Rescue plan for Sogo

Sogo had been expanding too fast overseas

The giant Japanese department store group Sogo has been saved from bankruptcy.

The Japanese government has agreed a $1.9bn (£1.2bn) rescue package to forgive most of the loans it owes to its creditor banks.

It is the largest rescue package ever agreed in Japan for a non-financial company, and could lead to claims for financial help from thousands of Japanese firms.

Under the terms of the deal, the government-owned Deposit Finance Agency will forgive half of the 197bn yen ($1.9bn, £1.2bn) of debt owed by Sogo which will be purchased from one of its main creditor banks, Shinsei Bank.

Shinsei, the former Long Term Credit Bank of Japan, was nationalised and sold by the government after collapsing under the burden of debts and bad loans.

The move will clear the way for 72 other creditor banks to forgive 631.9bn yen ($6bn, £4bn) of Sogo's debts.

Sogo has been hit by the decline in consumer spending, which was severely dented by Japan's longest post-war recession and unprecendented levels of unemployment.

Recent figures show that consumer spending fell 1.2% in May compared to the previous year, although unemployment was down to 4.6%, compared to 4.8% in April.

More bail-outs to follow

Japanese companies are going bankrupt in record numbers, especially in the property and retail sector, despite a government bail-out of the banking sector that cost trillions of yen.

Shares in ailing construction companies Hazaman and Kumagai Gumi surged more than 20% on the Tokyo stock market on hopes that they would also be helped by a government bail-out.

"No doubt there will be a few other companies that Long Term Credit Bank wants bailed out by the government," said Garry Evans, strategist at HSBC Securities in Tokyo.

But analysts warned that the rescue plans could delay the necessary restructuring of the Japanese economy and increase the burden of government debt over-hanging the economy.

One credit agency has already downgraded Japan's government debt rating, and Japan has a larger debt burden than any other major industrial country.

Over-ambitious plans

Sogo expanded aggressively at home and abroad during the boom of the 1980s and failed to scale back to cope with the subsequent drop in demand.

The company's group debt stands at more than $17bn, accumulated during that period.

Sogo has announced plans to close down five of its stores in Japan as well as most operations abroad, reducing it to an international presence in Hong Kong and Kuala Lumpur only. Last year the company sacked 20% of its workforce.

Sogo's group's vice-president in charge of finance and accounting, Yasuharu Abe, committed suicide in April after the company revealed that it had suffered losses of more than $1bn during 1999.

Sogo's shares dived, to close down 16.88 % at 128 yen on profit-taking after the announcement.

Some analysts believe the rescue will not go far enough.

"The chances are very low that Sogo will succeed in rehabilitating itself. Even after the debt forgiveness, it will still have excess liabilities," said Minoru Nakano, researcher at Teikoku Data Bank.