Item 1 of 5 The factory of Izumiya Tokyo, a Western confectionery manufacturer, in Kawasaki City, Kanagawa Prefecture, July 9, 2024 (Reuters/David Dolan)
[1/5]The factory of Izumiya Tokyo, a Western confectionery manufacturer, in Kawasaki, Kanagawa Prefecture, July 9, 2024. (Reuters/David Dolan)
KAKAMAGHAHARA, Gifu Prefecture (Reuters) – Founded in 1952, Hitoshi Fujita’s Gifu Prefecture company was a typical family-run factory that machined metal parts for half a century. But regarding 10 years ago, the company expanded by acquiring a company in the prefecture and then another one under its umbrella, an unusual move for a small or medium-sized Japanese company.
“I think that regional manufacturing will soon be reduced to one-third or even one-half unless mergers and acquisitions (M&A) progress,” said Fujita. “The national strength of the manufacturing industry will also decline.”
In Japan, where low economic growth and a declining population continue, many small and medium-sized enterprises have been supported by government support and loans at ultra-low interest rates. These companies, which account for regarding 70% of employment, are now facing a wave of restructuring as the “world with interest rates” returns for the first time in 17 years, with the temporary generous public support that was provided by the COVID-19 pandemic now gone.
Three government officials who spoke to Reuters said the government will not easily bail out struggling companies. This is an unusual statement from Japanese government officials, who have tried to avoid bankruptcies and protect jobs as much as possible, and sounds like they are impatient regarding the slow pace of corporate turnover.
With a labor shortage becoming more apparent, liquidating underperforming companies would allow Japan to redirect labor and investment to more productive businesses, boosting wages and economic growth, they said. While bankruptcies are not ruled out, the preferred route for such change would be through mergers and acquisitions, one government official said.
Sakai Manufacturing, which is run by President Fujita, used the business succession consultation service set up by the government when it acquired its second company three and a half years ago. At the suggestion of the service, the company hired a consultant, and the government covered half of the costs. “In the generation before me, many people were engineers who ran manufacturing companies. I don’t think that your skills are often directly useful when buying another company,” says President Fujita.
“We will proceed in a low-key manner”
According to a survey compiled by Teikoku Databank in November last year, one in six companies in Japan is a “zombie company” (as of the end of November 2023). The definition of a zombie company is a company established 10 years or more that has been unable to cover interest expenses with revenue from business activities, financial assets, etc. for three consecutive years.
Japan’s annual average wages, GDP per capita and rising zombie companies Bankruptcies have risen as state funding is dialed back
In March of this year, the government called on financial institutions to shift the focus of their support for clients from the traditional cash flow management to business revitalization. While the government did not directly use the term “metabolism,” which refers to encouraging less productive companies to exit the industry, a government official responded, “That’s correct,” when asked whether an increase in bankruptcies was inevitable.
The Ministry of Economy, Trade and Industry responded to an interview in writing regarding the government’s policy, explaining, “While supporting the management of small and medium-sized enterprises through measures to support cash flow and pass on price increases in response to cost increases, it is important for managers themselves to overcome the situation and increase their ‘earning power’ through improving productivity and capital investment.”
“We will continue to closely monitor the situation to ensure that bankruptcies do not increase to an inappropriate level that would raise the unemployment rate, and will support the management of local small and medium-sized enterprises and small business operators through measures to address labor shortages, cash flow management, and price transfer measures to address increased costs,” the government said.
Japan’s average wage is lower than the average for member countries of the Organization for Economic Cooperation and Development (OECD). Its per capita gross domestic product (2023), an indicator of productivity, was $33,834 per year, also below the OECD average. A government official said, “We will proceed slowly and quietly, unobtrusively,” adding, “Japan’s future is bleak unless we increase productivity.”
“The government is careful not to be seen as abandoning support for small businesses, and is working to mitigate the disadvantages that come with small businesses going out of business by creating safety nets that make it easier for workers to transfer to growing companies,” says Oya Tatsuro, a lawyer at Oe, Tanaka & Oya Law Office who specializes in business revitalization and M&A for small and medium-sized enterprises.
Still, there is a limit to the amount of “creative destruction” Japan can accept. In some regions, there are companies that are important to the region even if they are less productive, said another government official.
Kiryu Shinkin Bank, located in Gunma Prefecture, home to many auto parts factories, created a department in February last year to support the management improvement of borrower companies. Companies that had long faced difficulties were able to survive the COVID-19 pandemic with unsecured, interest-free “zero-zero loans,” but “this is the situation we’re in now,” says Takashi Harada, head of the business support center in the lending department.
