By Makiko Yamazaki, Ritsuko Shimizu and Anton Bridge
KAKAMIGAHARA, Japan (Reuters) – For a lot of its 72 years, Hitoshi Fujita’s firm was simply one other mom-and-pop enterprise grinding out metallic elements. Then it did one thing uncommon for a small Japanese producer: it expanded, shopping for two neighboring companies within the final decade.
If extra small corporations do not comply with swimsuit, Fujita says, the nation that remodeled international manufacturing within the twentieth century is taking a look at a dim future.
Years of faltering development and inhabitants decline left lots of Japan’s small and medium-sized companies squeaking by on state assist and almost-free funding. These corporations, which account for round seven out of 10 jobs, now face a shake-up as pandemic-era assist dwindles and rates of interest rise for the primary time in 17 years.
Japan’s authorities is prepared to let extra underperforming corporations fail, three senior authorities officers instructed Reuters, a beforehand unreported acknowledgment that they mentioned displays an pressing want to switch sclerotic companies with these in a position to ship development.
Whereas the officers didn’t anticipate such change to happen rapidly, they described the shift in pondering as a transparent departure for a rustic that has usually sought to keep away from bankruptcies and shield present jobs at the price of productiveness.
The transfer will assist Japan channel employees and funding to its best corporations in a good labor market, boosting wages, mentioned the officers, granted anonymity to debate a delicate subject.
To make certain, the federal government expects the change to come back by way of mergers and acquisitions, reasonably than large-scale bankruptcies and lay-offs, one of many individuals mentioned. The federal government has assist facilities to advise small companies on M&A.
This rethink of Japan’s conventional strategy to enterprise faces a number of hurdles, not least the social contract that has ruled the postwar economic system, in accordance with interviews with 20 individuals, together with 5 authorities officers, bankers, trade consultants and three enterprise house owners.
“Many owners of small manufacturers are from the generation before me and tend to manage their business as engineers,” mentioned the 46-year-old Fujita, who runs Sakai Seisakusyo in Kakamigahara, central Japan. “They don’t really have applicable skills when it comes to buying another company.”
Fujita’s agency makes elements for taps and semiconductors, and he desires to develop extra into higher-value parts.
In a written response to questions, Japan’s Ministry of Financial system, Commerce and Business mentioned it might proceed to assist small and medium-sized enterprises (SMEs) with funding and different measures, including that corporations wanted to spice up their incomes energy via funding and elevated productiveness.
It mentioned bankruptcies have been now “on a slight upward trend” and had returned to pre-pandemic ranges, whereas employees have been altering jobs for higher circumstances, together with greater wages.
“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,” it mentioned.
ZOMBIE PROBLEM
Some 251,000 corporations have been “zombies” final 12 months, that means their earnings did not cowl curiosity funds over an prolonged interval, in accordance with analysis agency Teikoku Databank, the very best in additional than a decade. The overwhelming majority had 300 or fewer workers.
Below authorities measures launched in March, banks are inspired to assist flip round weak corporations as an alternative of constant to prop them up with loans. The measures do not straight point out zombies or “economic metabolism,” a time period policymakers use to confer with stronger corporations changing weaker ones.
When requested if extra corporations could be allowed to fail, one of many senior officers mentioned, “Yes, that is correct.” However the authorities “cannot say that explicitly” as it might danger a public backlash that will be unwelcome for the ruling occasion, the official added.
“By stealth, we are doing this, gradually doing this,” the official mentioned. “Japan’s future will be bleak if we cannot raise productivity.”
Japan ranks under the OECD common for annual wages and per capita GDP. The latter, a barometer of labor productiveness, exhibits Japan at $33,834, behind France and Italy.
Nonetheless, there are limits to how a lot artistic destruction Japan can abdomen. In some rural areas, underperforming companies stay important to communities, a fourth official mentioned.
The federal government is cautious to not be seen as “abandoning” assist for small corporations, mentioned Tatsuro Oya of legislation agency Ohe Tanaka and Oya, who has expertise restructuring small corporations.
“They are trying to ease the pain as much as possible through the safety net of redirecting workers to growing companies,” he mentioned.
Prime Minister Fumio Kishida has pressured corporations to spice up pay. They delivered the largest enhance in three a long time this 12 months, averaging 5.1%, with smaller ones averaging 4.5%, in accordance with the Rengo union group, though that does not mirror wages at many non-unionized small corporations.
‘ZERO-ZERO’
SMEs should not be recipients of “welfare policies,” mentioned Akira Amari, an influential lawmaker from the ruling Liberal Democratic Occasion.
The purpose is to assist them enhance productiveness, earnings and wages, to allow them to pay taxes, he mentioned in an interview.
Japan spent 63.2 trillion yen, or about $400 billion, on SME assist within the pandemic, in accordance with a 2022 finance ministry report, with round $267 billion disbursed as “zero-zero” loans, which required zero collateral and had zero-interest-payment grace intervals.
Bankruptcies have surged because the loans got here due. Virtually 5,000 corporations went underneath between January and June, the very best first-half tally in a decade, in accordance with Teikoku Databank. Bankruptcies jumped by a 3rd final 12 months.
Amari mentioned repeated M&A would permit smaller corporations to develop into higher-margin industries, and permit workers to study new abilities.
“We do not want medium-sized enterprises to remain medium-sized, they should aim to become large,” he mentioned.
Fujita’s firm in Kakamigahara made its most up-to-date acquisition in 2020, shopping for a maker of auto and medical elements.
To barter phrases, either side agreed to make use of a guide from the assistance heart for small enterprise acquisitions. The federal government paid half the guide’s charges.
Some 1,681 small corporations have been acquired with the assistance of these facilities within the 12 months to March 2023, authorities figures present.
BREAK FROM PAST
One possibility for struggling companies is to extend costs, however that is troublesome to do after years of deflation.
Kiryu Shinkin Financial institution, a small lender in Gunma, north of Tokyo, final 12 months established a staff to assist hard-hit company shoppers.
Business house owners are reluctant to boost costs for concern of shedding prospects, mentioned supervisor Takashi Harada. Homeowners additionally really feel accountable to maintain corporations going for his or her workers, stopping drastic change, he mentioned.
“They are so focused on not going out of business,” Harada mentioned.
Nonetheless, some household companies are breaking the mildew.
When Yukiko Izumi took over her household’s cookie firm, Izumiya Tokyoten, after her father died six years in the past, it had misplaced cash for a decade.
She minimize prices, moved the headquarters from Tokyo to inside its manufacturing unit in industrial Kawasaki, and raised costs for the primary time in 15 years.
She labored with an illustrator to design a brand new cat-themed product line. It confronted some preliminary inner resistance, however now sells 120,000 packages yearly, “a big hit” for the 97-year-old Izumiya, which reported earnings for the final three years.
“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 mentioned. “So I decided to change things.”
Now, she is seeking to broaden her buyer base by concentrating on inbound vacationers.
However for a lot of companies, crunch time looms because the easy-money period ends and a weak yen drives up prices.
Yasushi Noro, president of NBC Consultants, which advises SMEs, mentioned he hears extra from corporations fighting debt and expects that to extend as rates of interest go up.
“The SME model that worked until now because of low interest rates is crumbling,” he mentioned.
($1 = 157.93 yen)
