BLOOMBERG NEWS Customers visited a Daiei Supermarket in Tokyo today as the debt-ridden retailer's stock regained ground, rising 34 percent after falling more than 50 percent in five days.

Daiei drop could foretell
the end of ‘zombie’ firms

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By Ian Messer
Bloomberg News

TOKYO >> Marc Desmidt sees a bright side to the plunge in Daiei Inc.'s shares in the past week: The slide suggests investors believe Japan is serious about pulling the plug on "zombie" companies.

"Perhaps this is the beginning of the big clearing out of corporate sector we have been waiting for," said Desmidt, who helps manage about $8.2 billion of funds at Merrill Lynch Investment Managers Co.

Shares of Japan's third-largest retailer, saddled with $17 billion of debt, tumbled more than 50 percent in five days as a new team of regulators suggested they will allow banks' most indebted borrowers to fail. The decline prompted Trade Minister Takeo Hiranuma to say Daiei is "on the road to recovery," helping the shares rebound today with a 34 percent rise.

The stock's drop and the government's reaction to it illustrate how Japan's drive to sort out an estimated $430 billion of bad loans is roiling not only banks but the struggling companies they have kept alive for years. Clearing out the bad debts is vital for banks to increase lending to healthier companies and revive the economy, investors say.

After just a week as the head of the Financial Services Agency, Heizo Takenaka said on Sunday that Japan will unveil plans to tackle those bad loans as early as this month, and there may be "some bankruptcies." On Thursday, he chose a consultant to his advisory panel, Takeshi Kimura, who has said crippled banks should be nationalized, a step that would lead to increased foreclosures on deadbeat borrowers.

Kimura's appointment weighed on a slew of shares in companies burdened by debt.

While shareholders of many companies may be hit by stricter demands for loan repayments, some fund managers say the result would help Japan crawl out of its third recession in a decade and end a plunge in stocks that took the Nikkei 225 Average to a 19-year low yesterday.

"A hard landing is positive in the long term," said John Wilson, who helps manage $2.5 billion in Japanese equities at HSBC Asset Management Japan KK. "We've had years without a strong recovery. The main thing that's been holding it back is the unresolved bad-loan problem."

Meanwhile, Daiei is sticking to a plan to trim debt. Its shares rose their exchange-imposed limit today after Hiranuma said he is concerned market speculation is thwarting Daiei's reorganization efforts "making it difficult for the government to create a framework for the disposal of bad loans," according to a transcript posted on the Ministry's Website.

Daiei shares rose &YEN30 to &YEN117 today, leaving them down 20 percent since Wednesday.