Under the increasing pressure of inflation, the number of bankrupt companies in Japan has reached a new high.

The latest data released by Japan's largest credit research institution, Teikoku Databank, shows that in the first half of the 2024 fiscal year (April to September), approximately 4,990 companies in Japan went bankrupt, an increase of 18.6% compared to the same period last year (4,208), reaching the highest level since 2013.

Combining historical data previously announced by the institution, the number of bankrupt companies in Japan once exceeded 9,000 in 2014, but then fell back, with the fewest bankruptcies occurring in 2021. In the past two years, the number of bankrupt companies in Japan has begun to increase consecutively, with 6,799 in the fiscal year of 2022, and in the fiscal year of 2023, it approached 9,000 again after 8 years.

In response, Teikoku Databank commented that with high prices, labor shortages, and unexpected interest rate hikes leading to a bifurcated business environment for companies, there are almost no factors that can prevent the decline in the number of corporate bankruptcies in the second half of this fiscal year. Therefore, the institution expects that the number of corporate bankruptcies in Japan for the entire fiscal year of 2024 (April 2024 to March 2025) will reach the 10,000 level again after 11 years.

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These reasons lead to

Calculated on a calendar year basis, from January to September 2024, the number of Japanese company bankruptcies tracked by the institution was 7,294, an increase of 19.0% compared to the same period last year (6,128). The number of bankrupt companies in September alone was 741, marking the 29th consecutive month of year-on-year growth.

The data shows that among the 4,990 companies that declared bankruptcy, 472 companies listed inflation as the main reason for bankruptcy, the highest proportion ever. In recent years, due to the depreciation of the yen, which has increased the import costs of various goods from food to energy, Japan's main price indicators have remained at or above the Bank of Japan's 2% target level for more than two years.

By industry, the construction, manufacturing, and retail sectors have the most cost-driven bankruptcies. A survey shows that nearly 70% of Japanese small and medium-sized enterprises are bearing high inflation but are finding it difficult to pass on the increased costs to consumers, thus suffering a great blow to their operations.

In addition to rising prices, the issue of "having orders but lacking manpower" has become a bottleneck constraining the development of Japanese companies, especially small and medium-sized enterprises. The data shows that 163 companies listed labor shortages as a reason for operational difficulties. Japan's unemployment rate has remained below 3% for more than three years, the lowest among developed economies. However, this still cannot cover up the "labor shortage" phenomenon caused by insufficient manpower. Taking the fiscal year of 2023 as an example, there were 313 bankruptcy cases caused by a lack of manpower, mainly concentrated in the construction, service, and transportation industries.

The tight labor market has also been transmitted to companies, forcing them to raise wages to retain employees, which further exacerbates the financial pressure on companies. The final results of the 2024 wage negotiations announced by Japan's largest union federation, Rengo, show that the average wage increase for members this year reached 5.1%, the highest level since 1991. Rengo has about 7 million workers, accounting for about 10% of Japan's workforce. However, the wage increase for small and medium-sized enterprises with fewer than 300 employees this year was 4.45%, lower than the overall level. Small and medium-sized enterprises account for 99.7% of the total number of enterprises in Japan and employ 70% of Japan's workforce. The wage increase for these companies is more critical to the prospects of the Japanese economy.The debt burden left over from the pandemic has added to the difficulties faced by these small and medium-sized enterprises (SMEs). From April to September of this year, the number of businesses that closed due to an inability to repay zero-interest loans reached 310. Following the Bank of Japan's interest rate hikes in March and July of this year, the cost of debt repayment for businesses has further increased. Some large and regional banks have already announced that they will raise the lending rates for certain short-term loans. This has further led to businesses facing a greater interest burden in loan financing.

Calls for the new government to "transfuse blood" to SMEs

The release of this latest data coincides with the rise of Japan's new Prime Minister, Shigeo Ishihara. Regarding future economic planning, Ishihara has indicated that he will raise Japan's minimum wage to promote consumption, adjust the sales tax on some goods, stimulate economic growth through increased investment, and strengthen the country's self-sufficiency in energy. At the same time, he also supports the Bank of Japan's gradual interest rate hikes, using higher interest rates to reduce the import costs of goods.

According to a survey on the new government's economic policies conducted by the Imperial Database in mid-September, "expanding support measures for SMEs," "measures against high prices," and "measures to expand private consumption" ranked high. The Imperial Database stated that Ishihara has expressed his intention to continue the basic policies of the previous Kishida government, such as his mention of vigorously inheriting the growth and distribution economic policies promoted during the tenure of former Prime Minister Fumio Kishida, encouraging Japanese households to actively invest their savings in the financial market to gain more profits in the stock market. "However, in the future, we will pay attention to the economic measures he may announce, especially the latest measures in response to high prices."

Wu Jinan, a senior researcher at the Shanghai Institutes for International Studies and a consultant to the Shanghai Association for Japanese Studies, told Yicai that Ishihara had previously served as the Minister of Local Revitalization and has shown more attention to local areas and SMEs. "But this presents a domestic policy challenge: how to balance the relationship between major cities like Tokyo and local areas, as well as between large corporations and conglomerates and SMEs. Additionally, he proposed financial taxation during his election campaign, a policy that would be quite difficult to implement."

In the view of Japanese media, these SMEs are mostly borrowing to alleviate their distress during the pandemic and are now facing the dual pressures of inflation and rising interest rates. Therefore, they are calling for the new Ishihara government to provide more assistance to "alleviate the distress and stop the bleeding" for these SMEs, to prevent the spread of bad debts that could trigger a financial crisis.