Japan must change its policy from supporting all small businesses -- including weak ones -- to promoting competitive small companies and startups, the Small and Medium Enterprise Policymaking Council said in a report submitted to Prime Minister Keizo Obuchi on Wednesday.

Calling the 1963 Small and Medium Enterprise Basic Law outdated, the advisory panel urged the government to rectify its policy in ways that encourage innovative and competitive firms. The 1963 law was aimed at correcting the productivity gap between large-scale firms and smaller ones.

Based on the report, drafted in response to Obuchi's request for advice in June, the government is expected to take legislative measures during an extraordinary Diet session this fall.

With implementation of the provisional industrial resuscitation law -- designed to help bigger enterprises dispose of excess capacity -- set for Oct. 1, the government is now coaxing competitive small firms to generate new venture businesses and thus increase job opportunities.

To this end, the panel is calling on the government to pursue three main policy goals pertaining to small firms:

1) support efforts to restructure management, reform the over-the-counter market and improve infrastructure and other aspects of the business environment;

2) ease the fundraising burden on small firms by providing tax incentives to "angel" investors and to those who inherit small business, and by improving the companies' access to fundraising channels, human resources, technology, managerial knowhow and information networks;

3) prepare a safety net and improve the bankruptcy law so failed businesses can get a second chance.

The panel report also proposes expanding the definitions of small and medium-size enterprises, taking into account the growing difficulty medium-size firms are facing in raising funds and in competing in today's globalizing economy.

Small companies in the manufacturing sector are currently defined as those with capital of 100 million yen or less, but the report recommends widening the definition to include those with capital of 300 million yen or less.

It recommends small wholesalers be redefined as those with a maximum 100 million yen in capital, against the current 30 million yen or less, and small companies in the retail and service sectors be defined as those with a maximum 50 million yen in capital, against the current 10 million yen or less.