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Small Companies Top Japanese Prime Minister's Fall Agenda

TOKYO -- Well, it's about time. After spending much of the last session of parliament devising ways to help Japan's large corporations restructure, Prime Minister Keizo Obuchi is finally solidifying plans to give small firms a boost. Accounting for 99% of the companies in Japan and employing 78% of the work force, these firms have borne the brunt of the bruising recession from which this country is just now emerging.

After months of leaking juicy tidbits to the press, the Obuchi administration began last week to reveal a rough outline of the small-business measures it intends to pass during the session of parliament convening on Friday. While most of these measures are designed to provide a shot in the arm to high-tech start-ups and encourage venture businesses, others will act as life support for failing firms that probably should have shuttered their doors long ago.

Part of the problem is funding. Japan's venture capital market is shrinking. Andrew Shipley, senior economist at Schroders Securities, says that in 1998 the total balance of venture capital funds fell a disturbing 27% to about $1.2 billion, less than one-tenth of the venture capital funds in the U.S. last year. In an effort to give a leg up to small start-ups, which played such a big role in fueling America's recovery a decade ago, Obuchi wants to implement changes to help them attract funds.

To begin with, individual "angel" investors in Japan can get tax write-offs if they incur losses on money put into venture businesses that are up to five years old. Obuchi hopes to encourage these risk-takers to invest more money in a greater number of new businesses by extending that limit to 10 years.

He also aims to help high-tech venture companies by letting them offer up to 30% of their outstanding shares in stock options to employees (up from 10%). And he intends to expand the people who can receive stock options to include outside contractors, such as consultants and patent agents. For start-ups, often desperately cash-poor, this provision is long overdue.

Furthermore, the prime minister will submit legislation that would permit Japan's Finance Corporation for Small Business to collateralize loans using a company's technology -- a thoroughly novel approach for a banking system that relies on assets like land for securing loans. Presumably, this initiative will encourage private banks to follow suit.

While these are good first steps, they don't go far enough and often involve considerable government meddling at a time when the ministries say they are trying to let market forces drive this economy.

For example, initially there was talk that "angels" would be allowed to write off losses from venture capital investments against any form of income, similar to what then-Prime Minister Margaret Thatcher did in the U.K. in the 1980s. Somewhere along the way, however, that idea was apparently scrapped, meaning "angels" will continue only to take tax write-offs for venture losses against gains made through equity trading. The exclusion has the fingerprints of the tax-hungry Ministry of Finance all over it.

Moreover, it will be trade ministry officials who decide which high-tech firms are eligible to expand the percentage of shares they can offer as stock options. Similarly, the Finance Corporation for Small Business will get into the business of picking winners and losers by determining which companies have technologies that can be used as collateral to secure loans from that quasi-governmental lending institution.

Another problem area: Last December, Obuchi created a special 20 trillion-yen ($189 billion) government loan-guarantee program for small firms. Trade minister Takashi Fukaya announced last Friday that he intends to expand the program by another 10 trillion yen and left open the option for even more guarantees next year. Furthermore, a key component of the small-firms legislation on deck this fall will probably be a proposal to expand significantly the definition of small and midsize companies.

Granted, this loan program has worked wonders for reversing the dramatic explosion of bankruptcies in Japan last year. It also reduced the sense of panic in the economy by slowing the rising unemployment rate, which now stands at 4.7%, down from the historic high of 4.9% this summer. And it's true the program has probably kept solvent a lot of viable companies that would have otherwise gone bust. But it has also almost certainly kept far more hopelessly inefficient mom-and-pop firms chugging along. As long as the loan guarantee scheme stays in place, the forces of "creative destruction" will be delayed.

Why is Obuchi so keen on devoting his all to small companies in the upcoming session of parliament? The answer is two-fold. Because these firms account for roughly half of the nation's output, this economy can't enjoy a full-fledged recovery until they get back on their feet. In addition, Obuchi finally seems to recognize, at least to some degree, that job creation will be limited unless he establishes a business environment friendly to innovative, venture firms.

The other answer, of course, involves electoral politics. Obuchi must hold a lower house poll by October 2000 and the people who run and work for small companies are generally big supporters of the ruling Liberal Democratic Party. That's why he's turned his attention from assisting Japan's corporate giants to passing out policy goodies to the little guys. What a surprise!
John F. Neuffer, a longtime observer of Japanese politics, is an analyst at Mitsui Marine Research Institute (MMR). He writes regular commentary for TSC and publishes an in-depth roundup of Japanese politics on his Website, The views expressed above are those of Neuffer and not necessarily those of MMR. This column is exclusive to TheStreet.com.

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