Financing SMEs and Entrepreneurs 2020

24. Japan

Key facts on SME financing

Japanese SMEs accounted for 99.7% of all businesses and employed 34 million individuals, or approximately 70.1% of the private sector labour force in 2014.

Lending to SMEs decreased 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, reaching JPY 271.5 trillion in 2016 and JPY 282.1 trillion in 2017 (+3.9%).

Average interest rates on new short-term loans in Japan were very low and continuously declined between 2007 and in 2017, more than halving from 1.64% to 0.61%. Long-term interest rates on new loans followed a broadly similar pattern, declining from 1.7% in 2007 to 0.8% in 2017, and were thus only slightly higher than short-term interest rates.

Japanese venture capital investments peaked in FY 2007 at JPY 193 billion, and decreased by 29.5% and 36% in FY 2008 and 2009 respectively. Since 2009, VC investments have been inconsistent. In 2017, VC investments totalled JPY 197 billion, a 29.6% increase from 2016.

Leasing volumes to SMEs plummeted in the aftermath of the financial crisis, dropping by almost 40% between 2007 and 2009. Between 2010 and 2013, leasing volumes recovered. In 2016, leasing volumes were JPY 2.56 trillion and they increased slightly to JPY 2.57 trillion in 2017, but still remain well below 2007 levels.

SME bankruptcies, which account for more than 99% of all bankruptcies in Japan, decreased by more than 40% between 2007 and 2017, reaching a 27-year low of 8 397 (-0.5% from 2016).

Total non-performing business loans have continuously declined since 2013, after having experienced erratic movement over the 2007-12 period. In 2016, total NPLs declined by 2.91% to JPY 11 787 billion in 2016 and by 2.52% to JPY 10 483 billion in 2017.

The Japanese Government offers financial support for SMEs, in the form of a credit guarantee programme and direct loans for SMEs. 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).

Table 24.1. Scoreboard for Japan, 2007-17

Indicator	Unit	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017
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
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
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
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
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
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
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
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
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
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
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
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
Non-bank finance
Venture capital investments (all stages total)	JPY billion	193	136	87	113	124	102	181	117	130	152	197
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	29.60
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	62.90
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	37.1
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
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
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
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
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

Source: See Table 24.3.

SMEs in the national economy

SMEs accounted for 99.7% of all Japanese businesses and employed 34 million individuals, or approximately 70.1% of the private sector labour force in 2014.

Table 24.2. Number of firms by size in Japan, 2014

Firm size	Number of firms	%	Number of employees	%
Micro enterprises	3 252 254	85.1	11 268 556	23.5
Medium-sized enterprises	556 974	14.6	22 341 244	46.6
Large enterprises	11 110	0.3	14 325 652	29.9
Total	3 820 338	100	47 935 462	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, 2017 White Paper on Small and Medium Enterprises in Japan. Data are based on a 2014 government survey.

Between 2009 and 2014, the number of SMEs decreased by 393 000, due in large part to a significant number of micro enterprises closures. While the number of people employed by micro enterprises decreased by 12.1% (1.6 million), the number of people employed by medium-sized enterprises increased by 9.9% (2 million).

Figure 24.1. Trends in the number of SMEs in Japan

In thousands of businesses

Source: METI, SME Agency, 2017 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.

SMEs recorded their highest profit ever and lowest number of bankruptcies in 27 years in 2017. 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. 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.

However, the share of SME outstanding loans has not recovered to pre-crisis conditions 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 has increased year-on-year and was 66.3%, i.e. 0.72 percentage points higher than in 2016 but still below pre-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 0.61% in 2017. Long-term interest rates on new loans followed a broadly similar pattern, declining from 1.7% in 2007 to 0.8% in 2017, and were thus only slightly higher than short-term interest rates.

Alternative sources of SME financing

Equity financing

Japanese venture capital investments peaked in FY 2007 at JPY 193 billion and decreased by 29.5% and by a further 36% in FY 2008 and 2009, respectively. Total investments recovered in FY 2010 and 2011, but decreased again in FY 2012. In FY 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 by 11.1% in 2015 (to JPY 130 billion) and 16.92% in 2016 (to JPY 152 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 38.80% of total venture capital investments. This share has increased drastically since then and was 62.9% in 2017. Expansion and later stage investments accounted for only 37.1% of venture capital investments in 2017. 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 2017, leasing volumes to SMEs were approximately JPY 2.56 trillion, a 0.16% increase from 2016. Despite the slight increase in 2017, leasing volumes reached less than 75% of their 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 40% between 2007 and 2017, attaining 8 405, a 27 year low. This can be explained by the favourable lending attitude of financial institutions, an increased availability of internal finance for SMEs, and a recovering economy. The SME number of bankruptcies in 2017 was slightly lower (-0.49%) than in 2016.

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 17 274 billion in 2012. Since 2012, NPLs decreased tremendously and totalled 11 787 in 2016, a 31.76% decline over the four-year period. The number of NPLs is likely to further declie due to Japan’s improving credit conditions, hereinabove described.

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 2018, the total amount of outstanding SME loans was approximately JPY 267 trillion. Of this volume, JPY 22.2 trillion was guaranteed by the credit guarantee programme and JPY 21.2 trillion worth of loans was provided directly by public financial institutions. As of March 2018, the credit guarantee program covered 1.3 million SMEs, while the direct loan program reached 1 million of Japan’s 3.81 million SMEs.

