Japan's Distressed Debt Market

30 Pages Posted: 14 Apr 2008

See all articles by Kazunari Ohashi

Kazunari Ohashi

affiliation not provided to SSRN

Manmohan Singh

International Monetary Fund (IMF)

Date Written: June 2004

Abstract

Sizable risk capital from outside may be necessary to accelerate Japan's corporate restructuring to replace the stock of impaired bank loans. To attract risk capital, impaired loans must find market-clearing prices. However, the asymmetry in the bid-ask prices faced by banks and distressed-debt investors continues to stall efforts to create a liquid distressed-debt market. This paper asserts that the wedge between the prices faced by different participants is primarily a result of different valuation methods employed by banks and distressed-debt investors. On the one hand, banks do not recognize "maturity default" that results in banks rolling over impaired-loan accounts, effectively turning them into perpetual debt, which is expected to capture any upside potential for value. On the other hand, distressed-debt investors presently view their investments as equity stakes that require improved cash flows, unlike the buy-and-sell distressed-collateral market that existed in the mid-1990s. We suggest that bids from distressed-debt investors may not be as low as they are deemed by local banks and the asymmetry in prices may be reduced if banks value their claims as corporate equity.

Keywords: Debt, Japan, Emerging markets, Debt restructuring

Suggested Citation

Ohashi, Kazunari and Singh, Manmohan, Japan's Distressed Debt Market (June 2004). IMF Working Paper No. 04/86, Available at SSRN: https://ssrn.com/abstract=1119423

Kazunari Ohashi (Contact Author)

affiliation not provided to SSRN

Manmohan Singh

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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