Global Spotlight: Japan

Japan has established a reputation as the home of some of the world’s most sophisticated technology and innovation. Even the nation’s SMEs are expected to invent and foster the newest tech and share it with the world. But at home, Japan has only just begun to emerge from a recession, meaning small businesses are in need of support to strengthen their cross-border trade. Luckily, both the government and the private sector have stepped up to help.

On The Cloud

A major contributor to Japan’s reputation for technological innovation is its development and embrace of the cloud and Software-as-a-Service development, placing the nation in a top position to bring new solutions to the enterprise.

A recent report published in April by ITR Market Review found that Japan’s businesses are turning towards the Software-as-a-Service market to offer enterprise cloud tools; analysts predicted a 36.6 percent growth in Japan’s SaaS market for this year.

The SaaS trend has materialized in an array of industries, most notably in the cloud-based travel and expense management services sector, currently dominated by Concur.

“Japanese companies are shifting to more profit-based structures and focusing on overhead cost management,” said Concur Japan CEO Masamune Mimura in an earlier interview. “In particular, companies are working to improve travel and expense management with a view to raising working productivity of employees, implementing governance controls at a global level and making expense expenditures more transparent.”

Enterprise security has also become an emerging market in Japan in the wake of several hacking scandals. Japan suffered its largest data theft to date last year when educational services conglomerate Benesse had troves of its customer data stolen. Just last month, Japan Pension Service revealed it had experienced a security breach that compromised personal information within 1.25 million accounts. These events were highlighted by NTT Communications and California-based Box, who partnered to launch Box over VPN. The service offers cloud-based content management and security services to enterprises.

Japan is catching on the cloud-based FinServ market, too. Only days ago, Japan eCommerce giant Rakuten took part in an $18 million fundraising round for cloud-based FinServ firm Currency Cloud, signaling a new focus on financial services by Rakuten.

Cross-Border Trade

With all of this top-tier technology, Japan’s SMEs are expected to share their expertise with other businesses around the globe. SME Support Japan, an initiative backed by the Japanese government, aims to promote Japanese SMEs’ technological advancements and encourage small businesses to lend their expertise to overseas SMEs.

As consumer spending remains muted, greater pressure is placed on manufacturing, industry and B2B cross-border trade to pull Japan out of a years-long recession.

Recent figures have shown a rise in exports fueled by the weaker yen. Industrial production has been on the rise, giving analysts reason to be optimistic about the future as businesses will need to boost inventory to meet higher demand. But the latest figures showed weak expansion of Japan’s manufacturing sector in June despite this rise in export demand.

Japan is finally beginning to see economic relief as it exits a recession, according to a recent analysis from Deloitte University Press. The latest figures showed that Japan saw weak GDP growth last year, with 2014’s fourth quarter offering a bump thanks to a spike in export activity.

But while confidence among SMEs for the manufacturing sector rose between May and June all around, small businesses are feeling less optimistic about the state of Japan’s economy, separate research found.

New legislation hopes to improve small businesses’ confidence in the economy, however, and strengthen their position in the global economy.

The recently established Trans-Pacific Partnership, a free trade agreement between Japan, the U.S. and other jurisdictions in the Pacific Rim, will likely boost B2B trade, too, while reports in May said lawmakers in the nation are looking to amend the Consumption Tax Act to impose taxes on B2C eCommerce services provided in Japan but based outside the nation. These taxes, however, would still not apply to B2B eCommerce transactions.

The impending rule change will require eCommerce businesses to register as either a B2B or a B2B and B2C firm, however, in order for B2B firms to obtain a tax credit.

Small Business Finance

The private sector has also moved to encourage cross-border commerce in Japan’s market. Amazon chose Japan as one of just two markets to launch its supplier financing program through Amazon Lending, founded in 2012. The service — which has since expanded to other nations — offers short-term working capital financing to businesses operating on the Amazon platform, providing SMEs in Japan with necessary funds to strengthen cross-border online sales.

Still, some experts argue that more has to be done. One solution for small businesses could be to gain help from their lenders. In an op-ed published early this year, experts argued that lender banks in the nation have the ability not only to provide financial services to SMEs but also business consulting services.

“If we assume that a particular bank is very knowledgeable about overseas business opportunities either through its own banking activities (e.g., foreign branches) or transactions with client firms with experience in exporting, potential exporter firms would find it helpful to consult with such a bank,” the authors wrote.

The writers, which included Gakushuin University Professor Tomohiko Inui, Senshu Economics Professor Keiko Ito and Hitotsubashi University Professor Daisuke Miyakawa, argued that providing such consulting to SMEs, in addition to traditional services like payments and lending, is even more crucial than it is for large corporations as it reduces risk, encourages close ties with their small business clients and would promote larger business opportunities for the banks themselves.

Small business lending has struggled in recent years, though. “Declining business investment means that companies are not yet convinced that demand will rise,” Deloitte’s reports said, “or that deflation will be avoided. While investors were disappointed that growth wasn’t stronger, there is reason to expect an improvement in performance in the quarters to come.”

The alternative lending industry has not singled out Japan as a particularly massive or robust market, but the nation’s alt-finance activities are noteworthy. For example, Bloomberg featured Japan’s crowdfunding market in a feature last January, highlighting the alternative lending tactic as a crucial source of capital for businesses following natural disasters like earthquakes. The March 2011 earthquake and tsunami caused about $144 billion in damages in Japan, reports said, and a slow relief response from the government led to businesses seeking financing options online.

“Crowdfunding has become popular as a way for people to provide assistance after the disaster without actually having to go there,” said Mitsubishi UFJ Research & Consulting Co. Analyst Yusuke Nakada.

As economic relief can often come too slowly for many small business owners, it will be interesting to see whether alternative financing similarly comes into play as Japan gradually eases out of a recession.