Japan grapples with lack of entrepreneurs; “Too few companies get started and too many unprofitable companies are staying in business. We need to increase Japan’s metabolism.”

June 12, 2013 5:43 am

Japan grapples with lack of entrepreneurs

By Ben McLannahan in Tokyo

All Hiromi Yamaguchi wanted to do was to sell coffee to pinball addicts. But to get his business up and running he had to convince the health ministry that pushing carts around pachinko parlours would not violate hygiene laws. The former Daiwa Securities employee then spent more than a year persuading a prefectural police chief that serving hot drinks from a trolley was not a gateway to hard liquor and mob violence. Only then could Mr Yamaguchi build a business that has morphed into JP-Holdings, Japan’s largest private provider of childcare centres and a stock market darling. “I was told I was very persistent,” chuckles Mr Yamaguchi, 52, now president.Mr Yamaguchi is a role model for the kind of entrepreneurship that Shinzo Abe, Japanese prime minister, wants to foster. A key element of Mr Abe’s new growth strategy, to be approved on Friday, is to make life easier for Japan’s risk-takers.

One senior government official says too many barriers lie in the way of would-be entrepreneurs, pointing out that Japan’s rate of start-ups is less than half the levels of the US or the UK.

To close that gap, Mr Abe will push for tax incentives for businesses to invest in venture-capital funds. He will also promise to “rationalise” a system where loans to small businesses are backed by personal guarantees.

When Koki Uchiyama wanted financing to develop an internet business a decade ago, for example, he had to provide guarantees of Y300m – more than 50 times his annual income at the time – to get a Y300m ($3.1m) loan.

His company Hottolink, which tracks consumer trends across social media, has since grown rapidly. But even still, when he wanted a loan of a “few million” dollars to buy a competitor last year, he had to give guarantees of $1m.

“Maybe my wife worries about the debts, but she still decides to live with me,” shrugs Mr Uchiyama, 42.

According to a draft plan of Mr Abe’s growth strategy seen by the Financial Times, Mr Abe will also encourage deregulation in special zones in Tokyo, Osaka and Nagoya, where procedures will be eased to attract people, money and goods.

In a speech last week, Mr Abe said “the power of the private sector is the engine of Abenomics”. But shaking things up will not be easy.

For one thing, Japan’s venture capital industry is small. Total loans and investments stood at about Y124bn in the year to March 2012, according to the government – about one-nineteenth the level of the US. What’s more, these funds are often offshoots of banks, inclined to prize profits over prospects.

When Mr Uchiyama wanted $1m of equity capital in 2000 to build a business based on bookmarking favourites, a precursor to the “like” button on Facebook, the former scientist and PhD student found it in California, rather than Japan.

“It’s weird,” says the tousle-haired chief executive. “In the US, people value start-ups at 10 times sales. Here, it’s two times operating profit.”

Undoing the system of requiring personal guaranteesmay also prove hard. Mr Abe wants commercial banks to adopt a regime where borrowers can get waivers from guarantees if they give regular updates on cash flows and don’t pay themselves big salaries.

But already there is resistance. While lenders naturally want to charge higher interest rates in exchange for waivers, the government is pushing against them.

“This is hard work, but we think it’s important,” says the government official. “Many talented and ambitious people are trapped within big Japanese companies because the stability of getting a monthly salary outweighs the huge risk of failure.”

On the hubs for start-ups, many note that the state’s record on energising the private sector is none too encouraging.

Take the Innovation Network Corporation of Japan, a government-backed fund set up in early 2009 under the premiership of Taro Aso, now finance minister, to promote the creation of “next-generation businesses” in areas such as clean-technology and life sciences.

So far, the biggest equity investments it has made have been in Renesas Electronics, a company hammered together a decade ago by Hitachi, Mitsubishi Electric and NEC, and Japan Display, formed from cast-offs from Sony, Toshiba and Hitachi.

The funding environment for SMEs has also been overturned since 2009 when a law compelled banks to allow borrowers to defer repayments on about Y95tn of loans. Partly as a result, bankruptcies of companies with more than Y10m in debts fell to a 22 year-low last year, even as Japan’s economy languished in its third recession since the Lehman crisis.

Analysts from Mizuho Securities estimate that about one-sixth of the 300-400,000 companies benefiting from that moratorium, which expired in April, could be sources of future dud loans. Banks could be reluctant to start parcelling out new ones, they say, while they sift winners from losers. Still, the determination is there.

“Too few companies get started and too many unprofitable companies are staying in business”, says Heizo Takenaka, a former economy minister and a close adviser to Mr Abe. “We need to increase Japan’s metabolism.”