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JULY 31, 2000 VOL. 156 NO. 4


Stuart Isett/Corbis Sygma.
The Saison group, which includes Seibu department stores like this one in Tokyo, faces restructuring after the failure of its property unit last week.

Learning to Let Go
First Sogo, now Seiyo. Has Japan Inc. finally figured out that shaky companies must fall if the wobbly economy is ever to rise again?
By DONALD MACINTYRE Tokyo

It all began in an army-surplus tent pitched in the dirt near a railway terminal. Under those unlikely conditions in the Ikebukuro district of northwest Tokyo, the Seibu department store chain was reborn after the devastation of World War II. The neighborhood—a seedy haunt of gangsters, prostitutes and day laborers—had turned into a thriving black market, where farmers peddled their produce to desperately hungry families. Seibu sold fruit, vegetables and fish. But that was just the beginning. As Japan evolved into an economic superpower, Seiji Tsutsumi, the eldest of two sons of one of Japan's greatest prewar railroad barons, built Seibu into the Saison retailing empire, whose pioneering, often edgy take on style and fashion helped shape Japan's emerging consumer society. For decades, Japanese watched with fascination and awe as Seiji competed for wealth and power with younger brother Yoshiaki, a railroad and hotel magnate who became one of the richest men in the world.

Last week brought an end to what may be one of the last chapters in the Tsutsumi saga: property developer Seiyo, a key part of the Saison group, went bust with almost $5 billion in debt. As part of a deal to restructure Saison, Tsutsumi will sell most of his remaining shareholdings to cover some of Seiyo's loans, marking his final departure from the empire he built. The financial daily Nihon Keizai Shimbun said his brother's rival group, Seibu Railway, will take a stake in Seibu Department Stores, bringing it into the orbit of his own conglomerate (a Saison Group representative denied the report).

Seiyo's collapse was not simply another episode in a long-running sibling rivalry. Coming a week after the failure of the Sogo department store chain, it was a shocking reminder of just how deep Japan's economic problems really are. A widely watched Bank of Japan survey released earlier this month showed that business managers are growing more bullish. Personal computer production and orders for machinery are rising. But the mood has turned gloomy again amid worry over which company might implode next. The Bank of Japan decided not to raise interest rates last week, evidently concerned about the impact of higher rates on shaky borrowers.

The failure of Sogo and the Seiyo aftershock were also indications that Japan Inc. is finally getting serious about restructuring. That, optimists believe, should be good news for the economy down the road. "There are still too many losers hanging around the market instead of exiting it," says Yoshifumi Suzuki, an analyst at credit research company Teikoku Databank. "Now we know where the exit is."

  ALSO IN TIME
COVER: The Triumph of Style
We don't want more; we don't even want better. We want things whose looks can kill. A new generation of designers brings style to everything from toothbrushes to computers

JAPAN: Once Were Giants
A week after the fall of Sogo, the Seibu department store chain runs into financial trouble. The good news: Japan may finally have learned that propping up ailing behemoths is a bad idea
Spilled Milk: A food scare points to regulatory apathy

CHINA: Muzzle Defense
Spooked by rising social unrest, Beijing tries to silence critics
Hong Kong: Did the government lean on a pollster?

CINEMA: Show's Over
An era ends with the closing of the last Chinese movie theater in New York City's Chinatown

SPOTLIGHT

MILESTONES

TRAVEL WATCH: How to See Paradise with the Help of a Paddle

The message was well timed. At last week's G-8 summit of eight leading industrial nations in Okinawa, the host country was worried that some participants, especially the U.S., would use the forum to chastize Japan anew for failing to take bolder steps to revitalize its economy. In the end, such criticisms were muted. Could the summiteers have failed to notice that Japan had just let two big corporate dinosaurs fall into the tar pit? In any case, the U.S. and Japan announced an agreement on a particularly thorny trade issue with implications for Japanese companies: opening the country's telecommunications industry to foreign competition. That deal is part of an ongoing effort by the U.S. to force open some of Japan's most carefully protected industries. If the process continues, more and more Japanese firms will be facing unaccustomed competition. So politicians and even ordinary Japanese are probably getting used to the idea that businesses will have to swim in rougher seas—or be allowed to go under.

Sogo had none of Seibu's panache, but both companies got into trouble the same way: Tsutsumi and then Sogo president Hiroo Mizushima used their powerful names to borrow scads of money from bankers who didn't ask many questions. ("The collateral is me," Mizushima liked to say.) They overexpanded during the 1980s real estate boom and paid the price when values fell in the 1990s. Both companies put off the inevitable day of reckoning as long as possible.

Sogo went under after Japan's politicians decided the public, already fed up with taxpayer-financed bailouts of troubled banks, wouldn't tolerate having to foot the bill to rescue a big private company. The squeeze on Seiyo came from the banks: facing new pressures from overseas competition and a deregulated financial system, they can no longer afford to keep companies on life support forever. Sogo's lender, the Industrial Bank of Japan, and Seiyo's, Dai-Ichi Kangyo, are due to merge, and both need to clean up their balance sheets first. In the short term, the result may be job losses that could puncture the nascent recovery. Still, with Japan now the biggest debtor among the major industrialized powers, many economists say the country needs to swallow strong medicine.

Seiji Tsutsumi has wielded influence only from the sidelines since stepping down as chairman in 1991. But if his empire splinters, as some now expect, it will be a sad denouement for a giant of Japanese business. Almost singlehandedly, Tsutsumi modernized Japanese department stores, turning them into celebrations of the glittering consumer culture that young Japanese embraced in the postwar years.

