Support from banks has prevented higher insolvency in Japan

Corporate insolvencies increased 4.9% year-on-year in 2009. The industries worst affected were steel/metal (50% increase year-on-year), machinery (70%), rubber (88%), leather and general trading (50%), and wood and textiles (20%). However, the frequency of bankruptcies decreased in the second half of the year, thanks to the governments emergency guarantee programmes and the fact that the banks have remained supportive during the crisis.

Payment morality in Japan is very high and it is usual for buyers to settle their invoices on or before due date. But, because so many Japanese businesses continue to pay diligently right up until the point of entering bankruptcy, punctual payment isnt necessarily indicative of healthy cash flow generation by a Japanese customer. For many businesses, those punctual payments are possible only because banks have been generous with funding, leading to a weak and leveraged balance sheet. As a result, it would take very little for those businesses to fail. 

Outlook for recovery looks fragile

The IMF forecasts that Japanese GDP growth will rebound 1.3% in 2010. But the recovery still looks fragile, with many adverse aspects to bear in mind. The strength of the yen against international currencies will dampen further export growth - and may price Japanese export goods out of the market. Japan's government debt has been steadily rising for the last few years, reaching 174% of GDP in 2008, and may even reach 220% in 2010 as a result of new spending plans. Unemployment is at post-war record levels (5.1% of the labour force in December 2009), wages are falling, businesses are deferring capital expenditure, and the risk of deflation is increasing, as Japans consumer prices fell for the tenth consecutive month in December 2009 (-1.7%).