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Japan's
Drowning
Small Businesses
By Michael Alan Hamlin
January 4, 2001
As Japan enters the new millennium
with increasingly grim prospects for an economic recovery, it seems
only appropriate to ask why the world's second-largest economic
power has so stubbornly refused to learn from its crisis and ingest
the bitter medicine of reform. Why hasn't a decade-long economic
malaise triggered a political crisis serious enough to remove from
power the nation's ruling — and bumbling — Liberal Democratic
Party? An important answer to these questions resides in the LDP's
relationship with its principal constituency: thousands of small-
and medium-sized enterprises and their millions of employees.
Despite the mythic proportions of "Japan, Inc."
and its mammoth corporations, SMEs (companies with 300 or fewer
employees) comprise 99.3% of the nation's businesses, according
to the Ministry of International Trade and Industry. They also account
for a whopping 72.7% of Japan's part- and full-time employment.
Less than a third of SMEs are engaged in value-creating
manufacturing. SME manufacturers account for about 40% of the manufacturing
sector's revenues and 70% of employment. In contrast, large corporations
make up just 0.2% of manufacturing companies, but account for more
than 60% of the sector's revenues and less than 30% of its employment.
These statistics are mirrored in other related sectors
of Japan's economy. Nearly 100% of the nation's retail, wholesale
and service sectors are considered SMEs. Despite having less than
half the population and a fraction of the land area of the United
States, Japan has about twice as many SMEs taking up retail space.
But few Japanese (other than the owners and employees
themselves) would mind if many of these retail shops disappeared.
A recent MITI survey, for example, aimed at determining the causes
of consumer dissatisfaction with small retail outlets, found that
respondents overwhelmingly don't like going to the shops because
of their limited choice of goods, high prices and poor conditions.
Elsewhere, such a study might suggest that retail SMEs
undermine consumer confidence, are a potential drag on national
productivity (productivity is already the lowest among the world's
seven most industrialized nations) and that the worst of them should
be weaned off government largesse. But in Japan that's not the case
because it can't be a political priority for the LDP. And that's
because SMEs are the next best thing to government as an employer-of-last-resort.
If it were allowed to take place at all, meaningful
restructuring would throw a spanner into the SME employment engine.
As a result, Japan under the LDP has spent lavishly, providing credit
to prop up even the most inefficient and ailing SMEs. The investment
is hardly paying off. In fact, it has contributed significantly
to government's $6 trillion of debt.
In 1999, SME bankruptcies were double expectations.
This occurred after the government curbed its spending on the sector
by 6.3% from 1998. It did so not because it decided SMEs have had
enough support. In fact, the Ministry of Labor plans to offer SMEs
employment subsidies that will kick in when unemployment reaches
pre-determined "crisis" levels. Unemployment rose, along
with a decrease in consumption, to 4.8% in November from 4.7% in
October, which is just shy of the record of 4.9%. There is now less
than one opening for every unemployed Japanese worker. The ministry
hasn't said how it expects to fund the subsidies.
Indeed, conditions for the SME sector are likely to
worsen along with the overall economy. First, economic growth has
been declining since the beginning of 2000 and it's likely the government
will revise downward its announcement that gross domestic product
grew by .02% in the third quarter. Consumption, which accounts for
60% of Japan's economic activity, continues to fall despite a continuing
decline in consumer prices. Second, slower U.S. growth threatens
exports not just to the U.S., but to European and Asian economies
similarly affected by the U.S. slowdown.
A good number of experts continue to predict that Japan
will record a third consecutive year of growth in 2001 on the strength
of rising consumer spending. But equally likely is that Japan is
in store for a huge and maddeningly difficult-to-manage economic
catharsis — one long overdue but which must precede a real
recovery. The reasons seem simple enough: Sans government support,
SME bankruptcies will accelerate; unemployment will increase and
government, essentially broke itself, will be powerless to do anything
but stand by and watch.
This means that the LDP knows that it will need much
more than just another face change at the top. Its choices are two:
Business as usual and watch while the SME sector hits bottom, then
rebuilds itself the way larger enterprises have — restructuring
despite the government. Or it can attempt to guide SME restructuring
by dismantling legislation and other barriers that have long protected
small businesses from competition and change.
Unfortunately, this is the point where the LDP's profligate
spending will be its undoing. That's because it no longer has the
billions to prop up an old economic model to help build a new one.
Little of the money funneled to the sector has gone toward retraining
a largely unproductive work force. And most SMEs have rejected new
business models that could help them develop new sources of profitability.
The implications of SME worker rage for the LDP, Japan
and the global economy are alarming. Like many other governments
in Asia in the vice-like grip of a single political party, Japan's
LDP-dominated government means the nation is absent a credible opposition
with the depth to manage what will clearly be a difficult recovery
on the way to building a sustainable economy. And as we have seen
elsewhere in Asia, Japanese voters are likely to become so disenfranchised
that they won't care. When there is change, it will come for the
sake of change.
When an opposition group does take power in Japan,
it will matter little whether it comes from within the LDP, an existing
LDP rival, or some combination of the two. It will have little or
no governance experience. If that seems a remote possibility to
some, South Korea and Taiwan (both are struggling to deal with unenviable
political and economic crises, respectively, after their long-dominant
political parties were thrown out of office) prove that the unexpected
can happen in Asia with unnerving regularity.
Japan under the LDP has squandered a decade of opportunity
and unfortunately the soon-to-get-worse SME debacle is just one
example. But the message in all this is that when asked what comes
next, increasingly the answer is a major political and economic
transmutation that will dwarf those in South Korea and Taiwan. There's
no other choice.
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