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Business failures in Japan drop slightly due to relief measures

But experts see more bankruptcies ahead as virus cases creep up

As cases of COVID-19 infection rise in Japan, restaurants are seeing fewer customers.  (Photo by Kai Fujii) 

TOKYO -- There was a total of 789 bankruptcy cases in Japan in July, down 1.62% from a year earlier following the introduction of business relief measures by the government and municipalities, after the country saw the highest monthly total for the year in June.

Analysis from Tokyo Shoko Research also found that total liabilities were up 7.94% year-on-year in July to 100.8 billion yen ($949 million).

June saw a 6.3% year-on-year jump in bankruptcy cases after courts and law firms resumed normal operations, following restrictions on their hours in May after the government declared a state of emergency due to coronavirus.

Of the companies that filed for bankruptcy, the services industry, including restaurants and hotels, has been the most affected by the pandemic and associated restrictions. But their number has continued to increase, up to 283 in July from 278 in June.

"The rapid increase [of the bankruptcy cases] was halted because of the widespread relief measures from the government and municipalities," Yoshihiro Sakata, an analyst at Tokyo Shoko Research told the Nikkei Asian Review.

Shortly after the declaration of the state of emergency in April, the government and local authorities introduced relief measures to help struggling small and medium-sized businesses to stay afloat.

Authorities granted loans and financial aid to compensate for the financial damage to businesses caused by the coronavirus restrictions and temporary store closures. For example, businesses in Tokyo that responded to the request to temporarily close were paid two subsidies of up to 1 million yen.

Coronavirus-induced bankruptcy cases stood at 89 in July, compared with 94 in June, according to Tokyo Shoko Research. Unlike in June, when there were bankruptcies with large-scale liabilities, there were no bankruptcy cases with a liability of 10 billion yen or more in July.

However, uncertainty remains for many businesses as cases of infection with COVID-19 have started to rise again across the country. On Aug. 1, Tokyo reported its highest number of new infections at 472, while Osaka reported its record of 221 daily cases on July 29.

In the face of the growing number of new infections, the Tokyo metropolitan government requested that restaurants serving alcohol should close by 10 p.m. from Aug. 3 for nearly a month. The city's authorities will pay 200,000 yen to compliant businesses.

"For many restaurants, a 200,000 yen subsidy is just a drop in the bucket," said Tomoyuki Utsuno, director-general of the Tokyo Food and Beverage Business Association. "Restaurants obeyed the request to temporarily close in the past few months, and they could manage to make it through using subsidies from the authorities. But their funds are running out."

As infection cases rise, restaurants are seeing fewer customers.

"In the next three months, those who cannot secure additional funds will have to shut their restaurants for good," said Akihiro Nisugi, a restaurant industry expert at management consultantcy Funai Soken.

The tourism industry has also been hammered by the pandemic. The government's "Go to Travel" campaign has been offering travelers discounts of up to 20,000 yen per night on accommodation since July 22, which has helped some businesses, but the promotion excludes Tokyo and travelers from there. Indeed, local governors are calling on people to refrain from visiting their hometowns over the annual summer holiday season.

For many travel companies and hotels, summer is their best earning season. But the reduced movement of people could negate the impact of the subsidies and suppress tourism industry sales.

As well as the massive hits to restaurants and the tourism industry, a wide range of other sorts of business has been affected by the coronavirus.

On July 27, restaurant equipment maker AIK Japan Corporation filed for bankruptcy with a liability of 4.79 billion yen, marking the largest bankruptcy case that month. This was followed by the bankruptcy, with a liability of 4.78 billion yen, of auto-parts metal stamping company Iwai which faced a drop in sales as the auto industry suffers from a slump in consumption.

July also saw the bankruptcy of an orthopedic surgery clinic in Okayama Prefecture, which marked the first medical institution to take such a measure during the pandemic. Tokyo-based wedding venue operator West also went bankrupt on July 28, after it was hit by the cancellation of wedding ceremonies.

Despite the growing number of new COVID-19 infections, the government appears to have no intention of declaring a new nationwide state of emergency. This might allow country to avoid business failures on a massive scale.

However, "headwinds have strengthened," warned Masamichi Adachi, UBS Securities Chief Economist for Japan. "Voluntary restraints on movement likely will weigh on economic activity."

Indeed, experts expect the number of bankruptcy cases to rise again in the coming months.

"Many business owners have already used up subsidies that were to make up for [losses] during store closures," said Sakata at Tokyo Shoko Research. "The question is: how can they manage to secure enough funds to resume regular operations and pay the rent and personnel costs?"

Sakata also pointed out that small and mid-sized businesses were over-indebted due to government loans offered as part of the relief measures. "We'll see many businesses suffering from cash-flow problems towards the fall," he warned.

Additional reporting by Nana Shibata in Tokyo.

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