How Japanese startups and others can find help in uncertain times
Shinzo Abe, the Prime Minster of Japan declared on the night of April 7 a state of emergency, applying to seven prefectures (Tokyo, Kanagawa, Saitama, Chiba, Osaka, Hyogo and Fukuoka), calling on the local governments of these prefectures to implement certain measures to contain the spread of the virus that causes COVID-19, including by urging residents to stay at home. Simultaneously with this declaration, the Prime Minister also announced a 108 trillion-yen (1 trillion-US dollar) proposed stimulus package (the “Proposed Package”) to fund the coronavirus countermeasures and help control the economic impact of the pandemic, including cash pay-outs to small and medium-sized enterprises (“SMEs”), which make up 99.7% of companies in Japan, and households in need and financial support to protect businesses and jobs. This comes in addition to the over 1.6 trillion yen (14.8 billion US dollars) worth of support already announced by the Japanese government (the “SME Package”).
This client alert outlines the Proposed Package and the SME Package available for SMEs in Japan, whether startups or established businesses. This may be also important for non-Japanese companies with Japanese subsidiaries, as some or all of the Proposed Package and/or the SME Package may be applicable to them. Because the details of these measures continue to evolve and depend on approval of the nation’s supplemental budget in the next Diet session, we provide only a sketch as of April 9, 2020. Those interested in the latest updates should consult the websites of the relevant government bodies and check back with Orrick for more detailed analysis in the near future.
Summary of Proposed Package
As part of the Proposed Package, the government announced that it will provide subsidies of up to 2 million yen to all companies with a paid-in-capital of less than 1 billion yen (which could be broader than the definition of SME below), if such companies’ revenue from business in any given month fall more than 50% compared to those in the same month of the preceding year. The government is still in the process of discussing how to implement this subsidy program. While this will provide fresh cash to the companies in need, including the startups, this is obviously not a sufficient amount for fast-growing startups. In addition, it may be challenging for such fast-growing start-ups to qualify for this subsidy program because their revenue from business in 2019 may be much lower (or even zero) than those in 2020, even with the COVID-19 effect.
Summary of SME Package
What is an SME?
The Ministry of Economy, Trade and Industry (“METI”) defines SMEs (chuushoukigyou) by reference to their paid-in capital (shihonkin), number of employees and sector. Businesses in the services sector are SMEs if they have no more than 50 million yen in paid-in capital and 100 or fewer employees; in the retail sector if they have no more than 50 million yen in paid-in capital and 50 or fewer employees; in the wholesale sector if they have no more than 100 million yen in paid-in capital and 100 or fewer employees; and in manufacturing or other sectors if they have no more than 300 million yen in paid-in capital and 300 or fewer employees.
Certain types of aid are available exclusively to what Japanese law calls “Small Scale Business Operators” (shoukibo jigyousha). These are a class of small enterprises that are covered by the Act related to Support of Small Scale Business Operators by Chambers of Commerce, regulations under the Income Tax Law. Not all law that governs these entities defines them in the same way, so caution should be used in determining whether your business is a Small Scale Business Operator. Finally, the Small and Medium-sized Enterprise Act also defines a “Small Scale Business” (shoukibo kigyousha) as a business with no more than 20 employees or 5 employees for trading businesses (shougyou) or service businesses (saabisugyou). This client alert does not make any other reference to Small Scale Businesses specifically.
What institutions are charged with supporting SMEs in Japan?
The Japanese government, particularly METI, is at the head of a large network of public and semi-private institutions established with the express purpose of nurturing and supporting SMEs in Japan.
Some key institutions include:
Materials released by METI identify three pillars of the Japanese government’s plan to support SMEs through the economic difficulties caused by the COVID-19 pandemic: securing cash-flow, capital investment, and ensuring job security.
