Raising Capital with Japanese Swords as Collateral — Pawnbrokers and Leaseback as Options

The Liquidity Challenge of Japanese Swords as Assets

Nihontō can carry appraisal values as works of art ranging from several hundred thousand yen to several million yen, yet they are also assets with limited paths to conversion into cash. Unlike real estate, there is no established system for having financial institutions directly appraise them as collateral, and many owners are unaware of ways to obtain funds "while keeping the sword in their possession" when an urgent need for capital arises. Inquiries from people wishing to raise funds without parting with swords inherited through an estate, or with collections built up over many years, are not uncommon in the antique and fine-art trade. This article focuses on two options — pawnbrokers and leaseback — and organizes the practical aspects of raising capital using nihontō.

How Pawnbroker-Based Financing Works

Pawnbrokers operating under the Pawnbroker Business Act are businesses that hold movable property as collateral (shichigusa, pledge items) and advance a certain percentage of the appraised value as a loan. Opening such a business requires a license from the prefectural Public Safety Commission, which is a separate category from a second-hand goods dealer license. The mechanics can be summarized as follows.

• When an item is pledged, the pawnbroker appraises the pledge item and verifies the customer's identity.
• The loan amount is typically around 50 to 70 percent of the appraised value of the pledge item.
• If the principal and interest are repaid within the stipulated period (generally around three months, extendable by contract), the pledge item is returned.
• If repayment is not made within the period, "shichinagare" (forfeiture of pledge) occurs, and ownership of the pledge item transfers to the pawnbroker.

An issue unique to using nihontō as pledge items is the handling of the registration certificate required under the Act for Controlling the Possession of Firearms or Swords and Other Such Weapons (Jūtōhō). Because a nihontō may not lawfully be possessed or transferred without the registration certificate issued by the Board of Education, the pawnbroker takes custody of the registration certificate together with the blade, and upon forfeiture of pledge a procedure equivalent to a change of registered holder becomes necessary. Because nihontō also demand specialized knowledge from the pawnbroker for authentication and storage-environment management, pawnbrokers that specialize in nihontō are limited even among those that handle antiques in general. Records from the Edo period show that arms and nihontō were already being used as pledge items, and the history of nihontō being treated as objects of movable-asset collateral finance is itself a long one.

The Reality of Leaseback as an Option

Leaseback is a structure in which an asset is first sold to convert it into funds, after which the seller enters into a contract with the buyer and continues to use the asset. In the fields of real estate and factory equipment, this is an established financial technique known as "sale-and-leaseback," but applying the same framework directly to fine art and antiques such as nihontō remains limited in practice. Because nihontō, unlike real estate or equipment, are not assets premised on everyday "use," the practical reality is closer to a "sale with a repurchase option (a structure resembling a repo transaction)" rather than a leaseback. While some specialist dealers in fine art do arrange such repurchase-option transactions through individual negotiation, it is important to understand that they are not widely offered as standardized products.

Financing Options Beyond Pawnbrokers and Leaseback

As means of obtaining funds while retaining the nihontō, the following additional options are also worth considering.

• Specialist loans that accept fine art and antiques as collateral (offered by some financial institutions and specialist dealers)
• Partial sale after a reliable appraisal (parting with part of a collection while retaining the rest)
• Ascertaining the appraised value in preparation for inheritance or inter vivos gift, and advancing a financial plan accordingly

With any of these options, the authenticity, condition, and presence of a registration certificate for the nihontō itself have a major bearing on the appraised value. Confirming that the blade is in good condition and that the accompanying documentation is in order before requesting an appraisal can make or break the financing effort. In particular, if the registration certificate has been lost, a reissuance procedure with the Board of Education will be required, and it is worth noting that the time to convert the asset into cash may take longer than expected.

Conclusion

Pawnbroking and leaseback using nihontō as collateral are not as institutionalized as real estate collateral lending, but they are options that exist in practice as a form of movable-asset finance. For pawnbrokers in particular, there is a clear legal framework in the Pawnbroker Business Act, and as long as the registration certificate is handled correctly, nihontō can qualify as collateral. Leaseback, on the other hand, is still a developing technique in the fine-art field, and the practical reality is closer to individually negotiated sale-with-repurchase-option transactions. When considering financing, the starting point is understanding what appraised value one's nihontō holds. For those wishing to get a sense of nihontō market values, the alternative financing perspectives introduced in Nihontō, Furusato Nozei, and Crowdfunding — Modern Capital Raising in Support of Traditional Crafts may also be a useful reference.