In the 1950s, Japan was still poor, unsure it could ever scrabble back from the war. Tsutsumi looked ahead and saw the coming revolution in lifestyles. He set up an office in Paris, opening a window on a world of glamour that was like something from another planet to Japanese at the time. He also won the rights to represent a young French designer named Yves Saint Laurent. After making a name for himself in New York, a young Japanese designer, Issey Miyake, made his debut in Japan at a Seibu store. When Tsutsumi's friend Yukio Mishima, the writer and right-wing extremist, needed designer uniforms for the private army he was raising, he turned to Seibu's tailor. He was wearing the Seibu-designed creation when he ritually disemboweled himself in 1970.

But business was only one side of Tsutsumi. A maverick in Japan's staid business community, he preferred poetry and books to golf. After a day's work, Tsutsumi would retire to his study to write; using a pen name, he published semi-biographical books and poetry to critical acclaim. Tsutsumi used his wealth—and borrowed money—to spread culture, which certainly didn't hurt his stores' image. His Parco department store featured a theater, where his friends like playwright and author Kobo Abe staged difficult avant-garde works. His Seibu Museum of Art promoted challenging contemporary work that was hard to find elsewhere in Japan.

Tsutsumi's retailing group often flirted with debt problems; the first sign was a failed store in Los Angeles in the 1960s. The debt grew heavier in the 1980s as Tsutsumi moved into leisure, opening an exclusive hotel on the Ginza where the likes of Elizabeth Taylor and Dustin Hoffman stayed. He even upstaged his brother Yoshiaki, who ran a chain of business hotels in Japan, by snapping up the luxury Inter-Continental Hotels group for more than $2 billion.

By then, the party was about to start winding down. In the early 1990s, Japanese stock and share prices collapsed, sending the economy into its continuing tailspin. Debts mounted at the department store and at Seiyo, which had bought land for golf courses and other resort projects that nobody needed anymore. Department store profits slumped as consumers stopped spending or turned to discount shops and convenience stores. Seiyo's banks forgave some of its debts and suspended interest payments in a restructuring plan worked out in 1995. But the company failed to turn itself around, and last week the banks ran out of patience.

Sogo got caught in the same downdraft. Started in 1830 as a second-hand kimono shop, it was a struggling three-store department chain when Mizushima became president in 1962. Over the years, he transformed it into a retailing colossus with 41 outlets in Japan and overseas. Mizushima used a neat trick to expand, opening stores near busy railway stations and buying nearby land. As business took off at the department store, surrounding land rose in value, providing collateral for further expansion.

The method ran into trouble as land prices headed south. But Mizushima continued to borrow. Known within the company as "the Emperor" or sometimes "God," he seems to have cowed his bankers as well. By 1994, Sogo was in default, but it was still opening new stores in 1998. When the end finally came, the Emperor had racked up more than $17 billion in debt, making his corporate collapse one of the biggest in postwar Japanese history.

Even two weeks ago Sogo was still trying to hang on. And why not? Many lawmakers in the long-reigning Liberal Democratic Party have tried to slow reform while supporting the use of public funds to prop up troubled businesses. Mizushima had plenty of political friends. So when Sogo asked its banks to forgive $6 billion in bad loans, it expected political backing. But in a sign of how times have changed, one of Sogo's banks is now owned by foreigners and wasn't willing to play along. That meant the government would have had to put up nearly $1 billion to make the bailout work. When the plan was announced in June, Sogo sales started slumping, right in the middle of the summer gift-giving season, as angry consumers voted with their wallets. The ldp, still smarting after urban voters deserted it during recent elections, decided Sogo wasn't too big to fail after all.

The department store's collapse seems to signal that time is running out for other deadbeats as well. And nowhere are there more of those than in the construction business. Riddled with corruption and companies on the edge of bankruptcy, the industry is trapping workers who would migrate to more productive sectors if only the government let market forces operate. But since 1992, the number of construction workers in Japan has actually climbed, from 6.2 million to 6.6 million earlier this year. After Sogo's demise and the recent arrest of a former Construction Minister on bribery charges, "the government won't be able to bail out construction companies aggressively now," says Kazutaka Kirishima, a senior economist at Sumitomo Life Research Institute, a private think tank.

Whether the government has finally gotten market religion or is just doing what is politically expedient, the change in approach comes none too soon. Since 1998, Japan's treasury has guaranteed $200 billion in loans to struggling businesses. Thousands have gone bust anyway, leaving taxpayers with the bill. The government has also spent $270 billion to shore up its financial system, more than the gross national product of Sweden, and more than what the U.S. spent to clean up its savings-and-loan debacle. While Japan's banks are still wobbly, they are strong enough to withstand more corporate failures, says Setsuko Akiba, banking analyst at Deutsche Securities in Tokyo. And with its budget deficit headed ever higher, Japan can't afford to keep a finger in the dike any longer.

Seibu's department store arm can probably restructure successfully, analysts say, though it hasn't been at the cutting edge of anything for years. Saison group companies are going their own way, says Ken Fukazawa, who writes about the group for Diamond, an economic weekly: "There is nobody to hold it together." Tsutsumi, who declines interviews about his businesses, is spending more time on his writing these days and running his non-profit Saison Foundation, which supports small contemporary dance and theater groups. Tsutsumi the man of letters hopes the foundation will perpetuate something of his vision after he is gone. But the story of Tsutsumi the businessman who showed Japan how to live well—too well—is now a cautionary tale for the new century.

—With reporting by Sachiko Sakamaki/Tokyo


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