Over the course of a year from April 2011, the Shinkin Bank supported the creation of 21 business improvement plans. With prices rising as the government’s COVID-19 support ends, many clients are forced to raise prices, but only regarding 30% of them actually do so for fear of losing customers. In the world of corporate restructuring, only 3 or 4 out of 100 improvement cases are successful, explains Harada.
Izumiya Tokyo, a long-established Western confectionery manufacturer in Kawasaki, Kanagawa Prefecture, is one example of a successful turnaround. Yukiko Izumi, who took over as president following her father’s death, overcame 10 years of losses. She moved the company’s headquarters from Tokyo, cut costs, raised prices, and began developing new products.
“My father had a different idea regarding how to improve productivity and break away from long-standing practices,” said Izumi, who is now looking into ways to target foreign tourists to further broaden his customer base.
Two years ago, Masayuki Matsuya, who runs a photo studio and beauty salon in Tokyo, felt great anxiety over rising expenses due to the weak yen and decided to overhaul his business. He collected all kinds of information on online marketing, cut his annual advertising expenses by 30 million yen, and increased sales by focusing on campaigns targeting repeat customers.
“From the outside it looks like a photography studio, but in reality it’s now mostly a campaign marketing business,” says Matsuie.
According to Teikoku Databank, the number of bankruptcies in the first half of 2012 was 4,887, the highest in the past 10 years. However, the total amount of debt was lower than the same period of the previous year for the second consecutive year, indicating that many of the bankruptcies were among relatively small companies.
Yasushi Noro, president of NBC Consultants, which provides consulting services mainly to small and medium-sized enterprises, said that the business environment is tough for small and medium-sized enterprises, and that “if you ask whether they can raise prices, they can’t be as aggressive as the larger companies, and I think this is a factor that is putting a lot of pressure on profits.” He added, “I feel that the model that small and medium-sized enterprises have had thanks to low interest rates is beginning to crumble.”
(Yamazaki Makiko, David Dolan, Shimizu Ritsuko and Anton Bridge; Editing by Kubo Nobuhiro and Tanaka Shiho)
*The name of the consulting company in the final paragraph has been corrected from “NC Consultants” to “NBC Consultants.”
Our Code of Conduct:Thomson Reuters “Trust Principles”
Japan’s "Zombie Companies" Face Restructuring as Interest Rates Rise
Item 1 of 5 The factory of Izumiya Tokyo, a Western confectionery manufacturer, in Kawasaki City, Kanagawa Prefecture, July 9, 2024 (Reuters/David Dolan)
[1/5]The factory of Izumiya Tokyo, a Western confectionery manufacturer, in Kawasaki, Kanagawa Prefecture, July 9, 2024. (Reuters/David Dolan)
KAKAMAGHAHARA, Gifu Prefecture (Reuters) – Founded in 1952, Hitoshi Fujita’s Gifu Prefecture company was a typical family-run factory that machined metal parts for half a century. But regarding 10 years ago, the company expanded by acquiring a company in the prefecture and then another one under its umbrella, an unusual move for a small or medium-sized Japanese company.
“I think that regional manufacturing will soon be reduced to one-third or even one-half unless mergers and acquisitions (M&A) progress,” said Fujita. “The national strength of the manufacturing industry will also decline.”
In Japan, where low economic growth and a declining population continue, many small and medium-sized enterprises have been supported by government support and loans at ultra-low interest rates. These companies, which account for regarding 70% of employment, are now facing a wave of restructuring as the “world with interest rates” returns for the first time in 17 years, with the temporary generous public support that was provided by the COVID-19 pandemic now gone.
Government Restructuring: A Shift Away from Bailouts
Three government officials who spoke to Reuters said the government will not easily bail out struggling companies. This is an unusual statement from Japanese government officials, who have tried to avoid bankruptcies and protect jobs as much as possible, and sounds like they are impatient regarding the slow pace of corporate turnover.
With a labor shortage becoming more apparent, liquidating underperforming companies would allow Japan to redirect labor and investment to more productive businesses, boosting wages and economic growth, they said. While bankruptcies are not ruled out, the preferred route for such change would be through mergers and acquisitions, one government official said.
Sakai Manufacturing, which is run by President Fujita, used the business succession consultation service set up by the government when it acquired its second company three and a half years ago. At the suggestion of the service, the company hired a consultant, and the government covered half of the costs. “In the generation before me, many people were engineers who ran manufacturing companies. I don’t think that your skills are often directly useful when buying another company,” says President Fujita.
The Rise of “Zombie Companies”
“We will proceed in a low-key manner”
According to a survey compiled by Teikoku Databank in November last year, one in six companies in Japan is a “zombie company” (as of the end of November 2023). The definition of a zombie company is a company established 10 years or more that has been unable to cover interest expenses with revenue from business activities, financial assets, etc. for three consecutive years.
