Dawn of a New Era for Japan’s SMEs

Japan’s small and medium enterprises (SMEs) may soon cease to enjoy the “indulgence and molly-coddling” heretofore afforded them, writes Odaki Kazuhiko.

After governing continuously for nearly eight years, Prime Minister Abe Shinzo retired for health reasons in September and Suga Yoshihide, who had been Chief Cabinet Secretary, became the new prime minister. The new administration has taken over many aspects of the Abe administration’s policies, including foreign policy, but some stakeholders are keeping a close eye on the new administration’s policy on small and medium enterprises (SMEs).

Every country has special interests or other sacred cows that are off limits. In Japan, small and medium enterprises are one such group. Japanese SMEs are viewed as noble enterprises where employees work hard for long hours to generate numerous innovations, and to contribute to both major corporations and consumers in Japan while they themselves get by on small profits and low wages. Both newspapers and television portray the proprietors of dirty backstreet factories like saints undertaking ascetic practices on holy ground: “These fantastic small and medium enterprises supporting Japan” and “These world-class national treasures.” Politicians have even more respect for SMEs. When the Small and Medium Enterprise Agency submits a bill to the Diet, all political parties are in agreement. Even the opposition, which stands against many government policies, cheers on the government when it is a question of more generous support for SMEs. 

But, in actual fact, many SMEs in Japan are not at all excellent and do not contribute to affluence in Japan. 

At major corporations, the production value per capita is about fourteen million yen. In contrast, the corresponding figure at SMEs is only 5.5 million yen. The difference is small in the commercial and hotel industries, but in important industries such as manufacturing and IT, productivity at Japanese SMEs is low. The illusion created by television that even if many SMEs are mediocre, some of them are beyond excellent has no basis in truth. Productivity at the top ten percent of major corporations is about ten million yen higher than the average for all major corporations, but the top ten percent of SMEs are only five million yen above the low average for SMEs. 

The fact that many SMEs with low productivity survive without being eliminated is largely due to the impact of generous support policies. The corporate tax rate for SMEs is low. The consumption tax burden is reduced or exempt. Social insurance costs are also low. A wide range of costs are recognized as expenses. There is little demand for compliance. For example, specially lenient standards apply to controls on second-hand smoking, the obligation to hire people with disabilities, and many other laws and ordinances. If the proprietor of an SME leaves the company to the children, the inheritance tax is particularly low. 

As a result of such preferential treatment, many inefficient SMEs survive. As far as proprietors of SMEs are concerned, if their company grows large taxes will increase and they will have many obligations, so they see it as a disadvantage. If they are successful, many proprietors establish another SME rather than grow their company. Or, they are not looking for growth to start with because growing large is not to their advantage. 

Many SMEs in Japan choose to survive on the generous support rather than to grow, and to leave the business to their children to avoid taxes. There are countless long-lived companies in Japan, but with few exceptions, most of them are inefficient and mediocre and do not boast high added value or advanced technologies.

The reason for the interest in the prime minister’s SME policies is due to the arguments and unique career of David Atkinson, one of the advisors behind Suga’s economic policies. Formerly an analyst at Goldman Sachs, Atkinson understands economic rationality. Currently, he is also president of Konishi Decorative Arts and Crafts, a company that repairs works of art at shrines and temples across Japan. Atkinson, who has taken over a long-lived company in possession of traditional skills that are surely the pride of Japan, is critical of the low productivity of many SMEs in Japan and the protective policies that enable them.   

At present, change is finally starting to come to the SMEs in Japan. Even with the current extent of preferential treatment, the number of SMEs without someone to take over the business is increasing rapidly due to the declining birthrate and the growing proportion of elderly people. Mergers and acquisitions between such SMEs are increasing. There is also a growing number of cases where external managers like Atkinson are brought in. If, as Atkinson has argued, the policies that support SMEs in Japan are changed from the current indulgence and molly-coddling to policies that encourage growth, many excellent companies creating high added value and innovation will emerge out of the small and medium enterprises in Japan.

ODAKI Kazuhiko is a professor at Nihon University and consulting fellow at the Research Institute for Economy, Trade and Industry.

Note: This article first appeared in the Jan/Feb 2021 issue of the Japan Journal.


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