Consumer over-indebtedness in Japan, Australia and the US

[Originally posted, with full hyperlinks, at]
Japan’s recent re-regulation of unsecured consumer credit provides another major example of the growing consumer voice in law and policy-making in that country since the 1990s. It also highlights another “blind spot” in the Australian media’s coverage of Japan. This is despite similar underlying problems in this country, and a belated awareness of the risks involved in consumer lending following the sub-prime loans crisis in the US.

The situation does seem worse in the US. Consumers ramped up enormous unsecured loans primarily through credit cards. Applying insights especially from social psychology, such as people’s “over-optimism bias”, Columbia Law School Professor Ronald Mann wrote a book in 2006 identifying credit cards as particularly risky instruments. Multiple reform proposals by him and others went unheeded. Meanwhile, borrowers were increasingly induced into sub-prime (high-interest, low-documentation) home mortgage loans. On the supply side, the bandwagon was pushed along by burgeoning securitisation of both types of loans. Parties to the sales and financing of these loans lacked incentives and supervision to price and control risks adequately. Some now argue that the net socio-economic costs have become so apparent that sub-prime loans effectively should be banned, by limiting the interest rate chargeable. Others suggest we take other techniques and insights from product safety regulation, and apply them to “unsafe” consumer credit services.
Australia has also developed high levels of credit card and home mortgage debt, not helped by our national addiction to gambling. Fortunately, our levels of subprime lending and securitisation are much lower than in the US. But the socio-economic consequences of the lending boom, followed by growing defaults, are also disturbing.
Japan has been grappling with similar issues since the 1980s. Unlike the other two countries, unsecured consumer loans come primarily in the form of cash advances. But they too ballooned for similar reasons over the 1990s. Those included advances in IT (such as ubiquitous automated “loan application and dispenser” machines) and more targeted marketing (aimed at lower-income men). Aggressive sales and debt collection (sometimes involving yakuza gangsters), combined with remarkably high interest rates: the “three evils of loan-sharking (sarakin san-aku)”. The results included growing numbers of debt-related suicides and other socio-economic problems. But the market also generated large profits for non-bank lenders, including several that linked up to Japan’s large banks or foreign investors.
From the late 1990s, even Japan’s highest court – quite conservative, like highest courts tend to be everywhere – decided that enough was enough. In a series of judgments from the late 1990s, adopting sometimes purposive and sometimes literal interpretations of various laws, the Supreme Court started ruling in favour of consumers. The nail in the coffin came in January 2006. The Court required repayment of excessive “grey zone” interest, ruled not to have been paid “voluntarily” when loan contracts included (as most do) “acceleration” clauses in the event of default. The legislature was forced to respond. A package of amendments was introduced in December 2006, including (from 2010) the abolition of all grey zone interest. Although Japan’s traditional and ongoing emphasis on interest rate caps seems somewhat crude, it has also tried many other techniques to restore some fairness and integrity in the consumer credit market. Caps may be a necessary back-up for any regulatory arsenal directed at this persistent socio-economic problem area in all industrialized democracies.
Further reading: Kozuka, Souichirou and Nottage, Luke R., “Re-Regulating Unsecured Consumer Credit in Japan: Over-Indebted Borrowers, the Supreme Court, and New Legislation” (September 2007). Sydney Law School Research Paper No. 07/62

Author: Luke Nottage

Prof Luke Nottage (BCA, LLB, PhD VUW, LLM LLD Kyoto) is founding co-director of the Australian Network for Japanese Law (ANJeL), Associate Director (Japan) of the Centre for Asian and Pacific Law at the University of Sydney (CAPLUS), and Professor of Comparative and Transnational Business Law at Sydney Law School. He specialises in international dispute resolution, foreign investment law, contract and consumer (product safety) law.