Japanese cinema

The movie biz is back in the good books of financial folk in Japan with film funds sprouting left, right and center.

Film financing in the country long had a simplicity born of necessity. Banks were leery of an industry they saw as dodgy, making products too risky for their conservative blood. Meanwhile the Sonys, Toshibas and other giants of postwar Japanese industry saw little reason to invest in local films as long as they were raking in huge profits from their core hardware businesses.

With the collapse of the studio system in the 1970s, the surviving Japanese film companies could no longer easily finance their lineups from their own coffers. Instead they developed the “production committee” (seisaku iinkai) system, in which a group of media companies — a studio, a TV network, a video company and so on — jointly underwrote a film while dividing the rights and profits. Gap financing, completion bonds and other standard Hollywood financing tools were conspicuous by their absence (and, for that matter, still are).

In the bubble economy of the late 1980s and early 1990s, cash-flush trading houses and banks set up film funds, but the promised profits never materialized, and, with the bursting of the bubble, the newcomers fled.

Now, however, funds are back — in larger numbers and new forms. The catalyst: a government that now views content, including films, as an engine for economic growth and funds as a useful tool for promoting film production.

“We see the advance into films funds by financial institutions as positive, and we’re doing what we can to support it,” says Tomoko Higuchi of the Ministry of Economy, Trade and Industry’s (METI’s) Media and Content Industry Division.

With powerful bureaucracies like METI and the Financial Services Agency giving the greenlight, more companies are launching film funds. The biggest is Japan Film Fund (JFF), launched by Kadokawa Herald Pictures in September 2004 to raise ¥3.5 billion ($31 million) for film production. The fund’s ultimate goal: 20 films over its seven-year life, though investors can cash out after five.

Partners include Kadokawa Shuppan Kikin, Konami, Imagica, Development Bank of Japan and Mizuho Financial Group, with the last serving as the partners’ main bank. Films made so far include “One Missed Call 2,” “Samurai Commando” and “The Great Goblin War.”

This year JFF intends to underwrite at least three more films, including the latest installment in the classic “Gamera” series about a giant flying turtle. “We’re making a mix of films, both big-budget and small,” said JFF spokesman Shiko Daida. “We are also distributing them through various channels.”

Among the more innovative funds is the one Shochiku designed for “Shinobi,” a ninja actioner that opened in September. The first Japanese film fund open to individual investors, the “Shinobi” fund raised $4.4 million — one-third of the film’s production budget — from 1,300 individuals and companies by the time it closed in February 2005.

Given that the target was $2.6 million, fund manager Morito Ito is “pleased with the results. We got a lot of publicity for being the first with this sort of fund. Second, the two stars, Yukie Nakama and Joe Odagiri, have a lot of fans, especially among young people. Third, Japanese film stocks were flat last year, making the fund look attractive by comparison.”

The fund business, Ito believes, can only get better — and not only for Shochiku. “When a film is budgeted at ¥500 million ($4.4 million), it’s relatively easy to raise funds with a production committee,” he explains. “But a production committee alone can’t easily raise a budget of ¥1.5 billion ($13.2 million) — and more and more Japanese films are in that category. A fund can close the gap.”

Also launching a new type of film fund is North Stars Pictures, a contents rights management company started in 2004 by Mitsuru “Mitch” Imoto, former CEO of Mitsui Sumitomo CitiInsurance Life Insurance. The fund has raised $22 million from both individual and institutional investors to make three feature animations and two original video animations based on Fist of the North Star, a popular sci-fi comic with a two-decade history and sales in paperback editions of nearly 100 million copies worldwide.

SMBC Friend Securities, an Internet brokerage, markets fund shares, each one costing $877. North Star then produces content with the funds and, in partnership with Sumitomo Mitsui Bank (SMBC) manages the copyrights through a trust account. “This is first fund to use this sort of trust scheme for a public offering,” Imoto says.

The advantages for the investors include safety and clarity. No matter what happens to North Star, investors will continue to get returns through SMBC. Also, since results are reported every six months, investors can compare them with other funds, “making everything clear-cut,” Imoto comments.

Not all funds, however, are clear-cut enough for the Japanese government, which is studying the implementation of an Investment Services Law to strengthen disclosure requirements.

“We want all types of funds, not just film funds, to supply adequate information to investors,” Higuchi says. The object is not to slow the growth of funds, but encourage it by making cautious Japanese punters more willing to take the plunge.

That said, the fund business is already booming, with the list including:

  • Usen Corp., the parent company of distrib Gaga Communications, partnering with Daiwa Securities SMBC in a $263 million contents fund. Usen, which made an initial $26.3 million investment in January, will use fund money to underwrite films produced by Gaga. It will also seek other film investment opportunities, both in Japan and abroad. The two partners will each contribute a 50% share of the total, with the cooperation of their group companies. Usen, a major supplier of broadband services, acquired an $87.7 million majority stake in Gaga in October 2004.

  • A fund announced in December by talent agency Yoshimoto Kogyo to produce two comedy features for release in 2007. The films will star top-tier Yoshimoto talent and be budgeted at $8.5 million each.

  • Two funds announced in December of last year by Icot, an Osaka-based contents management company, with the backing of brokerage Mizuho Securities. One fund will raise $5.3 million for the production of three feature films. Another will collect $3.5 million to make a 24-episode animated series, “Rabugetsu,” for terrestrial network broadcast in 2006. Icot will manage all rights from these projects, from theatrical and DVD release to television, broadband and cell phone broadcast. It also intends to launch other contents funds, on an annual basis.

  • Independent Film Fund, started in April by marketing, financing and management company Cinema Investment Corp., in association with the Organization for Small & Medium Enterprises and Regional Innovation, JAPAN and the Kadokawa Trust Fund for Publishing and Business Promotion. CIC will invest the $17.5 million fund in films by small- to medium-sized production companies over an eight-year period, with a two-year extension possible.

  • The fund launched by animation house Gonzo, with Internet brokerage Rakuten Securities in 2004 to underwrite the production of Basilisk, a straight-to-DVD animation. Totaling $2.1 million, the fund gave investors a chance, for a 1% fee, to earn returns based on the film’s DVD sales, up to 10% over two years.

  • The fund started in 2004 by Taka Ichise’s Entertainment Farm to partially fund productions of the J-Horror Theater slate of six horror films, each by a different director, that Ichise is producing for distribution in Japan by Toho and sales worldwide by Lionsgate. The first two, “Premonition” and “Infection,” were released in Japan in October 2004. The third, “Reincarnation,” opened in Japan in January 2006.

  • The Tokyo Multimedia Fund managed by JDC Trust to invest in various media contents, including animation and films. There have been three funds since the first in 1998, with a total investment of $22 million. TMF covers up to 75% of production costs. Once investors have received at least 100% of their money back, TMF begins dividing profits with producers.

Will the fund boom continue? The entry of more financial institutions, securities company and trading houses into the fund business is unstoppable “as long as investors keep coming up with the money,” Ito believes.

Funds with international ambitions, particularly Asian ones, however, will find the going harder unless they can “tell a marketing story that international investors can easily understand,” he comments. “They’ve got to have strong original material or a film in a popular genre like action-adventure.”

Also, the Japanese market, with a 15% world share, is still more attractive than the considerably smaller markets of China or Korea. “But if they get bigger,” he adds, “and I’m sure they will, joint fund-raising will be an interesting possibility.”

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