Why Japan Cannot Reform:
Rewriting the Social Contract
Ulrike Schaede
Graduate School of International Relations and
Pacific Studies
University of California, San Diego
In maybe 20 minutes….
1)
2)
3)
4)
5)
6)
Definitions
The role of SME in Japan ’s economy
The Ugly: bankruptcies, financial squeeze
Government programs for SME finance
The Good: some cool firms (and why there
aren’t more of them)
Small firms and Japan’s social contract: Why
Japan cannot reform
(c) Ulrike Schaede 2003
What is “Small”?
Depending on industry, the upper limits on
capital/workers are:
SME
Basic Law
of 1999
“Very
Small”
(SME
Agency)
Manufacturing,
Construction,
etc.
Wholesale
up to ¥300
million;or 300
employees
up to ¥100
million, or 100
employees
Up to 20
employees
Up to 5
employees
(c) Ulrike Schaede 2003
Retail
Services, Food
Services
up to ¥50
up to ¥50
million, or 50 million, or 100
employees
employees
Up to 5
employees
Up to 5
employees
The Role of Very Small Firms, 1999
(Up to 20 employees; up to 5 in commerce/services)
% of all Firms
100
90
80
70
60
50
40
30
20
10
0
88.4
86.9
% of all Employees
94.6
89.4
84.5
87.2
68.6
45.7
27.7
18.4
us
tri
es
*
nd
Al
lI
s tr
uc
tio
n
Se
rv
ic
od
Fo
(c) Ulrike Schaede 2003
Co
n
es
14.6
Se
rvi
ce
s
les
a le
Wh
o
Ma
nu
fa c
tur
i ng
9.7
15.3
Re
tai
l
17.2
First, the Ugly…
Manufacturing Production Index
Domestic WPI
Ordinary Profits
(c) Ulrike Schaede 2003
Number of Bankruptcies and
Total Liabilities
SME
All bankruptcies
18,819
19,164
(c) Ulrike Schaede 2003
Birth and Death Rates of
Small Business Places
8
7
6
Births
5
%4
3
Deaths
2
1
0
1966- 1969- 1972- 1975- 1978- 1981- 1986- 1989- 1991- 1994- 199669
72
75
78
81
86
89
91
94
96
99
(c) Ulrike Schaede 2003
And the Bad News is….
Small firms are caught in the recession in
more than one way:

Orders are down (recession/hollowing out):
– 50% of SME are shitauke

Keiretsu may be down:
– Toyota, Nissan etc. procure where it is cheapest

Prices are down, but not wages:
– What they sell, they get less money for

Banks are down:
– No access to loans, especially before 3/31
– Kashi-shiburi and kashi-hagashi
(c) Ulrike Schaede 2003
Loan
Volume
Small Firm Loans and
Interest Rates
//
1 2 3 4 5 6 7 8 9 10 11 12
(c) Ulrike Schaede 2003
23 24 25 %
SME Loans by Lender (2001)
Total Loans to SME: 280 trillion Yen
Total by Gov’t SME Banks: 28 trillion Yen
NLFC
3%
Shinkin
15%
JFS
3%
Credit Coops
4%
7%
Long-term
+Trust Banks
9%
2nd Reg.
Banks
3%
Shoko Chukin
32%
City Banks
24%
Regional Banks
(c) Ulrike Schaede 2003
Government SME Banks

JFS (Chūsho kigyō kinyū kōko) and
NLFC (Kokumin seikatsu kinyū kōko)
– Special loan programs (energy-saving, efficiency-
increasing, IT, etc.) at subsidized rates
– Financed through FILP

Shōkō Chūkin
– Full banking services
– 20% special loan programs; 80% normal loans
– Financed through FILP, debentures, and member
deposits (27,000 cooperatives)
(c) Ulrike Schaede 2003
Government Loan Guarantee Programs

Backed through JASMEC (Chūsho kigyō sōgō
jigyōdan); run by local offices
Loan Guarantee
Associations’
Total Guarantees
Number of
Cases
Amount underwritten by
JASMEC
1998
¥ 28.97 trillion
2.06 million
¥ 26.66 trillion
1999
¥ 18.78 trillion
1.52 million
¥ 17.83 trillion
2000
¥ 19.63 trillion
1.53 million
¥ 18.51 trillion
2001
¥ 13.23 trillion
1.21 million
¥ 12.2 trillion
(c) Ulrike Schaede 2003
“Reform” Plans

Takenaka proposal: Reduce total loans of
government banks by 50% until 2005
 Reduce government financing and stop
amakudari (METI)
 Increase risk evaluation rules and evaluate
all banks based on market-based principles
(but force them to lend to SME at low rates)
(c) Ulrike Schaede 2003
METI Policies
Series of laws on “new firms”
 Active venture capital policies (SBIC,
subsidy programs)
 Active loan plans for very small, old firms
 Revision of laws on stock market listings
etc.
 Revision of minimum equity capital for
founding a new firm (1 Yen)

(c) Ulrike Schaede 2003
And the Good News is….
Some small firms are doing really well, e.g.:
– Tosei Electrobeam
– Stack Electronics
– Okamoto Glass
– Neo
– … and many more…
(c) Ulrike Schaede 2003
Why Some Small Firms are
Doing Well

Important niche market
 Advanced technologies and R&D
 New ideas and “drive”
 Clearly developed strategic focus
(c) Ulrike Schaede 2003
The Solution may be the Problem:

Small firms that are not doing well get help
from the government
 Unemployment is still below 10%

But: Some good small firms cannot raise
funds (discrimination due to “affirmative
action”)
(c) Ulrike Schaede 2003
Japan’s Social Contract (1)

After WWII, large firms had to grow fast:
– Low cost of borrowing (interest regulation)
– Cartels o.k. (high prices = high profit margins)
– Support, subsidies, preferential taxes

In return, large firms would:
– Provide “lifetime employment”
– Employ more, offer company housing, etc.
– Sent to affiliated small firms after retirement

No need for full-fledged unemployment insurance
or pension program
(c) Ulrike Schaede 2003
Japan’s Social Contract (2)

Consumers would:
– Earn no returns on their savings
– Earn low wages, pay high prices

And in return, consumers received:
– Stable employment
– Security, stability, education
(c) Ulrike Schaede 2003
Small Firms and the Social
Contract

50% are subcontractors; part of the deal
 Extensive government policies: special
banks, special laws, special exemptions
(antitrust, tax, etc.)
 Unemployment insurance geared towards
SME job changers: 6 months @ 80%,
nothing thereafter
(c) Ulrike Schaede 2003
Wanted:
Sufficient Welfare Provisions

Without extensive unemployment insurance,
Japan cannot reform:
– Large firms cannot restructure easily
– Bad small firms cannot go bankrupt; good small
firms are dragged down with them
– With every reform, new compensating
countermeasures needed for small firms, crowding
out space for small firms with good ideas

Without fixing the SME system, Japan’s
economy cannot reform.
(c) Ulrike Schaede 2003