A massive profit warning by one of Japan’s “big four” consumer finance companies has prompted fears that the sector could be poised for disaster and that Japan itself could be on the brink of becoming a loan shark’s paradise.

Takefuji delivered its profit warning today, slipping it into the market just before a string of Golden Week national holidays. The company, which will report full-year results for fiscal 2006 next Tuesday, said that its net loss for the year likely would be 481billion yen (£2 billion) — far worse than the Y333 billion loss forecast at a similar profit warning issued in January.

With dozens of small, legitimate non-bank lenders expected to collapse over the next six months and the Government tightening usury laws for mainstream consumer finance firms, analysts are predicting soaring growth in illegal backstreet lending.

One senior Shinsei Bank executive said that the consumer loans crisis “represents the biggest single opportunity for Japanese organised crime to fill its coffers since the property bubble of the Eighties”.

Analysts believe that, by the time the reporting season ends next week, combined losses for the listed consumer loan sector could run at about Y3 trillion. Senior executives say that their companies are “caught in a perfect storm” of adversities, including a Supreme Court ruling last year that could mean that billions of yen booked as profits in previous years could be claimed back by borrowers.

Japan’s ageing population and the rising risk of more non-performing loans are also significant drags on growth. Scandals involving heavy-handed collection strategies and a huge drop in television advertising have badly damaged the lenders’ ability to attract new business.

Fiercer regulation on the size of loans available to ordinary Japanese has left many investors deciding that the chances of long-term recovery are slim — particularly if lower credit ratings for the lenders mean that they cannot finance themselves as cheaply.

Analysts such as Walter Altherr of Lehman Brothers, predict a shakedown throughout the industry. “Smaller firms are definitely in worse shape than the larger ones,” he said. “In what was certainly a very difficult year, shareholders’ equity has, in some cases, fallen by more than half, and that is not something that can go on for much longer.”

Takefuji is not the first of the large Japanese consumer lenders to report a dismal turn of fortunes. Others, including Promise, Acom and Aiful, also have told investors to expect bad things when they report their results next week.

In each case, the main driver for deepening losses has been the provisions that have had to be made against widespread claims for reimbursement by borrowers who were loaned money at so-called grey-zone interest rates.

Consumer loan companies used to be able to exploit a gap between the 20 per cent legal cap on rates under the Interest Rate Restrictions Law and the 29.2 per cent cap available under the Investment Deposit and Interest Rate Law.

A ruling by the Supreme Court last year placed a ban on loans made within that range and gave scope for perhaps tens of thousands of borrowers to demand repayment of the profits made by the lenders on loans sold at rates in the grey zone. Mr Altherr noted that with many low-income borrowers forced out of the legitimate consumer loan market by the rate cap, the risk of a rise in illegal lending activities could rise significantly.

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