Financing SMEs and Entrepreneurs 2022

23. Japan

Key facts on SME financing

Japanese SMEs accounted for 99.7% of all businesses and employed 32 million individuals, or approximately 68.8% of the private sector labour force, in 2016.

Lending to SMEs declined every year between 2007 and 2012, reaching a total decrease of 6.6% over that period. In 2013, outstanding SME loans rose by 1.5%, and have continued to increase since then: JPY 286.6 trillion in 2019 and JPY 314.9 trillion in 2020.

Average interest rates on new short-term loans in Japan have been very low and continuously declined between 2007 and in 2017, more than halving from 1.64% to 0.61%, as a result of easing monetary policy. Long-term interest rates on new loans followed a broadly similar pattern, declining from 1.7% in 2007 to 0.76% in 2020.

Japanese venture capital investments peaked in FY 2007 at JPY 193 billion, before decreasing by 29.5% and 36% in FY 2008 and 2009 respectively. Since 2009, VC investments have been inconsistent. Since 2014 VC investments increased and reached JPY 289 billion in 2019, which was the highest value since 2007.The amount of investment in 2020 declined by 22.4 %, amounting to JPY 224 billion. One of the possible reasons behind this drop is that some of the VC funds could not make their investment decisions during the first half of 2020 because of the effects of the COVID-19 crisis. This might be resolved in the second half of the year by using online communication methods.

Leasing volumes to SMEs plummeted in the aftermath of the global financial crisis, dropping by almost 40% between 2007 and 2009. Subsequently, with the recovery of domestic capital investment demand, the volumes have been on an upward trend and recovered to 2.7 trillion in 2019. In 2020, leasing volumes fell to JPY 2.3 trillion due to a sharp drop in capital investment demand for machine tools and industrial machinery by Japanese companies as a result of the COVID-19 crisis.

SME bankruptcies, which account for more than 99% of all bankruptcies in Japan, decreased between 2007 and 2020. In 2020, the number of cases was below 8 000 for the first time in 30 years.

Total non-performing business loans have continuously declined since 2013, after having experienced erratic movement over the 2007-12 period. In 2019, total NPLs amounted to JPY 10 326 billion.

The Japanese Government offers financial support for SMEs in the form of a credit guarantee programme and direct loans. In March 2018, the total amount of outstanding SME loans was approximately JPY 267 trillion (provided by domestically licensed banks and credit associations); the outstanding amount of the credit guarantee programme was JPY 22.2 trillion (covering 1.3 million SMEs); and the outstanding amount of the direct loan programme was JPY 21.2 trillion, (covering 1 million of Japan’s 3.81 million SMEs). In 2020, as a response to the COVID-19 crisis, government-affiliated and private financial institutions offered interest-free and unsecured loans of up to 5 years, and provided JPY 100 trillion yen in business scale and JPY 12.5 trillion in budget.

