Lending regulation changes in Japan?

Mr. Kenji Tamura announced today a new regulation for consumer finance companies might be voted. The deadline to the 2006 regulation is a few months away. The voted regulation is very restrictive on companies like Aiful and Promise, which seems to come at a bad time when japan like many other countries are trying to revive the lending activities especially for consumer finance companies.

The consumer credit sector has been since 2006 under scrutiny and has experienced a lot of changes. To recall, before 2006 there were no limitation on credit loans to consumers and interest rates were as high as 30%. Companies were using ancestral techniques of persuasion to recover their money, which looked more like Mafia’s behavior to many.

In 2006, the Japanese government decided to get rid of these practices and implemented ceiling on interest rates. The decision devastated many consumer finance companies but it was a needed move by the government. I am sure you remember the tumble of many stocks, like Credit Saison, in 2006-2007 even before the financial crisis hit Japan. Even though, the Japanese government had given companies three and half year to implement the new legislation, investors decided to stay away from such stocks.

Recently, many market participants have expected government to ease legislation as the country is under threat of a long period of deflation. Stock prices for consumer finance companies have skyrocketed more than 50% in a few weeks. However, Mr. Tamura’s announcement is not as optimistic as investors would have loved to. It seems there is a 50-50 chance legislation would not be change. As a result consumer finance companies tumbled today in the stock market. Promise led the group with a fall of more than 6%.

It is a very difficult decision for the new Japanese government. If legislation was to change it would had more pressure on consumers, which goes against political campaign promises. On the other hand the lending activity on the archipelago needs to recover if the government wants to get out of deflation.

I believe if there is a change in the legislation it would be a big step backward for the government. There are probably other ways to revive the lending activity. I think it would be a wrong message to send the Japanese population …. But a positive one for investors!