Japan’s annual average wages, GDP per capita and rising zombie companies Bankruptcies have risen as state funding is dialed back
In March of this year, the government called on financial institutions to shift the focus of their support for clients from the traditional cash flow management to business revitalization. While the government did not directly use the term “metabolism,” which refers to encouraging less productive companies to exit the industry, a government official responded, “That’s correct,” when asked whether an increase in bankruptcies was inevitable.
Government’s Response: Slow and Steady
The Ministry of Economy, Trade and Industry responded to an interview in writing regarding the government’s policy, explaining, “While supporting the management of small and medium-sized enterprises through measures to support cash flow and pass on price increases in response to cost increases, it is important for managers themselves to overcome the situation and increase their ‘earning power’ through improving productivity and capital investment.”
“We will continue to closely monitor the situation to ensure that bankruptcies do not increase to an inappropriate level that would raise the unemployment rate, and will support the management of local small and medium-sized enterprises and small business operators through measures to address labor shortages, cash flow management, and price transfer measures to address increased costs,” the government said.
Japan’s average wage is lower than the average for member countries of the Organization for Economic Cooperation and Development (OECD). Its per capita gross domestic product (2023), an indicator of productivity, was $33,834 per year, also below the OECD average. A government official said, “We will proceed slowly and quietly, unobtrusively,” adding, “Japan’s future is bleak unless we increase productivity.”
“The government is careful not to be seen as abandoning support for small businesses, and is working to mitigate the disadvantages that come with small businesses going out of business by creating safety nets that make it easier for workers to transfer to growing companies,” says Oya Tatsuro, a lawyer at Oe, Tanaka & Oya Law Office who specializes in business revitalization and M&A for small and medium-sized enterprises.
Facing the Challenges: Case Studies of Restructuring
Business Model Collapses Under Low Interest Rates: The Need for “Creative Destruction”
Still, there is a limit to the amount of “creative destruction” Japan can accept. In some regions, there are companies that are important to the region even if they are less productive, said another government official.
Kiryu Shinkin Bank, located in Gunma Prefecture, home to many auto parts factories, created a department in February last year to support the management improvement of borrower companies. Companies that had long faced difficulties were able to survive the COVID-19 pandemic with unsecured, interest-free “zero-zero loans,” but “this is the situation we’re in now,” says Takashi Harada, head of the business support center in the lending department.
Over the course of a year from April 2011, the Shinkin Bank supported the creation of 21 business improvement plans. With prices rising as the government’s COVID-19 support ends, many clients are forced to raise prices, but only regarding 30% of them actually do so for fear of losing customers. In the world of corporate restructuring, only 3 or 4 out of 100 improvement cases are successful, explains Harada.
Izumiya Tokyo: A Success Story of Overcoming Losses
Izumiya Tokyo, a long-established Western confectionery manufacturer in Kawasaki, Kanagawa Prefecture, is one example of a successful turnaround. Yukiko Izumi, who took over as president following her father’s death, overcame 10 years of losses. She moved the company’s headquarters from Tokyo, cut costs, raised prices, and began developing new products.
“My father had a different idea regarding how to improve productivity and break away from long-standing practices,” said Izumi, who is now looking into ways to target foreign tourists to further broaden his customer base.
Matsuya’s Photo Studio: Adapting to Changing Times
Two years ago, Masayuki Matsuya, who runs a photo studio and beauty salon in Tokyo, felt great anxiety over rising expenses due to the weak yen and decided to overhaul his business. He collected all kinds of information on online marketing, cut his annual advertising expenses by 30 million yen, and increased sales by focusing on campaigns targeting repeat customers.
“From the outside it looks like a photography studio, but in reality it’s now mostly a campaign marketing business,” says Matsuie.
Looking Ahead: Challenges and Opportunities
According to Teikoku Databank, the number of bankruptcies in the first half of 2012 was 4,887, the highest in the past 10 years. However, the total amount of debt was lower than the same period of the previous year for the second consecutive year, indicating that many of the bankruptcies were among relatively small companies.
Yasushi Noro, president of NBC Consultants, which provides consulting services mainly to small and medium-sized enterprises, said that the business environment is tough for small and medium-sized enterprises, and that “if you ask whether they can raise prices, they can’t be as aggressive as the larger companies, and I think this is a factor that is putting a lot of pressure on profits.” He added, “I feel that the model that small and medium-sized enterprises have had thanks to low interest rates is beginning to crumble.”
(Yamazaki Makiko, David Dolan, Shimizu Ritsuko and Anton Bridge; Editing by Kubo Nobuhiro and Tanaka Shiho)
*The name of the consulting company in the final paragraph has been corrected from “NC Consultants” to “NBC Consultants.”
Our Code of Conduct:Thomson Reuters “Trust Principles”