Due to the economic circumstances and the Great East Japan Earthquake of 2011, the Japanese government increased the terms of the credit guarantee and direct loans programmes from 2008 to 2012. As lending to SMEs by private financial institutions decreased significantly, these programmes t played a crucial role in complementing private financial institutions’ lending, which had become much more conservative.

The Japanese Government rapidly prepared a safety-net for SMEs after 2008 in response to the global financial crisis and increased the number of sectors eligible under the 100% guarantee programme. SMEs which were directly damaged by the 2011 earthquake, tsunami and nuclear accident, lost most of their assets, making it difficult for them to procure loans from financial institutions. The direct loans programme supported the restructuring of these SMEs by lending them additional funds at extremely low interest rates.

Since 2013, the government has changed these policies and encouraged banks to take on more risks. For example, the Japanese government shifted to the regular operation of safety-net guarantees and reduced the targeted sectors to which a 100%-guarantee was applied in March 2014.

In addition, 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 Safety-net Guarantee No.5 from 100% to 80% but enhanced a credit Guarantee scheme targeting start-ups as a means of promoting private sector innovation.

The procedures and costs for examining and monitoring new loans 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 viable clients 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 distressed companies).

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, personal guarantees are not well suited for early business revitalization, smooth business succession or 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 FY 2017, 34% of loans by public financial institutions and 16% of loans by private financial institutions did not require personal guarantees from business owners. The government has also implemented promotional activities to raise awareness and provides expert consultation about the Guidelines for SMEs to facilitate the use of these guidelines.

Figure 24.2. Trends in SME and entrepreneurship finance in Japan

Source: See Table 24.3.

Statlink

Table 24.3. 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. As soon as the latest data is updated, I will send that data to you.	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 2016–Annual Report on Japanese Start-up Businesses 2016-
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 (2016), “Financial and Economic Statistics Monthly” https://www.boj.or.jp/en/statistics/pub/sk/index.htm/

Bank of Japan (2016), “Loans and Bills Discounted by Sector” https://www.boj.or.jp/en/statistics/dl/loan/ldo/index.htm/

Bank of Japan (2016), “Financial System Report” https://www.boj.or.jp/en/statistics/dl/loan/ldo/index.htm/

Financial Services Agency (2016), “Status of Non-Performing Loans” http://www.fsa.go.jp/en/regulated/npl/index.html

Japan Federation of Credit Guarantee Corporations (2016), “Credit Guarantee System In Japan” http://www.zenshinhoren.or.jp/english/anual.pdf

Japan Finance Corporation (2014), “2014 Japan Finance Corporation Annual Report” (pp 43) https://www.jfc.go.jp/n/english/pdf/jfc2014e_3.pdf

Japan Leasing Association (2016), “Lease Statistics” http://www.leasing.or.jp/english/statistics/toukei.html

Shoko Chukin Bank (2016), “2016 The Shoko Chukin Bank Annual Report” (pp4, 12) http://www.shokochukin.co.jp/english/report/2016/pdf/ar16_all.pdfMETI, "News Releases (2015) -Cabinet Decision on the Bill for the Act for Partial Revision of the Shoko Chukin Bank Limited Act and the Act for Partial Revision the Small and Medium-sized Enterprise Credit Insurance Act-" http://www.meti.go.jp/english/press/2015/0220_01.html

METI, "News Releases (2015) -Credit Guarantee System to be Available for Specified Non-profit Organizations (NPOs) from October 1, 2015 http://www.meti.go.jp/english/press/2015/0807_03.html

National Central Society of Credit Cooperatives (2016), “Figures of Credit Cooperatives” http://www.shinyokumiai.or.jp/keisu.html (Japanese)

OECD (2015), “OECD Economic Surveys: Japan 2015”, OECD Publishing, Paris. DOI: http://dx.doi.org/10.1787/eco_surveys-jpn-2015-en

SME Agency (2014), “2014 White Paper on Small and Medium Enterprises in Japan” (pp289) http://www.chusho.meti.go.jp/pamflet/hakusyo/H26/download/2014hakusho_eng.pdf

SME Agency (2016), “2016 White Paper on Small and Medium Enterprises in Japan” (pp23, 25, 564) http://www.chusho.meti.go.jp/pamflet/hakusyo/H28/download/2016hakusho_eng.pdf

SME Agency (2016), "Safety-net guarantee system -No.5 for industries whose business conditions are worsened-" http://www.chusho.meti.go.jp/kinyu/sefu_net_5gou.htm

Tokyo Shoko Research, Ltd. (2016), “State of Corporate Bankruptcies” http://www.tsr-net.co.jp/news/status/

Venture Enterprise Center, Japan (2015), “VEC YEARBOOK 2015–Annual Report on Japanese Startup Businesses 2015”, http://www.vec.or.jp/category/vec_release/vec_whitepaper_dt3/?backone=1&paged=1

Venture Enterprise Center, Japan (2016), “VEC Venture News - Preliminary Report on Survey on Venture Capital Investment Trends in FY2015” http://www.vec.or.jp/wordpress/wp-content/files/20160810_21_VEC_H28_No25_.pdf (Japanese)