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What Role Can Financial Policies Play in Revitalizing SMEs in Japan?

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  • Waikei R Lam
  • Jongsoon Shin

Abstract

The paper discusses the role the financial sector can play in supporting growth in Japan. While overall credit conditions have been accommodative, credit growth has remained weak, especially for small and medium-sized enterprises (SMEs). Firm-level SME data and sectoral corporate balance sheets show that many SMEs have faced structural challenges of high leverage and low profitability. Moreover, the global financial crisis has weakened the financial position across SMEs, particularly for those with low credit worthiness. These challenges are closely related to low availability of riskcapital and the pervasiveness of credit support measures. This paper argues that to encourage the supply of risk-based capital, costly government support measures should be phased out and SME restructuring be accelerated. Efforts are also needed to deepen capital markets to enhance risk capital availability and address regulatory barriers to starting businesses. In that regard, addressing SMEweaknesses would improve private investment, enhance firm productivity, and lift growth.

Suggested Citation

  • Waikei R Lam & Jongsoon Shin, 2012. "What Role Can Financial Policies Play in Revitalizing SMEs in Japan?," IMF Working Papers 12/291, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:12/291
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    References listed on IDEAS

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    1. Ono, Arito & Sakai, Koji & Uesugi, Iichiro, 2008. "The Effects of Collateral on SME Performance in Japan," PIE/CIS Discussion Paper 401, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
    2. Iichiro Uesugi, 2008. "Efficiency of Credit Allocation and Effectiveness of Government Credit Guarantees: Evidence from Japanese Small Businesses," Bank of Japan Working Paper Series 08-E-2, Bank of Japan.
    3. Ricardo J. Caballero & Takeo Hoshi & Anil K. Kashyap, 2008. "Zombie Lending and Depressed Restructuring in Japan," American Economic Review, American Economic Association, vol. 98(5), pages 1943-1977, December.
    4. Uesugi, Iichiro & Sakai, Koji & Yamashiro, Guy M., 2010. "The Effectiveness of Public Credit Guarantees in the Japanese Loan Market," Journal of the Japanese and International Economies, Elsevier, vol. 24(4), pages 457-480, December.
    5. Sakai, Koji & Uesugi, Iichiro & Watanabe, Tsutomu, 2010. "Firm age and the evolution of borrowing costs: Evidence from Japanese small firms," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1970-1981, August.
    6. Ichiro Tokutsu & Kazuo Ogawa & Mika Saito, 2012. "Japan out of the Lost Decade; Divine Wind or Firms’ Effort?," IMF Working Papers 12/171, International Monetary Fund.
    7. KWON Hyeog Ug & NARITA Futoshi & NARITA Machiko, 2009. "Resource Reallocation and Zombie Lending in Japan in the '90s," Discussion papers 09052, Research Institute of Economy, Trade and Industry (RIETI).
    8. Arping, Stefan & Lóránth, Gyöngyi & Morrison, Alan D., 2010. "Public initiatives to support entrepreneurs: Credit guarantees versus co-funding," Journal of Financial Stability, Elsevier, vol. 6(1), pages 26-35, April.
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