Economic Woes Reach Small Japanese Firms
While Honda, Sony and other blue-chip Japanese exporters prosper under today’s cheap yen, the country’s economic predicament seems stacked against the heart of its economy--the small and medium-sized companies that employ two-thirds of Japan’s nonfarm workers.
Entrepreneurs like Norimichi Suzuki often are overlooked in the talk about Japan’s seeming powerlessness to pull the rest of Asia out of its tailspin. But these business owners need to expand for Japan to expand--instead, they are retreating.
Suzuki, a manufacturer of cutting tools and riveting machines, is focused on survival, not growth. His business returned to black ink in 1997 after four long money-losing years, and he’s not about to risk the firm’s hard-won new stability by gambling on expansion right now.
“For the Japanese economy as a whole, it’s hard just to maintain the current situation,” said Suzuki, who employs 35 workers, down from 45 employees three years ago. “I don’t think just our company alone will grow. I want to cut costs and make our company more profitable by doing so. If we expand our business, I’m afraid we’ll make a mistake and lose momentum.”
The conditions of smaller firms like this one, Suzuki Machinery Manufacturing Inc., are critical to the future of the Japanese economy. Unless they are strong, Japan’s overall economy cannot be strong.
The trend, however, is that over the last six months, smaller firms have been sinking deeper and deeper into gloom. Between July and December, the percentage of small and medium-sized firms reporting declining sales leaped from 42% to 61%.
Yasumasa Takahashi, director of manufacturing at Takahashi Heat Treatment Industrial Co., and other entrepreneurs cite these problems:
* Big manufacturers have been shifting to lower-cost overseas suppliers throughout the 1990s, putting constant downward price pressure on those that manage to survive in Japan despite high land and labor costs.
* The drive to slash Japan’s government deficit has cut back drastically on stimulative public works projects, which tend to benefit “people like us,” Takahashi says.
* Last year’s hike in the national sales tax, to 5% from 3%, caused consumer demand to plummet.
* The continued fall in the price of land has dramatically reduced the size of loans that businesses can obtain using real estate as collateral and threatens otherwise viable firms with defaulting on debt.
* Tough new capital-to-loans ratio requirements set to take effect April 1 mean banks are refusing to make loans to weak firms that once could borrow easily.
While tighter government spending and higher sales taxes hit companies of all sizes relatively equally, small- and medium-sized businesses have been especially hard hit by the rest of these trends. Suppliers are hurt when big firms move production overseas. Big firms are less dependent on land collateral to get bank financing. And firms too small to export get no benefits from the weaker yen, which has tumbled from 80 to 130 to the dollar.
“The small companies and subcontractors haven’t benefited from the weak yen,” said Hideaki Kondo, general manager of the Small and Medium Industry division of the Japan Chamber of Commerce and Industry. “Only companies like Sony and Honda have benefited. For those small companies, the price is set when they receive an order. When the yen gets weak, the price doesn’t go up. But when the yen gets strong, the price goes down. That’s been the trend in the past.”
Meanwhile, says Suzuki: “The trend for all the Japanese banks is to cut down on issuing loans. We would have to prove that ‘If we make this much of our product, we will get this much profit.’ If we show there’s an 80% chance we’ll get a profit, they’ll say no. It needs to be a 100% chance.
“In the past, if there was a 50% chance you’d make a profit, they’d encourage you to take a loan.”
For small- and medium-sized firms, the hardest-hit industries are retail, construction and manufacturing. Their woes are visible in every direction.
The disproportionate hit felt by smaller firms is reflected on the unemployment rolls. Companies with fewer than 30 workers saw payrolls shrink by 70,000, or 0.4%, in November, compared with the same month last year, even as Japan’s overall employment grew that month by 44,000, or 0.8%
Tough times are also reflected in bankruptcy statistics. Last year through November, there were 1,425 bankruptcies in Japan among companies with debts of at least $77,000, the highest figure in more than a decade, according to Teikoku Data Bank Inc. The debt carried by firms that went bankrupt last year was 41% greater than those that went under during the same period in 1996.
“A couple of years ago, things started to get better, but then from around May they started getting worse again,” said Takahashi, whose 20-employee firm provides customized heat treatment to metal products made by other companies.
The government has recently taken a series of measures aimed at stemming this deterioration.
The Finance Ministry, responding to fears of a growing credit crunch, announced in late December that for banks that operate only domestically and not overseas, enforcement of the new capital-adequacy rules due to kick in April 1 would be delayed for one year.
The government has also drawn up a $231-billion financial system stabilization plan aimed both at protecting depositors in institutions that are allowed to fail and at shoring up solvent banks that need more capital to function effectively.
Funding for a government program that provides loans on favorable terms to small- and medium-sized companies is also to be boosted by more than one-third to provide about $190 billion in funding over the next 15 months.
Critics say even these measures are far from adequate. But few expect to see more effective steps any time soon.
The troubles faced by smaller firms “are like a flood,” said Masahiko Nakanishi, chairman of the Tokyo Federation of Commerce, a small- and medium-sized business association.
“When a major flood comes, it’s not enough to pile up three or four sandbags,” Nakanishi said. “We need a lot more sandbags.”
*
Etsuko Kawase of The Times’ Tokyo bureau contributed to this report.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Slipping Sales
Japan’s economy can’t grow without expansion by its small and medium-sized businesses, and their sales are going in the wrong direction. Percentage of small and medium-sized firms say:
Sales up over same month of 1996: December 1997: 9%
July 1997: 15%
*
No change
December 1997: 30%
July 1997: 43%
*
Sales down from same month of 1996
December 1997: 61%
July 1997: 42%
*
Source: Japan Chamber of Commerce and Industry
