Traditionally, much of the financing provided to Japanese SMEs (especially those managed by sole owners or their relatives) must be accompanied by joint and several guarantees by the executives of such companies, such as a president or representative director. On the one hand, those unlimited liabilities have facilitated financing for start-up businesses that are less resourceful in their own properties. On the other hand, they have made it difficult for executives to take drastic measures due to the fear of losing their private assets (typically houses) by the execution of guarantee obligations if the companies find themselves in financially distressed circumstances where such drastic measures might, in the long term, have been prudent.
In light of this, the Japan Chamber of Commerce and Industry and the Japanese Bankers Association established the Guidelines as voluntary and autonomous rules. The principles incorporated into these new rules include, among other things, the following: (i) financial institutions should refrain from demanding executive guarantees under certain criteria when they make new loans to smaller companies; (ii) the necessity and appropriateness of executive guarantees should be reviewed and reconsidered in the case of business succession and other situations; and, (iii) when executive guarantees must be executed, allowing the possibility of leaving out certain properties (including non-luxurious houses), to enable the guarantor to continue to make a living, should be considered in good faith.
It will be necessary to observe how these rules work in practice before we can fathom how much these voluntary principles will represent a viable option for smaller Japanese enterprises. Nonetheless, backed by the Small and Medium Enterprise Agency and the Financial Services Agency, these Guidelines are inspiring a certain amount of hope that one of Japan's long-lasting financial practices can be changed.
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