Trial and error results in best policies, regulations

The current Japanese Credit Supplementation System for small and medium enterprises (SMEs) is a product of trial and error, with the first considered to be a loss compensation system implemented in the 1930s. In this system, some local governments partially compensated bank’s total losses incurred by defaulted loans to SMEs, and the central government provided re-compensation to assist the local governments. Since they did not have to contact numerous SMEs, or deal with recovery process, the business operation was relatively easy. However, financial institutions tended to loss prudent lending attitudes, and it was quite hard to keep the system in balance without refunding recovered money.

The Credit Guarantee Corp. (CGC) was first established in Tokyo in 1937, amid strong demand for expanding credit without collateral, and other local governments followed suit. The credit guarantee system can facilitate fund-raising for such SMEs that the government considers really necessary for the national economy, because CGCs investigate each SME before providing guarantees.

Also, CGCs have recovery processes, which makes it highly possible to keep the system in balance, but business operations are inevitable troublesome. Moreover, the local governments budgetary limitation deters CGCs from expanding their businesses.

Another trial was the creation of a special account for the credit insurance system, directly targeting middle term, middle-size loans, by the government. However, this insurance had several problems. For instance, it did not prohibit "adverse-selection" for financial institutions, so the insurance balance was becoming worse year by year although the active expansion of the system was greatly required.

Considering the good and bad points, the government finally decided to establish the Small Business Credit Insurance Corp. (Japan CIC now JASMEC) as a public corporation, comprehensively promoting the Credit Supplement System, and the current two-tier system. Under the system, CGCs are in charge of investigating creditworthiness of SMEs on the frontline, and JASMEC, as a government-affiliated organization, supports the CGCs’ guarantee activities by providing insurance for their guarantee liabilities and extending low interest loans to CGCs.

The new Credit Insurance System has the following features:

1. Comprehensive insurance system: All guarantees meeting certain conditions stipulated in insurance contracts must be automatically insured. Thus, adverse selection is prohibited.

2. Partial coverage: JASMEC covers only 70 percent to 80 percent of the risk assumed by CGCs.

3. Insurance payment against "temporary loss": JASMEC generally makes insurance payment soon after CGCs‚ subrogated payments, though they can possibly collect some defaulted loans. Instead, any money recovered after insurance payments must be refunded to JASMEC.

In April 2003, the Machinery Credit Insurance System was abolished in accordance with the decision at a Cabinet meeting in December 2001, regarding the consolidation and rationalization plan of special public corporations and other entries. In this plan, the Machinery Credit Insurance System was deemed to have virtually accomplished the end desired and to have lacked policy needs.

In order to comprehensively and efficiently the government’s policy for SMEs, JASMEC was established on July 1999, through the integration of Japan CIC and the Japan Small Business Corp. (JSBC) and transfer of business from the Textile Industry Restructuring Agency.

JASMEC is a government-affiliated institution that comprehensively implements the government’s policy for SMEs. Under the new SME policy, JASMEC, as a core institution for implementating the policy, takes an active role in supporting vital growth and development of SMEs.

Through its various business operations, JASMEC aims at contributing to

i) promotion of SMEs,

ii) improvement of welfare for small-scale enterprises, and;

iii) stabilization of SMEs management.

JASMEC carries out various activities to support SMEs as follows:

i) Support for venture enterprises and management innovation

ii) Support for SMEs business revival

iii) Upgrading the structure of SMEs by providing guidance and loans for upgrading projects, and providing loans and capital investment for projects supporting to strengthen the managerial

iv) Ensuring smooth flow of funds from financial institutions to SMEs through the operation of the Small Business Credit Insurance System and financial assistance to the CGCs

v) Rationalization of SMEs management and improvement of their technologies by personnel training and guidance at the Institutes for Small Business Management and Technology

vi) Improvement of welfare for small-scale enterprises and prevention of bankruptcies at SMEs through operation of the Mutual Relief Systems

vii) Restructuring of textile industry through support for structural reform, demand development, personnel training, and other activities

viii) Information services, technical upgrading and support for internationalization of SMEs.

The Ministry of Economy, Trade and Industry, and the Ministry of Finance oversee the operation of the Credit Insurance System. (To be continued)