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

Abstract

The paper discusses the role the financial sector can play in supporting growth in Japan. While overall credit conditions have been accommodating, 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 risk capital 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 SME weaknesses would improve private investment, enhance firm productivity, and lift growth.

Keywords: Corporate sector, Japan, Financial sector, Credit policy, Small and medium-sized enterprises (SMEs), credit guarantees

JEL Classification: G01, G21, G32