A prescription for the Japanese economy: Now is the time to shift policies from supporting small and medium-sized enterprises to revitalizing industries Shuko Sato | Weekly Economist Online

A Prescription for the Japanese Economy / 13 The rate of business startups and closures in Japan is low even by international standards, suggesting that low-productivity firms remain in the market. The number of “zombie companies” also increased during the corona crisis.

The recovery of the Japanese economy has been sluggish even after the novel coronavirus pandemic has ended. This is because estimates by the Cabinet Office and the Bank of Japan suggest that Japan’s potential growth rate (the growth potential of the economy in the long run) will not rise from below 1%. Due to the long period of deflation (sustained price decline), Japan’s economic measures have been biased toward stimulating demand. However, what will support growth over the medium to long term will not be the expansion of quantitative demand, but the improvement of productivity through the creation of innovation. Low labor productivity is also behind wage stagnation.

So, who are the leaders of innovation? Schumpeter, a giant economist of the 20th century, said that entrepreneurial animal spirits (curiosity, inquisitiveness, etc.) are the source of innovation. However, Schumpeter emphasizes that the entrepreneur is a “function” rather than a “personal” concept. You can only be an entrepreneur if you innovate. Few people remain entrepreneurs for the rest of their lives. What is important here is the “metabolism” (entry and exit) of “entrepreneur = growth driver”.

In June 2016, the Japanese government decided on the Grand Design and Implementation Plan for New Capitalism. “High”, especially “young companies (startups) contribute more to the creation of added value”. In the fiscal 2023 tax reform, the “innovation promotion tax system”, which deducts a certain amount of investment in start-up companies by large companies, will be applied not only to “entry = investment” but also to “exit = M & A (mergers and acquisitions of companies)”. It is decided.

“Zombie companies” on the rise

From an international perspective, the rate of business start-ups and closures in Japan has remained low. According to the White Paper on Small and Medium Enterprises (2010 edition), the business closure rate was 3.4% in Japan in 2019 before the coronavirus pandemic, while it was 8.5% in the United States and 10.8% in the United Kingdom. This also suggests that low-productivity firms are staying in the market. There are various possible reasons for this, but one of the reasons is that vested interests tend to be prioritized in the decision-making and implementation of policies. For example, there are still regulations that make it difficult for IT companies to enter the development and sales of programmable medical devices (including applications for treatments such as smoking cessation).

The trend of prioritizing existing companies did not change even during the corona crisis. While securing employment through employment adjustment subsidies, the government has provided companies with funds through virtually interest-free, unsecured “zero-zero loans.” It can be said that he aimed to maintain the status quo even in the emergency of the corona crisis. Furthermore, although it imposes certain requirements, it has also started the “Corona Refinancing Guarantee” as a new credit guarantee system to reduce the repayment burden on companies.

A side effect of this is the rise of so-called “zombie companies.” According to Teikoku Databank, it is estimated that there are about 188,000 zombie companies nationwide (as of November 2010) that cannot cover their interest expenses with their operating profits. It is difficult to say that the corona crisis has triggered a redistribution of employment and funds to highly productive fields. Losing the opportunity to regenerate will lead to sluggish productivity in the medium to long term, and could impair economic growth.

Until now, companies have served as a safety net in the form of continued employment. However, the safety net should be a national (public) responsibility. What should be protected here is “people = workers (employment)” and accumulated “know-how = technology”, not “organization = company”. In order to maintain the technology, it is necessary to take over or transfer the business to a third party (…