties them together.

Respectable institutions lure new customers with glitzy ads that eventually provide more business for loan sharks, who return the favor by taking problem clients off their books and into even greater debt. Cheap leaflets and cold-calling salesmen seduce the desperate with visions of financial salvation.

“We want to build a bridge to your heart with 100% loans,” reads a direct-mail solicitation from a company called Breeze. “We’re not concerned about your past, your bankruptcies, your bad debts.”

“Pearson welcomes you with a smile,” reads another, depicting wads of large bills. “We support your lifestyle,” says a third called Vision, targeting middle-aged homemakers with a pink-and-red tulip motif.

The game is stacked against consumers. Advertising isn’t closely regulated, and there’s little public education on the perils. Borrowers often don’t know their legal rights or understand that a 15% interest rate over 10 days exceeds 500% a year.

A common tactic by unscrupulous lenders is to use a shell network of five or six seemingly independent companies. One company lures the desperate borrower in, sometimes using lists of problem cases acquired from unprincipled bank employees.

A seemingly attractive rate gets them in the door, at which point they’re told they only qualify for a 15% or 20% rate, payable in 15 days, assuming they provide a respectable cosigner and contact numbers for friends and family.

In Japan’s group-oriented society, the unwitting cosigner represents an insurance policy that the borrower won’t commit suicide or run away, as well as another cow to milk.

As the borrower inevitably can’t meet the terms of the initial loan, a second company appears with a new offer to help him pay off the first, generally at an even higher interest rate. In most cases the network extracts far more money than it lends. In the Osaka triple-suicide case, for instance, loan sharks forced the family to pay $850 a month interest on an initial loan of $165.

Compounding the problem is the enormous stigma against being in debt.

“People try desperately to avoid having their neighbors know their troubles,” said Kenichi Fujimoto, a sociologist with Mukogawa Women’s University. “It’s just too shameful.”

Disreputable lenders exploit these fears to wring the last yen from their victims. Tactics include posting handbills on house walls for neighbors to see, screaming outside victims’ homes in the middle of the night, visiting them at work and hitting up their friends and colleagues for payment.

These days, most of the extreme threats aren’t carried out, detectives say. Loan sharks have figured out that outright violence attracts police and media attention whereas verbal harassment generally doesn’t, and in most cases there’s enough new pickings to compensate for the few they lose.

They will abduct borrowers, however, which the victims rarely report, and force them to plead with friends for money over the phone. Or they’ll drive them to homes of terrified relatives. Some also force female borrowers into prostitution to repay.

An estimated 25% of yamikin have ties to the yakuza, or Japanese organized crime, according to police estimates, a further source of terror for those strapped by debt.

Lenders that don’t have mob ties often pretend they do to boost collections. Media reports highlight some recent messages left on answering machines: “Your child will be injected with drugs” and “Be careful, your house could catch fire.”

Where Americans would tend to walk away from a hopeless situation, a characteristic sense of responsibility and fear of embarrassment keep Japanese on the hook. “Japanese keep on making every effort to repay until the end,” said attorney Kenji Utsunomiya.

The author who uses the pseudonym Yoshida said his fall into quicksand began in 1994, when his father approached him to cosign a $42,000 loan at the then-legal interest rate of 39% for their family’s struggling building-supply business. Things quickly snowballed, and by 1998 they owed more than half a million dollars.

One day, with the pressure mounting after months of nightmares, he saw an advertisement. “Consolidate your debts at a low 10% interest rate,” it read. The “loan office” turned out to be a grimy room with a few empty desks, where Yoshida was persuaded to sign a loan of $7,200 at 15% interest for 10 days.

“I was so desperate to grasp a straw,” he said. “I didn’t think about interest rates as long as it bought even a few minutes of breathing space before the next payment.”

When he couldn’t pay up on time, another lender mysteriously appeared offering another short-term loan at a still higher rate that translated to over 1,000% a year.

In late 1999 he decided that committing suicide was the only escape, crafting a plan to have a “car accident” in the snowy Tohoku region.

He backed down at the last minute and, as he regrouped, decided to fight back.

He researched the six sharks that held his outstanding loans, identifying two that weren’t registered. He secretly taped their threats. And he dared them to go ahead and call in his loans, he said.

Not used to such defiance, they harangued him, threw boiling water at him (he was not seriously hurt) and held him in their office for several hours trying to wear him down.

But Yoshida eventually discovered that he’d actually paid four of the six far more than the law allowed. He made settlements with the others.

Now the family’s $600,000 debt has been cut to $85,000, while sales of his book and consultations with other debtors should enable him to be debt-free within two years.

Yoshida’s success in turning things around makes him the exception in Japan, but he’s also become an inspiration to thousands in similar straits. “I’ve become more pushy,” he said. “They’re squeezing people dry. There’s just so much pain out there.”

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Hisako Ueno in The Times’ Tokyo Bureau contributed to this report.