New dawn for Japanese state aid

Kanebo is one of Japan's best-known brands

The Japanese state agency that aims to rebuild troubled firms has taken on its first serious client.

Kanebo, a consumer-goods company with debts of 520bn yen (£2.6bn; $4.9bn), has thrown itself on the mercy of the The Industrial Revitalisation Corporation of Japan (IRCJ).

The firm had hoped to mend its finances by selling its cosmetics unit to rival firm Kao.

The news caused gloom on the Tokyo markets, where Kanebo's shares plunged.

But Finance Minister Sadakazu Tanigaki, who previously oversaw the IRCJ, has welcomed the move as a sign that the agency could finally come of age.

Capitulation

The failure of the Kao-Kanebo deal was the result of concerns from some company and union officials, who worried that Kanebo could not survive without its cosmetics business.

The cosmetics business is crucial to Kanebo, some feel

That, Kanebo felt, left the IRCJ as its only recourse short of liquidation.

This capitulation was seen as premature by some analysts, who felt that Kanebo could have explored a management buy-out.

Some had hoped that Kanebo - a company with a valuable brand-name in Japan - would seek a solution within the private sector, rather than opting for what is, effectively a state bail-out.

Test case

The deal is a boost for the IRCJ, however.

The agency was set up last May as a central part of its plan to resuscitate the sluggish economy; indebted companies are one of the main causes of economic stagnation, according to Mr Tanigaki.

Since then, however, it has not taken on a corporate patient of any significance, leading to complaints that it is a white elephant.

Under the terms of the proposed deal, the IRCJ would buy the cosmetics stake earmarked for Kao, on the understanding that Kanebo can buy it back when its finances are in better shape.

This structure, far short of a state bail-out, is seen as a crucial test-case for the IRCJ's future prospects.

"This case could establish the IRCJ procedures and valuation methods as the de facto standard for revival cases," said Richard Jerram of ING Securities.

"Other cases would then come forward more quickly,"