Table 23.1. Scoreboard for Japan

Indicator	Unit	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	2020
Debt
Outstanding business loans, SMEs	JPY trillion	260.8	259.1	253.1	248.3	245.6	243.6	247.2	251.7	258.4	265.6	275.4	281.4	286.6	314.9
Outstanding business loans, total	JPY trillion	374.5	385.0	379.3	366.1	366.9	370.4	369.7	387.2	395.2	405.1	415.5	426.6	435.03	482.15
Share of SME outstanding loans	% of total outstanding business loans	69.64	67.31	66.72	67.82	66.94	65.76	66.87	65.00	65.38	65.57	66.29	65.96	65.88	65.31
Value of CGCs loan guarantees (Government loan guarantees, SMEs)	JPY trillion	29.4	33.9	35.9	35.1	34.4	32.1	29.8	27.7	25.8	23.9	22.2	21.08	20.8	40.5
Non-performing loans, total (amount)	JPY trillion	17.1	17.1	16.8	16.6	17.2	17.3	15.3	13.9	12.8	11.8	10.5	10.3	10.3	..
Non-performing loans, total	% of all business loans	4.56	4.45	4.42	4.54	4.68	4.66	4.14	3.60	3.23	2.91	2.52	2.41	2.37	..
Prime lending rate for short-term loans	%	1.88	1.68	1.48	1.48	1.48	1.48	1.48	1.48	1.48	1.48	1.48	1.48	1.48	1.48
Prime lending rate for long-term loans	%	2.30	2.40	1.65	1.60	1.40	1.20	1.20	1.10	1.10	0.95	1.00	1.00	1.05	1.00
New short-term interest rate (Not only for businesses)	%	1.64	1.53	1.23	1.10	1.04	1.02	0.91	0.88	0.80	0.67	0.61	0.60	0.60	0.47
New long-term interest rate (Not only for businesses)	%	1.73	1.67	1.46	1.29	1.21	1.16	1.10	1.00	0.94	0.80	0.80	0.76	0.72	0.76
Outstanding short-term interest rate (Not only for businesses)	%	1.67	1.49	1.26	1.19	1.10	1.03	0.88	0.85	0.78	0.62	0.58	0.60	0.60	0.48
Outstanding long-term interest rate (Not only for businesses)	%	2.05	1.99	1.76	1.65	1.54	1.42	1.30	1.19	1.10	0.97	0.90	0.85	0.85	0.78
Non-bank finance
Venture capital investments (all stages total)	JPY billion	193	136	87	113	124	102	181	117	130	152	197	277	289	224.
Venture capital investments (all stages total)	%, year-on-year growth rate	..	-29.53	-36.03	29.89	9.73	-17.74	77.45	-35.36	11.11	16.92	30	41	4	-22.49.
Venture capital (seed and early stage)	% (share of all stages)	..	..	36.80	32.50	44.30	57.80	64.50	57.20	62.80	68.30	67.80	71.40	73.7	72.1.
Venture capital (expansion and later stage)	% (share of all stages)	..	..	63.20	67.50	55.70	42.20	35.50	42.80	37.20	31.70	32.20	28.60	26.3	27.9.
Leasing, SMEs	JPY billion	3 471	2 822	2 100	2 139	2 231	2 284	2 645	2 363	2 604	2 566	2 570	2664	2700	2329
Other indicators
Bankruptcies, SMEs	Thousands	14.0	15.5	15.4	13.2	12.7	12.1	10.8	9.7	8.8	8.4	8.4	8.2	8.4	7.8
Bankruptcies, SMEs	%, year-on-year growth rate	..	10.76	-0.82	-13.96	-4.22	-4.81	-10.18	-10.37	-9.43	-4.17	-0.50	-1.93	1.74	-7.27
Bankruptcies, total	Thousands	14.1	15.6	15.5	13.3	12.7	12.1	10.9	9.7	8.8	8.4	8.4	8.2	8.4	7.8
Bankruptcies, total	%, year-on-year growth rate	..	11.04	-1.06	-13.95	-4.41	-4.79	-10.47	-10.35	-9.44	-4.15	-0.49	-2.02	1.80	-7.28

Source: See Table 23.3.

SMEs in the national economy

SMEs accounted for 99.7% of all Japanese businesses and employed 32 million individuals, or approximately 68.8% of the private sector labour force in 2016.

Table 23.2. Number of firms by size in Japan, 2016

Firm size	Number of firms	%	Number of employees	%
Micro enterprises	3 048 390	84.9	10 437 271	22.3
Medium-sized enterprises	529 786	14.8	21 763 761	46.5
Large enterprises	11 157	0.3	14 588 963	31.2
Total	3 589 333	100	46 789 995	100

Note: 1. Number of enterprises = Number of companies + Business establishments of sole proprietors (independent establishments and head offices). 2. “Micro enterprises” refers to “micro enterprises” as defined under the Small and Medium-sized Enterprises Basic Act. “Medium-sized enterprises” refers to SMEs other than micro enterprises.

