Japan is not a country where companies can gain quick wins at times of restructuring. Unless the company is willing to exit the market forever, restructuring activities should be planned and executed carefully with sufficient time” explains Hajime Baba, founder of Clareza Partners in Tokyo, to Steve Rutherford, partner of Valtus UK in London.
At Valtus Alliance, we rely on a worldwide network of restructuring experts – because legislation and restructuring practices vary significantly from country to country.
What makes the legal framework for insolvency and restructuring unique in your country?
Japan’s legal framework for insolvency and restructuring is distinctive due to its blend of formal statutory procedures and informal practices influenced by culture, history, and economic structure.
While there are formal procedures such as Civil Rehabilitation (“Minji Saisei”) and Corporate Reorganization (“Kaisha Kosei”), Japan has a long tradition of out-of-court workouts through frameworks like the Business Turnaround ADR (“Jigyo Saisei ADR”) system which are consensus-based approaches that rely on cooperation among main banks and other creditors without court intervention.
These informal practices are strongly preferred over formal proceedings because filing for bankruptcy in Japan carries a strong social stigma and is seen as a last resort. Companies and banks often try to resolve issues privately to avoid reputational damage.
It is also notable that employment laws in Japan, with their strong employee protections and cultural emphasis on job stability, act as a brake on aggressive restructuring and shape the choice and conduct of insolvency proceedings. These laws make it more challenging to downsize rapidly or liquidate, encouraging cooperative solutions, informal workouts, and employment-preserving strategies even in the face of financial distress.
In your experience, what is the most common mistake companies make in the early stages of a liquidity crisis?
The most common mistake is to hide or downplay the seriousness of their liquidity problems. There is a strong cultural emphasis on avoiding shame, leading to a reluctance to disclose issues to banks, creditors, or stakeholders early on. Companies also tend to over-rely on relationships with their main bank—assuming they will step in again for further support—while avoiding hard operational choices.
These behaviors worsen the situation and close the window for a soft-landing restructuring. By the time external help is sought, options are limited, creditors are less cooperative, and the business may have deteriorated beyond repair.
At what point, and in what role (e.g., consultant, CFO, CRO), should an external restructuring expert be brought in – and who should mandate them (management, board, owners, banks, government)?
An external restructuring expert should be brought in as early as possible, ideally at the first clear signs of a liquidity squeeze or operational distress. A key trigger could be when the bank lines are near exhaustion or rolled over only with tighter terms.
Japanese management may resist bringing in outsiders, particularly in decision-making roles like CRO or COO. The appointment is often more acceptable if it comes from a main bank’s suggestion or is positioned as a neutral “advisor” rather than someone taking control.
Do employees in your country continue to receive their salaries and bonuses in the event of insolvency or do they loose the entire or part of the wages?
When a company becomes insolvent or goes bankrupt, employees may not receive their full wages, but there are legal protections in place to help them recover at least part of what they’re owed. Japan has a government-supported system which can pay up to 80% of unpaid salaries, within certain limits. Bonuses are usually out of scope and will be lost in the event of bankruptcy.
Which case in your career has most profoundly shaped your view of restructuring – and what did you learn from it?
I spent nearly 10 years at a global HR consulting firm where I had the opportunity to lead various projects related to restructuring. One memorable project was a global private equity firm asking for help in restructuring a business which they acquired from a traditional Japanese company. The client was really struggling with cultural and psychological resistance from the employees and labor union, against making necessary changes to turn around the business. As our project team got involved, we came to learn that the employees were also struggling to deal with the drastic changes brought about by the new shareholder. We worked with the client to bridge the gaps between the parties, and our knowledge and familiarity with both global and local practices were key in resolving the issue.
From these experiences, I learned that doing it the “global way” does not work in Japan, and having a local expert is essential in executing difficult tasks necessary for restructuring. This is particularly the case for employment related matters, since Japanese employees generally place a high value on job security, and losing a job can be associated with shame or failure.
This learning was further emphasized during the 4 years I served as the managing director of Japan for a global HR services company, where outplacement was one of our core businesses. Japanese employees’ sentiments toward job security and fears of possible layoffs can lead to serious issues in times of restructuring, without the right support by a local expert.
In the event of a severe profitability and liquidity crisis, what would you consider the best course of action for a foreign corporation with a local subsidiary in your country?
The best course of action is to balance financial survival with legal, cultural, and reputational considerations.
Japan has strict labor laws and strong employee protection norms, especially regarding layoffs and restructuring. Mishandling employment issues may result in serious financial, legal and reputational implications, which could further damage the company’s profitability and become a long-time obstacle for the company’s future business in Japan.
A local expert should be brought in as early as possible to support in times of restructuring. Someone with legal knowledge and practical restructuring experience in Japanese business context would be key.
Generally speaking, Japan is not a country where companies can gain quick wins at times of restructuring. Unless the company is willing to exit the market forever, restructuring activities should be planned and executed carefully with sufficient time.
How established is private equity in your country with regard to restructuring? Does PE play a significant role, or do banks and existing shareholders remain the key stakeholders?
Private equity in Japan has become increasingly established in corporate restructuring, although main banks and traditional stakeholders (including cross-holding of shares) still play key roles, especially in legacy companies. These stakeholders tend to prioritize employment preservation, gradual change, and face-saving exits over the aggressive restructuring models typical of western PE.
In the past 10–15 years, PE has gained more credibility and influence through high-profile deals by foreign PEs combined with emerge of domestic PEs. However, their role in restructuring has been limited due to multiple factors such as; limited pipeline as a result of cultural resistance in filing for bankruptcy or selling a company even when necessary, labor protections and social expectations which constrain rapid workforce reduction, and aggressive takeovers being strongly refused by management, labor union, and main banks.
Hence, most PE firms in Japan take a more collaborative and gradual approach with a few executives joining at board level as strategic partners. This comes with downsides in several aspects including speed, decisiveness, and limited control in making critical changes to the organization. It also tends to create a situation where there is a huge deviation between strategy and culture at executive level, versus what is actually happening and how employees feel at ground level. It is very important to have senior and middle level managers who can bridge the gaps within the organization, and keep employees aligned and engaged while executing restructuring activities.
Interim managers can play a critical role in such situations. They bring experience, neutrality, and execution focus, often serving as the “hands” of the PE firm when the workforce is passive, resistant, or its managers are not equipped to lead through changes. In Japan, where direct confrontation and rapid disruption often backfire, interim managers provide a quiet but powerful lever for PE firms to implement strategy, improve performance, and navigate complex internal dynamics—without breaking the social contract that binds Japanese corporate culture.