Firm entry and exit dynamics in Japan: institutions, policies, and empirical insights

This study comprehensively reviews the distinctive features of firm entry and exit in Japan. As a unique feature of the survey, we focus on how Japan’s unique institutional, cultural, and policy environments interact to shape entrepreneurial behavior, firm turnover, industry structure, and, thus, the country’s long-term economic performance. While standard Schumpeterian models posit that highly productive entrants naturally displace inefficient incumbents, Japan’s financial and labor market institutions, regulatory frameworks, and cultural norms frequently delay or distort optimal exit decisions. Drawing on historical perspectives from the postwar economic boom to the prolonged stagnation of the “Lost Decades,” this survey highlights how rigid labor arrangements, “zombie lending,” and public credit guarantee programs have impeded productivity-enhancing reallocation. Recent shocks, such as the COVID-19 pandemic, further highlight the tension between broad and uniform policy support for business enterprises and the need for competitive selection processes. Drawing on micro-level evidence from the manufacturing and non-manufacturing sectors, we illustrate how small- and medium-sized enterprises (SMEs), which dominate Japan’s corporate landscape, face unique constraints and policy-induced distortions. The study concludes by proposing policy options to balance social stability with economic dynamism, including reforms to labor market rigidity, reconfiguring public credit guarantees, and tailoring financial support mechanisms more selectively.