Japan’s Rising Tide Leaves Small Business Out At Sea

As an entrepreneur, I am intensely interested in how business operates – not just here in the US- but in other countries as well. As much as business is universal, the perspectives and problems faced in other countries can be unique, challenging, and widely varied. Having recently spent several weeks in Japan, I interviewed a number of business owners and executives to get their take on Japan’s economic challenges and its outlook for the future.

In Japan, the world’s 3rd largest economy, entrepreneurship is a hugely important, but has been under considerable strain for over 2 decades. In fact, the period since 1990 has come to be called the “Lost 20 years” (失われた20年, Ushinawareta Nijūnen) due to the economic stagnation and repeated failed attempts to fix it. Even though recent economic news from Japan is cautiously positive due to Prime Minister Abe’s economic reforms, optimism is hard to find amongst entrepreneurs.  While ‘Startup’ companies in the tech space are relatively few, small businesses and entrepreneurs are a huge force at work in the economy  — a force which is overwhelmingly negative in its assessment of the economy and its prospects for the future. In the December 2013 release of the Bank Of Japan (BOJ) Tankan Survey, 79% of small non-manufacturing enterprises are negative in their outlook, which is consistent with the interviews that I conducted with business people in rural Kyushu Japan over the period from December 2013 to January 2014.

As a glimpse behind the numbers, here are some of the issues that were shared with me from the Japanese entrepreneurs that I surveyed:

A Macro Focus

A difference that I noticed in my discussions with Japanese entrepreneurs as compared with their counterparts in that while in the US there is very often a  focus on how to tactically pivot or make the most of changing circumstances, a common theme in Japan has been on dealing with macro forces that are much larger than the businesses themselves.   This sense comes in part from the fact that Japan is a small island nation, with limited resources: Fuel, food, metals, textiles, and other natural resources are imported in great quantities. This dependency puts industry and national interests at significant risk should any of the needed resources fluctuate significantly in price or become unavailable.

Two Separate Worlds

While large corporations are most likely to make the headlines, small enterprises make up the traditional ‘last mile’ between consumers and the goods that they purchase. The sheer abundance and diversity of small businesses in Japan is breathtaking – and has been seeing hard times for years. These businesses are seen by those conducting them to be the base of the economy, and largely overlooked by the government. While the news has been better over the past year for the big corporations, there is a sense that small business has a significant time yet to wait to see an economic turnaround.

The ‘Wal Mart’ Effect

Several changes in legislation are seen to be unfavorable to small enterprises – specifically the repeal of laws that previously limited the size of retail outlets that could be opened in small cities. There were laws in place that limited the physical square footage of retailers in an effort to protect small ‘mom & pop’ stores, which upon repeal have seen an influx of large retailers and significant loss of consumer market share for small retailers. This trend is in line with what we saw in the US, with big box retail decimating long-established rural small businesses. There are significant  visible signs of economic hard times evident in many smaller towns, with many failed shops closed and falling into disrepair. Another pattern occurring outside of the big cities is an increasing dependence on cars. As seen in the US, while town centers used to be the main shopping areas for consumers, larger retailers with abundant on-site parking are now the norm and expected by consumers. Consumer shopping areas built decades ago, with limited support for car-owning consumers are falling by the wayside.

A Skeptical Eye On The Future

With a raft of concerns facing Japan, it is hard to find factors driving any sense of positive outlook amongst the small businesses I talked to. Chief among the concerns is an attitude of extreme skepticism about the government and its intentions. The recent visit to the  controversial Yasukuni Shrine by Prime Minister Shinzo Abe, and a increase of Japanese nationalist rhetoric is seen as nearly incomprehensible political posturing and a clear detriment to important regional ties with China and Korea. Japan’s low birth rate is another long-term issue that is frequently discussed, with dire implications for social and economic stability.  A rising China, and the political (and military) implications of its strained relationship with Japan are another macro factor outside of the control of individual Japanese citizens that comes up frequently in conversation. For now, Japan is dependent on its security agreements with the US for protection from any aggression, however there is a clear sense of uncertainty about the long-term implications of such a dependency, which at a macro scale adds to the sense of strain and uncertainty amongst businesses.

The Positive Viewpoint

Awash in bad news and in search of positive balance, I contacted a former member of the Japanese parliament and asked if he would share his insight into what the brightest point in the Japanese economic picture is. His viewpoint is that there is a new generation of entrepreneurs that are shaping the future by creating new industries that work themselves around, through, and over any of the challenges that Japan currently faces.  Indeed Tokyo and Osaka are beginning to see their share of “Silicon Valley” styled startups, although this is still a very small segment of the overall economy. Insofar as my interviews focused on businesses outside of the large cities, this is as much a discussion of rural decline versus urban concentration of wealth as it is a commentary on the wider Japanese economy. It would seem that for the small business owners I interviewed for this piece (in semi-rural Kyushu), the pragmatic sentiment is that there is little choice but to hold on and hope for better times.

After 20 years of increasing difficulty many small businesses are now left with little available resources, and depleted cash reserves. With little practical alternative, small business continues to focus on relationships with established customers, and taking care of day-to-day issues.  In the end, this is perhaps Japanese entrepreneur’s strongest asset: The loyalty and relationships of long-held customers.

-Kevin Ready