It's already well known that credit standards are tightening in the U.S. largely because of the problems in subprime lending. However, there are now signs of credit tightening in Japan among lower-quality borrowers as well.
The tightening in Japan involves lending to higher-risk consumers, but it also involves straight consumer loans. This differs from the U.S., where we're seeing bad loans increase at mortgage lenders Accredited Home Lenders
In Japan, consumer lenders such as Promise (OTC BB: PMSEY.PK), Aiful (OTC BB: AIFLY.PK), Acom, and Takefuji had the maximum interest rate they could charge lowered from 29% to 20% by the government. Customers that as a group were profitable to lend to at 29% aren't all profitable to lend to at 20%, and the lenders are now paying closer attention to the quality of the borrower. This means fewer loans coupled with lower interest income. This would be OK if the lenders didn't also have to refund previous interest received on loans with rates above 20%. It turns out that even under the old law lenders had to explicitly explain the terms of the loan and provide a schedule of payments to borrowers in order to legally charge rates above 20%. It seems no matter which way the consumer lenders turn, they're getting squeezed.
From an investing perspective, Promise is perhaps the most interesting, because the company consistently capped its maximum rates below the maximum legal rate -- meaning its refunds of previous interest received and adjustment to new rates should be less severe. But on a broader scale, it's worth noting that two of the largest economies in the world are clamping down on risky borrowers at the same time and also at a time when consumer spending is expected to pick up the slack in the U.S. and start to show some signs of growth in Japan.
At the time of publication Nathan Parmelee had no financial interest in any of the companies mentioned. He was ranked 82nd out of 25,369 Motley Fool CAPS investors. The Motley Fool has an ironclad disclosure policy.