become the second-largest economy in the world. 18 Government leaders and businesses prioritized technological advancements, capital accumulation, improved quality and quantity of labor, and increased international trade. 19 The success of this era was built upon the principles of collaboration and commitment to quality—values that continue to underpin Japan’s approach to business and social responsibility today. However, by the early 1990s, Japan’s economic bubble burst. This so-called “Lost Decade” extended from 1995 to 2007, the country’s GDP fell from US$5.55 trillion to US$4.58 trillion. 20 This period of prolonged stagnation, along with the global financial crisis in 2008, shifted Japan’s approach to the financial sector. Businesses became more prudent and more focused on risk management. 21 Modern Japan Challenge Japan stands as the world’s fourth-largest economy, valued at US$4.2 trillion. 22 The economy is heavily dominated by the service sector, contributing 70 percent of GDP (gross domestic product) annually over the past decade, with the industrial sector making up most of the remainder. 23 The country is home to forty-one Fortune 500 companies. 24 While large companies play a critical role in Japan’s economy, Small and Medium Enterprises (SMEs) are the lifeblood of the nation. Many of these SMEs are family-owned businesses with around fifty employees, collectively employing an estimated 3.6 million people, or 70 percent of the workforce. 25 According to The Economist , these smaller firms are often less productive than comparatively sized businesses in other wealthy countries. 26 The productivity gap between Japan’s SMEs and its larger companies is greater than the average for OECD countries. 27 This gap highlights a major challenge for Japan’s economy. Although SMEs are essential, many are at risk of closure due to aging owners who either cannot find successors or are reluctant to sell to non-Japanese companies. In 2023, 60 percent of the 50,000 SMEs that closed were still profitable when they shut down. In 2000, 80 percent of leadership transitions in SMEs involved a family member taking over, but today that number has fallen to 34 percent. 28 The closure of SMEs will have a domino effect, particularly on suppliers and buyers in rural areas. These trends are not unexpected or new. The Japanese government, as well as private and philanthropic organizations, has been actively addressing issues related to aging populations, the decline of SMEs, and rural economic stagnation. However, more action is needed. Efforts to rejuvenate rural areas and SMEs are further challenged by climate change and Japan’s reliance on imported food and energy.
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Ten Years in the Making
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