Part of the 1.6 trillion yen in aid announced by the government comes in the form of credit guaranties (shinyou hoshou). The Japanese Small and Medium-Sized Enterprise Credit Insurance Act (the “Credit Insurance Act”) provides several heads under which SMEs may receive guaranteed loans. Among the guaranties made available by the Credit Insurance Act are a number of “safety net” guaranties. Among these, a “No. 4” guaranty is a guaranty of an SME whose monthly sales have dropped at least 20% on a year-on-year basis due to an officially-designated unforeseeable disaster in the prefecture in which the business is established. In response to the spread of COVID-19, METI has designated all 47 prefectures of Japan as being subject to an unforeseeable disaster (the spread of COVID-19), meaning that all SMEs in Japan can apply for credit guaranties if they meet the revenue criteria. Even if they do not meet the sales-drop criteria for a No. 4 guaranty, SMEs operating in the industries enumerated in the Credit Insurance Act may instead be eligible for “No. 5” guaranties if they suffer a 5% drop in revenue or meet certain other economic criteria. Further, credit guaranty associations may provide “crisis related guaranties” for almost all industries if they suffer a 15% drop in revenue. These will be available to many SMEs affected by the outbreak. The aggregate result of these measures is that SMEs may now be eligible to receive, in addition to the standard guaranty amount under the Credit Insurance Act of 280 million yen, (i) an additional 100% guaranty of no more than 280 million yen as a No. 4 guaranty or an additional 80% guaranty of no more than 280 million yen as a No. 5 guaranty and (ii) another 100% guaranty of no more than 280 million yen as a crisis-related guaranty, assuming the business in question meets all the criteria.
The second form of financial aid is loans. Government agencies (both the Japan Finance Corporation and Shoko Chukin Bank) are providing support in the form of loans in three tiers. First, the government is providing emergency loans with interest rates lowered by 0.9% for the first three years to SMEs that have experienced a fall of at least 5% in revenue. This aid is supplemented by a special interest rate subsidy for certain badly-affected businesses. For SMEs eligible for both, these measures combined result in effectively interest-free loans. Second, Small Scale Business Operators with revenue that drops by at least 5% are eligible for a so-called “Marxian” (maru-kei) loan of up to 10 million yen with a 0.9% discount in interest rate as long as they agree to take on a management advisor from a local chamber of commerce or similar group. Third, even SMEs that have not experienced a drop in revenue can apply for a “safety net” loan of up to 7.2 million yen, at the standard interest rate of 1.11%.
The Japanese government is promising to make capital investments in SMEs in order to mitigate disruption to supply chains. SMEs engaged in manufacturing and services can apply for aid from the government, which will cover between 1/2 and 2/3 of capital investments up to 10million yen intended to improve manufacturing or service development processes in response to the outbreak of COVID-19. Materials released by the METI give as an example a Japanese SME that is seeking to onshore operations that were halted at a plant it owns in China.
Aid is also available for “sustainablization”(jizokuka) – investment required to make a business sustainable in the current environment. Examples provided include developing an online store for a small shop or purchasing automated front desk software for an inn. This aid covers 2/3 of the investment up to 500,000 yen and is available to Small Scale Business Operators only. Separately, the government will bear subsidize investments in technology (described as “IT tools”) purchased by SMEs to ensure that the business can continue to operate.
The government also announced its plan to increase the subsidies for employment adjustment (koyochosei joseikin) from 66.7% to 90% of the paid salary to SMEs (from 50% to 66.7% in the case of non-SMEs) whose employment was maintained but who are put on temporary leave, training or secondment (such measures, collectively, “Employment Adjustment”) during the period between April 1 and June 30, while also relaxing other requirements to be eligible for these subsidies, including allowing applicants to submit their leave plans after the application by the end of June. Further, the government is applying such relaxed requirements to be eligible for subsidies for Employment Adjustment in other periods (i.e., the subsidy ratio remains 66.7% for SMEs and 50% for non-SMEs). This seems likely to attract many SMEs, including startups, who wish to avoid the termination of their employees but find it difficult to manage their cash-flow. The actual implementation of application is still in progress but should be publicly available shortly.
Other measures announced under the heading of “maintenance of business environment” are too numerous to cover in full but include the following:
How to learn more.
If you are a struggling Japanese SME and you are able to read Japanese, a good place to start looking for application forms and to find more information is the METI website. The English version of the site contains less information and appears to be updated less frequently but is nonetheless useful. In addition, METI, along with related SME industry groups, government-affiliated financial institutions and other bodies, has opened consultation counters located across Japan in the offices of the Japan Finance Corporation, Shoko Chukin Bank and others. SMEs can reach out to these desks (some of them seven days a week) by telephone for help dealing with the economic effects of the COVID-19 outbreak. A full list of these consultation counters is available on the METI website here. No information on ability to communicate in English is provided, so expect it to require Japanese. A description in English of the consultation service is available here. Orrick’s team of experienced, Japanese-qualified startup and corporate lawyers is ready to help with any more detailed assistance you might need.
 These include sole proprietors, Small Scale Business Operators seeing a 15% drop in revenue and medium-sized businesses seeing a 20% drop in revenue.