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The fiscal 2006 government white paper on medium and small enterprises states that there are about 4.3 million such enterprises in Japan. Their employees account for about 70 percent of the nation’s total employment. Given their weight in the economy, it is important that the government understand their situation and work out proper policies that meet their needs.

The government’s monthly economic report for April shows that Japan’s current economic expansion has continued for a record 63 months. But the Bank of Japan’s “tankan” (short-term survey) report for January-March indicates that the economic expansion is mainly enjoyed by large enterprises. The white paper points out that medium and small companies are at a comparative disadvantage during the current economic expansion, which has been driven by exports and plant-and-equipment investment.

While pointing to the possibility that many medium and small firms do not have the power to pass the rises in the cost of raw materials and personnel costs on to the prices of their products, it says that smaller firms that have succeeded in differentiating their products and services through ingenuity have been able to set competitive prices.

Analyzing the structure of business relations involving medium and small firms, the white paper says that the traditional pyramid structure in which a smaller firm had business relations solely with one particular larger firm is crumbling. Instead, the tendency of a smaller firm having business relations with a number of firms is increasing. The change has enabled some smaller firms to strengthen their negotiating power.

The white paper underlines smaller firms’ difficulty in securing employees who can serve as leading managers and engineers or create new business opportunities due to 1990s’ restructuring and the current tight labor market. Government and business organizations should create some mechanism that smaller firms can use to find capable workers, including retired baby boomers with experience and skills.

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