Source: METI, SME Agency, 2020 White Paper on Small and Medium Enterprises in Japan. Data are based on a 2016 government survey.

Figure 23.1. Trends in the number of SMEs in Japan

In thousands of businesses

Source: METI, SME Agency, 2021 White Paper on Small and Medium Enterprises in Japan.

Statlink

SME lending

Japan faced two major economic shocks with the global financial crisis of 2008 and the earthquake of 2011. Consequently, the country experienced an economic recession between 2008 and 2011. Since the end of 2012, however, the Japanese economy has been steadily recovering, despite several contractionary policies, including the consumption tax hike to 8% in 2014. The average annual real GDP growth between 2012 and 2016 reached 1.1%, a number that has almost doubled in the past four years.

In 2020, SMEs recorded lowest number of bankruptcies in the past 30 years. The business environment for SMEs has continued to improve, although the recovery of micro enterprises is weaker compared to large and medium-sized enterprises.

Outstanding loans to SMEs decreased every year between 2007 and 2012, and cumulatively by 6.6%. In 2013, however, outstanding SME loans increased 1.5% and have continued to increase since. Outstanding SME loans in 2016 were JPY 265.6 trillion and increased by 3.6% in 2017 to JPY 275 400 trillion. In 2017, outstanding SME loans are 5.6% higher than 2007 levels, an indication of an improving financial landscape for SMEs and a return to pre-crisis credit conditions. In 2020, in the context of the COVID-19 crisis and significant SME liquidity shortages, SME outstanding loans increased 10% y-o-y and reached JPN 314.9 trillion.

However, the share of SME outstanding loans has not recovered to pre- financial crisis levels and indicates a gap between SMEs and large enterprises. The share of SME outstanding loans dropped from 69.6% in 2007 to a low of 65% in 2014 (although it did not decrease every single year). SMEs have been investing more in recent years but not to the extent that the large companies have. Since 2014, the share of SME outstanding loans over the total outstanding loans has increased slightly and was 65.3% in 2020, still below pre-financial crisis levels.

Credit conditions

Average interest rates on new short-term loans in Japan are very low and have declined every year for the past 10 years, more than halving from 1.6% in 2007 to 0.5% in 2020. Long-term interest rates on new loans followed a broadly similar pattern, declining from 1.7% in 2007 to 0.8% in 2020, and were thus only slightly higher than short-term interest rates.

Alternative sources of SME financing

Equity financing

Japanese venture capital investments peaked in 2007 at JPY 193 billion and decreased by 29.5% and by a further 36% in 2008 and 2009 respectively. Total investments recovered in 2010 and 2011, but decreased again in 2012. In 2013, venture capital investments were JPY 181 billion, thus approaching pre-crisis levels. 2014 once again saw a decrease by 35% compared to the previous year, but volumes recovered again, increasing year by year and almost doubled between 2014 and 2019 to JPY 289 billion.

Seed and early-stage investments have become increasingly important to SME financing in the venture capital sphere. In 2009, seed and early-stage investments accounted for 32.5% of total venture capital investments. This share has increased drastically since then and was 73.7% in 2019. Expansion and later stage investments accounted for only 26.3% of venture capital investments in 2019. This reversal of VC investment composition is an indicator of Japan’s vibrant and growing start-up ecosystem.

Leasing

Leasing volumes to SMEs plummeted in the aftermath of the financial crisis, by almost 40% between 2007 and 2009. Between 2010 and 2013, leasing volumes recovered and expanded year-on-year. Since 2013, however, SME leasing has been somewhat erratic but nonetheless relatively stable with no big shifts in leasing volumes with the exception of 2014. In 2019, leasing volumes to SMEs were approximately JPY 2.7 trillion and dropped slightly in 2020(to JPY 2.3 trillion). Despite the slight increase, leasing volumes hasn’t reached pre-crisis levels (JPY 3.47 trillion in 2007).

