HEADLINE: INSIDE TRACK: Sogo's erratic aristocrat: MANAGEMENT JAPANESE RETAILING: The chain's chief has been blamed for its collapse. There were also more profound failings, says Michiyo Nakamo

BYLINE: By MICHIYO NAKAMOTO

BODY:

When pictures of Hiroo Mizushima's spacious residence began to appear in magazines and tabloid newspapers in July, the Japanese public gaped. But when it was reported that the former president of Sogo, the retailer that had just collapsed, had received up to Y4.4bn (Pounds 28m) in remuneration over 10 years, astonishment turned to outrage.

Mr Mizushima, who ran Sogo with an iron fist for more than 40 years, is widely blamed for the downfall of the retailer, now being rehabilitated under court protection. Many Japanese find it galling that Sogo's spectacular rise and fall under the rotund Mr Mizushima has left behind at least Y1,870bn of liabilities and possibly much more. Of these, Y205bn in loans owned by the government are unlikely to be recovered.

The common perception of the Sogo story is of a man whose ambition drove a prestigious retailer to ruin. Sogo's travails revealed procrastination, evasion of responsibility, and recriminations by company executives and bankers, many of whom failed to acknowledge the severity of what was about to happen. But it also reveals something about a country that has for a decade avoided taking difficult decisions in the hope that a return of bubble-era prosperity would render them unnecessary.

A retailer with a history of more than 100 years, Sogo began in 1887 as a kimono store in Osaka's bustling Shinsaibashi district. Mr Mizushima began at the prestigious Industrial Bank of Japan in Tokyo, joining the retailer only after marrying into the founding family.

Those who know him say Mr Mizushima always had a taste for the good life. Legend has it that, even as a young banker, he fancied himself as an aristocrat. He would dine only at the posh Tokyo Kaikan restaurant, in the company of the blue-blooded and the highly successful. But he was by no means a star banker. "He was not very good with figures," says one colleague.

Mr Mizushima left IBJ to join Sogo in 1958, becoming president in 1962. The retailer expanded rapidly, as Mr Mizushima sought to turn it into Japan's biggest and finest department-store group. By 1979, there were 10 stores. During Japan's asset-price bubble of the late 1980s, Mr Mizushima added 20 more within eight years.

Department stores typically take five years to establish themselves, 15 years to break even, and 30 years to repay their debt. Sogo's expansion under Mr Mizushima was extraordinary.

It was possible only because rising land prices enabled Sogo to borrow heavily, to invest in prime property and then, using that property as collateral, to borrow even more.

Sogo was hardly the only proponent of this strategy. But Mr Mizushima was able to realise his plan on a spectacular scale thanks to the enthusiastic backing of his old employer, the IBJ.

Indeed, the IBJ became Sogo's largest lender, with outstanding loans of Y363bn. Bank officials today admit that lending so much to a single retailing group betrayed a lack of judgment. But IBJ was desperate for business. As the Japanese economy matured in the 1970s and 1980s, the bank's main business of financing Japan's postwar economic reconstruction had all but dried up.

The partnership between bank and retailer thrived amid soaring property prices. It did not matter much to the banks that many of the Sogo group companies had a negative net worth, so long as property prices rose.

"At the peak of the bubble era, Sogo had hundreds of billions of yen in unrealised assets alone," says one banker. That allowed Mr Mizushima to add to the group's prestige by acquiring smart overseas addresses, including Two Rodeo Drive in Beverly Hills.

Yet as Sogo had thrived on rising property prices, so it ailed when they began to fall. And Japan's property boom collapsed with remarkable violence.

As Japan entered recession, the Sogo group lost large amounts. That was because it had to write off vast sums in its property portfolio, and because consumers were spending less.

Alarm bells were now ringing at IBJ. In 1994 the bank sent in a vice-president to clean up, but "it was not very clear what the real losses were," says an IBJ official.

Sogo has a convoluted ownership structure that made it impossible for the bankers to work out the financial health of the group, much less to address its underlying weaknesses. Part of the Sogo group is publicly listed, but many companies were controlled by Mr Mizushima himself. These privately controlled Sogo companies - some of which were technically bankrupt - borrowed heavily on guarantees from the publicly listed Sogo, which was financially sound.

By 1997, the bankers had come to the conclusion that Sogo might not survive. Yet instead of raising the alarm, they tried to bring the situation quietly back under control. If they waited long enough, they hoped, property prices would rise again and Sogo's problems would disappear.

The situation worsened. Sogo's real-estate assets were falling in value at the rate of Y100bn a year, causing terrible damage to its balance sheet. When Sogo was finally brought to its knees, it had publicly known debts of nearly Y2,000bn, which it owed to 160 banks and more than 2,000 business creditors.

Critics take IBJ to task for not having acted sooner to rein in Mr Mizushima. Why, asks Takayuki Suzuki, industry analyst at Merrill Lynch in Tokyo, did IBJ continue to pour money into a company that was not profitable and could not repay its loans? "This is a typical case of pushing the problem away," he complains.

Sogo's bankers claim that as well as having to control Mr Mizushima, they faced another threat. One of the largest lenders to Sogo was Long Term Credit Bank, known as LTCB, which had Y205bn in loans to the retailer and was itself on the brink of collapse.

The bankers argue that if they had pulled the plug on Sogo in 1997, the year of the collapse of Japan's fourth-largest securities company, Yamaichi, it could have triggered a much larger financial crisis. "We bought time," says one banker. In the end, LTCB collapsed anyway. The bank was nationalised and sold to Ripplewood, a US private equity group.

Even then, Sogo's bankers hoped to save the retailer by a debt-waiver scheme and restructuring. But the new LTCB - renamed Shinsei Bank and under the ownership of Ripplewood - refused to participate. Instead, it asked the government to take over its loans to Sogo. It could do this because of an agreement between the government and Ripplewood that allows the new bank, under certain conditions, to return loans that had fallen by 20 per cent or more. The government found itself having to bail out a private company by waiving Y205bn in debts now owed to the public. When public outrage forced the government to backtrack, Sogo filed for court protection.

The recriminations put no one in a good light. The media lambasted IBJ for its role. The political opposition jumped at the chance to fault both IBJ and the government, for the terms of its sale of LTCB to Ripplewood. In a magazine interview, Mr Mizushima blamed the banks for urging him to borrow money he did not want. The banks point the finger at Mr Mizushima, who has since retreated behind the high wall that surrounds his white mansion.

But bankers also concede that the Sogo debacle has revealed more profound failings. According to Japan's traditional banking system, a "main bank" would see a company quietly through its troubles to avoid collapse and prevent social disorder. However, these days capital markets play a larger role in corporate financing. The markets are suspicious of the system's lack of transparency and the banks have lost some of their influence over corporations. "Banks themselves are being swept away by the tidal waves of change," says one banker close to the Sogo fiasco. In the past 10 years, Japan has gone through "a kind of revolution" that has changed the rules of the game, he notes. "We cannot go back, no matter how long we wait."

What is more, although the traditional approach has its strengths, it became an excuse for avoiding the structural reform that the country so badly needed after the asset-price collapse. Sogo's difficulties, like those of Japan itself, could not simply be papered over. And when the bankers tried, the Japanese public would not stand for it.

LANGUAGE: ENGLISH

LOAD-DATE: September 4, 2000