Hitoshi Fujita's firm was essentially a typical mom-and-pop enterprise producing metal parts for the most of its 72-year existence. After then, it took an uncommon step for a tiny Japanese manufacturer: it grew, acquiring two nearby businesses in the previous ten years.
According to Fujita, the nation that revolutionised global manufacturing in the 20th century has a bleak future if more small businesses don't follow suit.
Many of Japan's small and medium-sized businesses were just scraping by on government assistance and practically free funding after years of slowing development and population reduction. Approximately seven out of ten employment are held by these enterprises, which are currently facing a shake-up as a result of declining pandemic-era funding and the first increase in borrowing rates in 17 years.
Three top government officials in Japan told Reuters that the government is ready to let more failing companies collapse. This was an earlier admission that had not been made public, but the officials said it demonstrated the urgent need to replace stagnant companies with ones that can generate growth.
The authorities characterised the mental shift as a significant departure for a nation that has always attempted to prevent bankruptcies and preserve current employment at the expense of production, even if they did not anticipate such a transition to happen rapidly.
The officials, who were given anonymity to discuss a delicate matter, stated that the measure will assist Japan direct labour and investment to its most productive enterprises in a competitive labour market, improving salaries.
Indeed, one of the persons stated that the government anticipates that mergers and acquisitions—rather than widespread bankruptcies and layoffs—will bring about the shift. The government offers small firms M&A advice through support centres.
We desire fish that are consistently in a high-quality habitat, exhibit little stress, and are happy.
Twenty persons were interviewed, including five government officials, bankers, industry specialists, and three business owners. They revealed that there are a number of obstacles to this rethinking of Japan's conventional approach to business, not the least of which is the social compact that has regulated the postwar economy.
"A lot of small manufacturer owners are from generations earlier than me and they usually run their companies as engineers," stated 46-year-old Fujita, who is the owner of Sakai Seisakusyo in central Japan's Kakamigahara. "They don't really have applicable skills when it comes to buying another company."
Fujita wants to diversify his company's product line to include higher-value components in addition to semiconductors and tap parts.
Japan's Ministry of Economy, Trade and Industry responded to inquiries in writing by stating that it will keep providing money and other forms of support to small and medium-sized businesses (SMEs) and emphasising the need for these businesses to raise their earning potential via investment and higher productivity.
It stated that while workers were switching occupations in search of better working circumstances, such as greater earnings, bankruptcies were now "on a slight upward trend" and had recovered to pre-pandemic levels.
"We will continue to closely monitor the situation to ensure bankruptcies do not increase at an inappropriate level that would cause the unemployment rate to rise," added the statement.
Research company Teikoku Databank estimates that 251,000 businesses were "zombies" last year—the largest number in almost 10 years—meaning that their income didn't meet interest payments over a prolonged period of time. Most of them employed 300 people or less.
Government initiatives unveiled in March urge banks to assist in restructuring troubled businesses rather than continuing to support them financially.
Zombies and "economic metabolism," the phrase used by policymakers to describe stronger enterprises displacing weaker ones, are not specifically mentioned in the proposals.
Upon being questioned if more businesses will be let to collapse, a senior official responded, "Yes, that is correct." However, the person said, the administration "cannot say that explicitly" since doing so would expose the government to undesirable public reaction against the governing party.
The official stated, "We are doing this by stealth, gradually doing this." "Japan's future will be bleak if we cannot raise productivity."
Japan's GDP per capita, average yearly salary, and growing number of zombie enterprises GDP per person among OECD nations
In terms of per capita GDP and yearly earnings, Japan is below the OECD average. In the latter, which measures labour productivity, Japan is ranked third, behind France and Italy, at $33,834.
However, Japan can only take so much creative devastation before losing its composure. According to a fourth official, underperforming enterprises might nonetheless play a vital role in the communities of some rural locations.
According to Tatsuro Oya of Ohe Tanaka & Oya, a lawyer with experience in small business reorganisation, the government is cautious not to appear as though it is "abandoning" support for small businesses.
"They are trying to ease the pain as much as possible through the safety net of redirecting workers to growing companies," he stated.
Fumio Kishida, the prime minister, has put pressure on businesses to raise wages. According to the Rengo union group, they gave the largest rise in thirty years this year, averaging 5.1%, with lesser ones average 4.5%. However, this does not account for salaries at many tiny, non-unionized businesses.
It is not appropriate for SMEs to receive "welfare policies," according to prominent politician Akira Amari of the ruling Liberal Democratic Party.
In an interview, he stated that the goal is to assist them in raising salaries, profitability, and productivity so they can pay taxes.
According to a 2022 finance ministry study, Japan spent 63.2 trillion yen, or around $400 billion, on supporting SMEs during the pandemic. Of that amount, about $267 billion was given out as "zero-zero" loans, which had no collateral requirements and no grace periods for interest payments.