Other indicators

SME bankruptcies, which account for more than 99% of all bankruptcies in Japan, decreased more than 7% between 8,383 in 2019 and 2020, attaining 7,773 cases. This can be explained by the favourable lending attitude of financial institutions, and increased availability of internal finance for SMEs, and a recovering economy.

Total non-performing business loans have declined continuously since 2013, after having experienced erratic movement over the 2007-12 period. Non-performing business loans declined in 2008-10 before peaking at JPY 17.2 trillion in 2012. Since 2012, NPLs decreased tremendously and totalled JPY 10.3 trillion in 2019, a 40.5% decline since 2012.

Government policy response

The Japanese Government offers substantial financial support for SMEs’ financing needs such as a credit guarantee programme and direct loans for SMEs. As of March 2021, the total amount of outstanding SME loans was approximately JPY 308 trillion. Of this volume, JPY 42.0 trillion was guaranteed by the credit guarantee programme and JPY 29.2 trillion worth of loans was provided directly by public financial institutions. As of March 2021, the credit guarantee program covered 1.55 million SMEs, while the direct loan program reached 1.24 million of Japan’s 3.81 million SMEs

Since January 2020, as the effects of COVID-19 infection have spread, the government has been taking steps to ensure that small and medium-sized enterprises (SMEs) do not face serious financial difficulties. Specifically, the government set up consultation desks, relaxed the requirements for "Safety net loans," and made a number of requests for consideration to financial institute. In March 2020, the government designated No. 4 Safety Nets for Financing Guarantee, which provides a 100% guarantee, as a nationwide program, activated crisis-related guarantees, and expanded the scope of industries covered by No. 5 Safety Nets for Financing Guarantee. In addition to these, government-affiliated financial institutions started substantially interest-free loans without requiring collateral, deferment of loan principles.

In May, from the perspective of expanding the lending window, private financial institutions began offering substantially interest-free loans without requiring collateral by utilizing the institution loans provided by prefectural governments, etc. The program has had a certain effect in supporting the cash flow of small and medium-sized enterprises (SMEs), and it was terminated at the end of March 2021, while decreasing of applications number.

To support businesses whose financial situation has deteriorated due to COVID-19, the government has provided "Capital Subordinated Loans against COVID-19" by government-affiliated financial institutions, which financial institutions can estimate those as capital for appraisal purposes, and has also made efforts to provide capital funds by supporting the formation of public-private funds such as the "Small and Medium Enterprise Management Strengthening Support Fund" and the "Small and Medium Enterprise Revitalization Fund" for the purpose of fundamental business revitalization in order to prevent the bankruptcy and closure of core regional enterprises.

Before the spreading of COVID-19, the government encourage banks to take on more risks. For instance, the government reformed the credit guarantee programme in 2017 to reduce banks’ over dependence on credit guarantees, to strengthen market forces, and encourage lending based on business evaluation. Specifically, the government decreased the guaranteed portion of No.5 Safety Nets for Financing Guarantee from 100% to 80% but enhanced a credit Guarantee scheme targeting start-ups as a means of promoting private sector innovation.

The procedural and costs for examining and monitoring new loans to SME reflect the problem of information asymmetry in SME finance. The government programmes address these difficulties and facilitate smoother lending circumstances especially for high-risk businesses that are not perceived as easy by private financial institutions (e.g. business start-ups, companies expanding overseas, companies facing external shocks such as natural disasters and financial/ economic crisis, and revitalization etc.).

The majority of business owners in Japan provide personal guarantees in order to obtain business loans. In some respects, personal guarantees are regarded as good tools for ensuring good corporate governance and mitigating credit risk due to low creditworthiness of customers and information asymmetries. In this regard they help lower funding costs. However, the others point out, personal guarantees are not well suited for early business revitalization, smooth business succession or willingness for the commencement of new businesses.

