Since sub-prime loans in the US started to hit the world economy a few months ago, scrutiny has turned to the government reaction to the issue, and protection for the debtors. In Japan, however, protection for individual debtors has been totally neglected; in a similar situation there is NO lender liability for the banks. Once one borrows money from a bank, all the responsibility goes to the borrower, even if the contract includes obvious mistakes and errors made by the bank. Once signature (in Japanese seals) is done, that’s it, all responsibilities and liabilities for the loan reside with the borrower!
This may, in part, be based on the assumption that Japanese banks are so professional and honest that they never lie to customers? Surprisingly, Bank Law in Japan has not changed basicaly for more than a hundred years since its first promulgation in Meiji Period, when Japan started its modernization. Considering the dynamic changes Japan has gone through since then, it is almost a miracle how the law has survived unaltered. Banks have lobbied strongly to maintain this law for their own benefit. It is based on the idea that banks never fail to keep its credibility, or in other words, never do wrong toward their customers. Protected by the law, banks have no need to take lender liability.
However, in the twenty-first century, we cannot but wonder if this is still true. Banks never do atrocious debt-collection from the debtors? Even after the bubble economy?
Here is one example.
The Large-Scale Free Loans, which was abolished in the late 1990s, used to be an active source of income for banks during the bubble economy in the 1980s. Banks started to target individuals in late 1980s, who had high-value real-estates. At that time sales persons from the banks used to rush to city halls to find out who had such real estates, and say, “If you don’t take our loans, your house and land may have to be sold to pay the government for inheritance tax. Trust us, we are a bank, we never tell a lie.”
The loans were huge. Banks even provided a loan of more than 300 times larger than the debtor’s annual income. A bank said, “The value of your land will rise in the near future. You can repay your debt in a few decades time.” But the land value never went up, as all know by now, but went down. After the collapse of the bubble economy in 1991, land value dropped significantly throughout all of Japan in just a few years time.
The Large-Scale Free Loans were abolished, being a major cause for the bubble economy. One thing for sure is, with all their abilities, banks knew a lot more than they were telling their customers about the risk of their own loans. However, they never explained it to their customers. This type of business, that is, selling a product without a balanced explanation of the risks, are strictly prohibited for banks in other countries and also for other industries including non-bank finance houses in Japan, but not the banks in Japan..

In any case, the abolishment of the Large-Scale Free Loans should be the end of the loan scandal, well everybody thought that way. Yes, it was the end of the sales of the loan, but the harsh debt-collection did not end. More than one million individuals became victims and have been deprived of everything, including their houses and lands, in order to repay their debts. Many of them are elderly people, who wanted to leave their houses and lands for their children. They are now losing their property that they have worked for throughout their lives, only because they trusted banks. They trusted banks because banks were a symbol of credibility in this country.
Why are these acts possible? Because the Bank Law protects banks. There is no lender liability in legal terms so that bank can do pretty much anything they want. With the law so protective to banks in Japan, even if individual debtors launch lawsuits, they have no hope of winning. With this legal advantage, banks keep depriving individual debtors of their property. Some banks even deprive debtors of their pensions, which is prohibited for non-bank finance houses, but not for the banks.
This is not a past issue. It is continuing today. My grandmother, who is going to be 90 years old soon, lives under uncertainty because, Mizuho bank, which first promised to protect her property from inheritance tax, is now preparing to evict her from her home, even though she is still alive. If they should decide to take her home, she will be kicked out and become homeless. Is this not an atrocious exploitation, of the weak banking laws in Japan?