Japan's GDP per capita, average yearly salary, and growing number of zombie enterprises Reduced governmental financing has resulted in an increase in bankruptcies.
The number of bankruptcies increased as the loans matured. Teikoku Databank said that the number of company closures during the first half of the year was close to 5,000, the highest number in ten years. Insolvencies increased by 33% in the previous year.
According to Amari, frequent mergers and acquisitions would help staff gain new skills and enable smaller businesses to grow into higher-margin sectors.
"We do not want medium-sized enterprises to remain medium-sized, they should aim to become large," he stated.
In 2020, Fujita's Kakamigahara-based firm completed its most recent purchase, purchasing a manufacturer of automotive and medical parts.
Both parties decided to hire a consultant from the small company acquisition support centre to discuss arrangements. The consultant's expenses were partially covered by the government.
Government data indicates that in the year ending in March 2023, the centres assisted in the acquisition of about 1,681 small businesses.
Increasing prices is one strategy available to failing businesses, but it's challenging to implement after years of deflation.
Small lender Kiryu Shinkin Bank, located in Gunma, north of Tokyo, set up a team last year to assist its business clients who were particularly struggling.
According to manager Takashi Harada, business owners are hesitant to raise prices because they worry about losing clients. According to him, owners also feel obligated to maintain their businesses for the sake of their staff, averting significant change.
"They are so focused on not going out of business," Harada said.
Nonetheless, a few family businesses are defying the norm.
After her father passed away six years prior, Yukiko Izumi took over her family's cookie business, Izumiya Tokyoten, which had been losing money for ten years.
She reduced expenses, relocated the corporate office from Tokyo to the company's plant in Kawasaki, an industrial area, and hiked prices for the first time in fifteen years.
She created a new product line with a cat motif in collaboration with an illustrator. Though it encountered some internal resistance at first, it currently sells 120,000 packets yearly, making the 97-year-old Izumiya, which has shown profits for the previous three years, consider it "a big hit".
"My father and I did not see eye-to-eye on how to break with the old way of doing things and improve productivity," Izumi said. "So I decided to change things."
She is now aiming to increase the size of her clientele by focusing on incoming tourists.
But when the easy-money period expires and expenses rise due to a weakening yen, many firms face an impending squeeze.
Yasushi Noro, president of SMEs advisory firm NBC Consultants, stated he anticipates seeing an increase in the number of firms he speaks with who are having financial difficulties as interest rates rise.
"The SME model that worked until now because of low interest rates is crumbling," he stated.
(Source:www.reuters.com)
According to Fujita, the nation that revolutionised global manufacturing in the 20th century has a bleak future if more small businesses don't follow suit.
Many of Japan's small and medium-sized businesses were just scraping by on government assistance and practically free funding after years of slowing development and population reduction. Approximately seven out of ten employment are held by these enterprises, which are currently facing a shake-up as a result of declining pandemic-era funding and the first increase in borrowing rates in 17 years.
Three top government officials in Japan told Reuters that the government is ready to let more failing companies collapse. This was an earlier admission that had not been made public, but the officials said it demonstrated the urgent need to replace stagnant companies with ones that can generate growth.
The authorities characterised the mental shift as a significant departure for a nation that has always attempted to prevent bankruptcies and preserve current employment at the expense of production, even if they did not anticipate such a transition to happen rapidly.
The officials, who were given anonymity to discuss a delicate matter, stated that the measure will assist Japan direct labour and investment to its most productive enterprises in a competitive labour market, improving salaries.
Indeed, one of the persons stated that the government anticipates that mergers and acquisitions—rather than widespread bankruptcies and layoffs—will bring about the shift. The government offers small firms M&A advice through support centres.
We desire fish that are consistently in a high-quality habitat, exhibit little stress, and are happy.
Twenty persons were interviewed, including five government officials, bankers, industry specialists, and three business owners. They revealed that there are a number of obstacles to this rethinking of Japan's conventional approach to business, not the least of which is the social compact that has regulated the postwar economy.
"A lot of small manufacturer owners are from generations earlier than me and they usually run their companies as engineers," stated 46-year-old Fujita, who is the owner of Sakai Seisakusyo in central Japan's Kakamigahara. "They don't really have applicable skills when it comes to buying another company."
Fujita wants to diversify his company's product line to include higher-value components in addition to semiconductors and tap parts.
Japan's Ministry of Economy, Trade and Industry responded to inquiries in writing by stating that it will keep providing money and other forms of support to small and medium-sized businesses (SMEs) and emphasising the need for these businesses to raise their earning potential via investment and higher productivity.
It stated that while workers were switching occupations in search of better working circumstances, such as greater earnings, bankruptcies were now "on a slight upward trend" and had recovered to pre-pandemic levels.
"We will continue to closely monitor the situation to ensure bankruptcies do not increase at an inappropriate level that would cause the unemployment rate to rise," added the statement.