"The Guidelines for Personal Guarantees Provided by Business Owners" have been implemented since February 2014 to address the negative effects of personal guarantees described above. In early FY 2017, 36% of loans by public financial institutions and 26% of loans by private financial institutions did not require personal guarantees from business owners. In May 2019, “Comprehensive Measures for the Release of Personal Guarantees Provided by the Business Owners at the Time of Business Succession” was released, which includes the formulation of "Special Provisions of the “Guidelines on Management Guarantees” focusing on business succession" which clearly states that, in principle, there will be no double collection of guarantees from old and new management. In addition, a new credit guarantee system that eliminates the need for management guarantees for successors has been established and it has been in operation since April 2020.

Figure 23.2. Trends in SME and entrepreneurship finance in Japan

Source: See Table 23.3.

Statlink

Table 23.3. Definitions and sources of indicators for Japan’s scoreboard

Indicator	Definition	Sources
Debt
Outstanding business loans, SMEs	Figures include lending to SMEs from domestically licensed banks, credit associations, credit cooperatives, Shoko Chukin Bank, and JFC (Micro Business and Individual Unit and SME Unit). Loans supplied by credit cooperatives include lending to individuals and local governments, etc. Figures are the values at the end of December of each year.	SME Agency, White Paper on Small and Medium Enterprises in Japan
Outstanding business loans, total	Figures include lending to all enterprises from domestically licensed banks, credit associations, credit cooperatives, Shoko Chukin Bank, JFC (Agriculture, Forestry, Fisheries and Food Business Unit) as well as JFC (Micro Business and Individual Unit and SME Unit), and other financial institutions, which are all but credit cooperatives surveyed by BOJ. Loans supplied by credit cooperatives include lending to individuals and local governments, etc. As mentioned above, institutions surveyed are different in business loans, SMEs and total, thus, these indicators are not consistent. Figures are the values at the end of December of each year.	Compiled by Office for International Cooperation, SME Agency from sources including BOJ, National Central Society of Credit Cooperatives
Value of CGCs loan guarantees (Government loan guarantees, SMEs)	The value of obligation to guarantee that credit guarantee corporations have, as at the end of March of each year.	JFG, Credit Guarantee System in Japan
Non-performing loans, total	Non-performing loans, total are proxied by the amount of “Risk Management Loans” by deposit-taking financial institutions. “Risk Management Loans” are based on the Banking Act. “Non-performing loans” includes lending to individuals and local governments, etc. as well as to enterprises. Institutions surveyed in "Non-performing loans" are deposit-taking financial institutions.The value of "Non-performing loans" isat the end of March every year. The latest data will be updated in August.	FSA, Transition of Risk Management Loans
Prime lending rate for short-term loans	Short-term Prime Lending Rates of Banks is the prime lending rate that has been applied by city banks as applicable to short-term to blue-chip companies.	BOJ, Financial and Economic Statistics Monthly
Prime lending rate for long-term loans	Long-term Prime Lending Rate is the prime rate adopted and released by Mizuho Bank as applicable to long-term loans provided to blue-chip companies.	BOJ, Financial and Economic Statistics Monthly
New short-term interest rate (Not only for businesses)	Figures are “Average contract interest rate on New short-term loans and discounts” which is published by BOJ. Surveyed from the data of domestically licensed banks, not accommodating credit associations, credit cooperatives, and other financial institutions. The figures are average rates which are arithmetically calculated from the monthly data. Because the calculation methods has changed in some institutions, data since May 2011 are not consistent with the before. New loans, of which the month-end outstanding loan balances, are all loans that are provided during the month. Short-term lending rates apply to shorter-than-1-year contractual loans. Figures are taken into consideration lending rates on loans to households (including housing loans), the central government, and local governments, in addition to loans to all enterprises.	BOJ, Financial and Economic Statistics Monthly
New long-term interest rate (Not only for businesses)	Figures are “Average contract interest rate on New long-term loans” which is published by BOJ. Surveyed from the data of domestically licensed banks, not including credit associations, credit cooperatives, and other financial institutions. The figures are average rates which are arithmetically calculated from the monthly data. Because the calculation methods has changed in some institutions, data since May 2011 are not consistent with the before. New loans, of which the month-end outstanding loan balances, are all loans that are provided during the month. Long-term lending rates apply to 1-year-or-longer contractual loans. Figures are taken into consideration lending rates on loans to households (including housing loans), the central government, and local governments, in addition to loans to all enterprises.	BOJ, Financial and Economic Statistics Monthly
Outstanding long-term interest rate (Not only for businesses)	Figures are “Average contract interest rate on Outstanding short-term loans and bills discounted” which is published by BOJ. Surveyed from the data of domestically licensed banks, not including credit associations, credit cooperatives, and other financial institutions. Outstanding means all loans outstanding as of the end of the month. Long-term lending rates apply to 1-year-or-longer contractual loans. Figures are taken into consideration lending rates on loans to households (including housing loans), the central government, and local governments, in addition to loans to all enterprises.	BOJ, Financial and Economic Statistics Monthly
Other indicators
Venture capital investments (all stages total)	Seed, early, expansion, and later stage investments are all included. Both domestic and foreign investments are included. Data covers information for the final balance at the end of each fiscal year (end of March of each year).	Venture Enterprise Centre, Japan, VEC YEARBOOK 2020
Leasing, SMEs	The figures indicated are surveyed by companies who are members of Japan Leasing Association. The figures include the finance leases and operating leases, and exclude “rental”. The figures indicates the values of leases contracted by the companies with capital less than or equal to 100 million JPY, those with no capital, and sole proprietorships, thus, they do not correspond to the present definition of SMEs under Small and Medium-sized Enterprise Basic Act. Figures are the values at the end of March of each year.	Japan Leasing Association, Lease Handbook
Non-Bank Finance
Bankruptcies, SMEs	Only enterprises with debts of at least JPY10 million are included. Data cover 12 month numbers for 31 December of each year.	Tokyo Shoko Research, Ltd., State of Corporate Bankruptcies
Bankruptcies, total	Only enterprises with debts of at least JPY10 million are included. Data cover 12 month numbers for 31 December of each year.	Tokyo Shoko Research, Ltd., State of Corporate Bankruptcies

