Japan Reconstructs Its Policy to Facilitate Small Business Development

The comprehensive restructuring now occurring in Japan has introducing a greater emphasis on corporate efficiency and profitability. Reorganizations have resulted in higher unemployment and many managers and workers now need to change the direction of their careers. Students entering the workforce are also no longer able to entrust their future to a single large employer. SME's have, therefore, come to be appreciated for their potential to introduce more flexibility and a greater diversity of business practices. An environment that facilitates and rewards entrepreneurship will also help to motivate innovation as well as minimize the severe social and financial penalties for failure that have hindered new business creation in Japan.

The extraordinary session of the Diet recognizes the need for change. Future initiatives will focus on market-oriented policies, based on competitive rather than protectionist principles.

As the rate of business start-ups has been lower than business closures in Japan since 1986, policy-makers have come to realize that start-ups and rapidly growing technology-oriented companies need to be in center of the policy mix. While these measures will help SME's to compete in the global economy, Japan recognizes that it needs both business start-ups and closures to promote dynamism and the effective allocations of resources on the firm level.

Japan is also moving to redefine the parameters required to achieve an SME designation, from levels previously determined in 1973. This will empower SME's who have introduced successful business strategies by maintaining their access to market-based incentives that will further enhance their competitiveness and profitability. Depending on the sector, businesses have generally been required to have a capitalization level ranging from 10 to 100M yen or up to 50 to 300 employees to be viewed as an SME. Within the legislative package, these definitions will be expanded, in many cases tripling the amount of capitalization under which a firm will remain entitled to receive an SME designation. Under these changes it is forecast that 16,000 additional existing companies will receive an SME definition, with more than half of this increase attributed to firms in the service industry.

1) Self-support of business management: Companies will do their best when exposed to market forces. Those that possess the soundest strategies and corporate structures will prove their competitiveness and become eligible for government programs and incentives designed to enhance their growth and development.

2) Enhance competition: Government programs will seek to support SME's by: a) assisting their ability to obtain adequate capital, human resources and information, and b) rectifying difficulties arising from contractual and sub-contracting relationships with large firms.

3) Provide a safety net in emergency situations: Another program includes supporting SME's through a) a more comprehensive social safety net that will help them to adapt to globalization and other rapid changes within Japan's business environments, and b)enacting legislation similar to Chapter 11 bankruptcy law in the United States. This will help to facilitate start-ups and closures of inefficient firms.

• Venture businesses that can take advantage of initial public offerings (IPO's) in the over-the-counter market.

  Goal: to have an equal number of IPOs as has the United States. For example, in 1998, the U.S. NASDAQ market had 287 IPOs, while Japan lagged with only 62.

• Competitive SME's with distinctive goods or services.

  Goal: within 3-5 years to have an increase of 10,000 new companies.

• Start-ups and existing companies who seek to expand their business activities.

  Goal: increase business start-ups from 140,000 to 240,000 new enterprises to create one million new jobs within the next five years.
  
  

The national center will be staffed by professionals from the private sector, who can provide the expertise needed to evaluate businesses with new activities, and enable them to analyze examples of success and failure. They will also help to allocate government funding and support for venture capital and research and development. Prefectural centers will provide also advice in a manner similar to SCORE (Service Corps of Retired Executives) in the United States. They will also serve as a vehicle to disseminate the information gathered and developed by the national center and to coordinate industry-academic relationships and to evaluate technologies developed on prefectural level. Local and regional centers will provide consulting windows to start-ups and established firms, providing hands-on advice on the local level.

In addition to these advisory and professional services, Japan proposes to initiate a public information campaign to educate the Japanese people about the attractions of entrepreurship and the potential it offers to enrich their lives and personal development.

• Reform of Japanese Over-the-Counter Market: To facilitate the flow of risk money to deserving firms, Japan plans to restructure its OTC market. Previously, the Japan Securities Dealers Association managed this market. At the same time it functioned as an industry association. Separation of the association from the market function in a similar manner as the National Association of Securities Dealers (NASD) and NASDAQ in the United States is strongly recommended.

• Creating New Sources of Venture Capital: Japan proposes to expand tax incentives for "angel" investors. It also seeks to extend the granting of stock options, which were first introduced in 1995 and formerly reserved for employees, to consultants, suppliers, subcontractors and other key individuals who can enhance a firm's growth and development.

• Promoting Flexible Financial and Corporate Structures: A diversified mechanism will be introduced to help fund a company's growth depending upon their individual needs and requirements. This includes: a) granting government guarantees for bonds in order to encourage their use over bank loans, b) introducing a factoring system to ease cash flow requirements, and c) creating a new system that relaxes collateral requirements to companies with proven growth potential.

The Japanese government also proposes to abolish taxes that family-owned companies formerly paid on their retained earnings. Additionally, a program will be initiated to grant interest-free loans for equipment purchases to promising microenterprises that meet certain requirements.

Furthermore, it is proposed that tax obligations on inheritance and business and real estate transfers be eased.

This includes the creation of a small business credit risk database for lenders and investors in order to facilitate financing and to reduce risk premiums. Additionally, to help ease Japanese businesses from their traditional reliance on bank loans, the Japanese government proposes to allocate additional funding † beyond the 20 trillion yen that has already been made available through March 2001-- to provide credit guarantees for small businesses Flexible mechanisms will also be introduced to provide a special lending system during extraordinary circumstances and emergencies. For example, when the Hokkaido Takushoku Bank collapsed in Japan in 1997, many sound firms with longstanding relationships with this institution unnecessarily lost their credit lines through no fault of their own. Financial support will also be strengthened to female and elderly entrepreneurs over 65 years old.

Focus: Economic Recovery
Focus: Economic Recovery 2
Focus: Economic Recovery 3
Focus: Steel
Focus: Economic Recovery 4
Focus: Industrial Revitalization
Focus: New Enterprise Development