Research company Teikoku Databank estimates that 251,000 businesses were "zombies" last year—the largest number in almost 10 years—meaning that their income didn't meet interest payments over a prolonged period of time. Most of them employed 300 people or less.
Government initiatives unveiled in March urge banks to assist in restructuring troubled businesses rather than continuing to support them financially.
Zombies and "economic metabolism," the phrase used by policymakers to describe stronger enterprises displacing weaker ones, are not specifically mentioned in the proposals.
Upon being questioned if more businesses will be let to collapse, a senior official responded, "Yes, that is correct." However, the person said, the administration "cannot say that explicitly" since doing so would expose the government to undesirable public reaction against the governing party.
The official stated, "We are doing this by stealth, gradually doing this." "Japan's future will be bleak if we cannot raise productivity."
Japan's GDP per capita, average yearly salary, and growing number of zombie enterprises GDP per person among OECD nations
In terms of per capita GDP and yearly earnings, Japan is below the OECD average. In the latter, which measures labour productivity, Japan is ranked third, behind France and Italy, at $33,834.
However, Japan can only take so much creative devastation before losing its composure. According to a fourth official, underperforming enterprises might nonetheless play a vital role in the communities of some rural locations.
According to Tatsuro Oya of Ohe Tanaka & Oya, a lawyer with experience in small business reorganisation, the government is cautious not to appear as though it is "abandoning" support for small businesses.
"They are trying to ease the pain as much as possible through the safety net of redirecting workers to growing companies," he stated.
Fumio Kishida, the prime minister, has put pressure on businesses to raise wages. According to the Rengo union group, they gave the largest rise in thirty years this year, averaging 5.1%, with lesser ones average 4.5%. However, this does not account for salaries at many tiny, non-unionized businesses.
It is not appropriate for SMEs to receive "welfare policies," according to prominent politician Akira Amari of the ruling Liberal Democratic Party.
In an interview, he stated that the goal is to assist them in raising salaries, profitability, and productivity so they can pay taxes.
According to a 2022 finance ministry study, Japan spent 63.2 trillion yen, or around $400 billion, on supporting SMEs during the pandemic. Of that amount, about $267 billion was given out as "zero-zero" loans, which had no collateral requirements and no grace periods for interest payments.
Japan's GDP per capita, average yearly salary, and growing number of zombie enterprises Reduced governmental financing has resulted in an increase in bankruptcies.
The number of bankruptcies increased as the loans matured. Teikoku Databank said that the number of company closures during the first half of the year was close to 5,000, the highest number in ten years. Insolvencies increased by 33% in the previous year.
According to Amari, frequent mergers and acquisitions would help staff gain new skills and enable smaller businesses to grow into higher-margin sectors.
"We do not want medium-sized enterprises to remain medium-sized, they should aim to become large," he stated.
In 2020, Fujita's Kakamigahara-based firm completed its most recent purchase, purchasing a manufacturer of automotive and medical parts.
Both parties decided to hire a consultant from the small company acquisition support centre to discuss arrangements. The consultant's expenses were partially covered by the government.
Government data indicates that in the year ending in March 2023, the centres assisted in the acquisition of about 1,681 small businesses.
Increasing prices is one strategy available to failing businesses, but it's challenging to implement after years of deflation.
Small lender Kiryu Shinkin Bank, located in Gunma, north of Tokyo, set up a team last year to assist its business clients who were particularly struggling.
According to manager Takashi Harada, business owners are hesitant to raise prices because they worry about losing clients. According to him, owners also feel obligated to maintain their businesses for the sake of their staff, averting significant change.
"They are so focused on not going out of business," Harada said.
Nonetheless, a few family businesses are defying the norm.
After her father passed away six years prior, Yukiko Izumi took over her family's cookie business, Izumiya Tokyoten, which had been losing money for ten years.
She reduced expenses, relocated the corporate office from Tokyo to the company's plant in Kawasaki, an industrial area, and hiked prices for the first time in fifteen years.
She created a new product line with a cat motif in collaboration with an illustrator. Though it encountered some internal resistance at first, it currently sells 120,000 packets yearly, making the 97-year-old Izumiya, which has shown profits for the previous three years, consider it "a big hit".
"My father and I did not see eye-to-eye on how to break with the old way of doing things and improve productivity," Izumi said. "So I decided to change things."
She is now aiming to increase the size of her clientele by focusing on incoming tourists.
But when the easy-money period expires and expenses rise due to a weakening yen, many firms face an impending squeeze.
Yasushi Noro, president of SMEs advisory firm NBC Consultants, stated he anticipates seeing an increase in the number of firms he speaks with who are having financial difficulties as interest rates rise.
"The SME model that worked until now because of low interest rates is crumbling," he stated.
(Source:www.reuters.com)