References

Bank of Japan (2020), “Financial and Economic Statistics Monthly” https://www.boj.or.jp/en/statistics/pub/sk/index.htm/

Bank of Japan (2020), “Loans and Bills Discounted by Sector” https://www.boj.or.jp/en/statistics/dl/loan/ldo/index.htm/

Bank of Japan (2020), “Financial System Report” https://www.boj.or.jp/en/statistics/dl/loan/ldo/index.htm/

Financial Services Agency (2020), “Status of Non-Performing Loans”

https://www.fsa.go.jp/en/regulated/npl/index.html

Japan Federation of Credit Guarantee Corporations (2020), “Credit Guarantee System In Japan”

https://www.zenshinhoren.or.jp/document/hosho_jisseki.pdf (Japanese)

Japan Leasing Association (2020), “Lease Statistics” http://www.leasing.or.jp/english/statistics/toukei.html

SME Agency (2020), “2020 White Paper on Small and Medium Enterprises in Japan” https://www.chusho.meti.go.jp/pamflet/hakusyo/2021/PDF/chusho/00Hakusyo_zentai.pdf (Japanese)

Tokyo Shoko Research, Ltd. (2020), “State of Corporate Bankruptcies” http://www.tsr-net.co.jp/news/status/

Venture Enterprise Center, Japan (2020), “VEC YEARBOOK 2020–Data on Venture Capital Investment,