Teikoku Databank's latest data reveals that during the fiscal year 2023 (April 2022 to March 2023), the number of corporate bankruptcies in Japan, where liabilities exceed 10 million yen (approximately 470,000 RMB), reached 8,881, marking an increase of 30.6% compared to the previous year, with the fastest growth rate in 30 years. The total liabilities of bankrupt companies exceeded 2.46 trillion yen.

Combining comprehensive data from Teikoku Databank, the number of bankrupt companies in Japan once surpassed 9,000 in 2014, but then declined, with the lowest number of bankruptcies occurring in 2021. In the past two years, the number of bankrupt companies in Japan has begun to increase consecutively, with 6,799 in the fiscal year 2022, and in the fiscal year 2023, it approached 9,000 again after an 8-year gap.

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Cash flow difficulties are the primary cause.

The survey indicates that in the fiscal year 2023, bankrupt companies were mainly small and medium-sized enterprises (SMEs) with fewer employees, and the number of bankruptcies in all 10 industries surveyed rose year-on-year. Among them, the service industry recorded 2,187 bankruptcies, followed by the retail industry (1,874). Additionally, the number of hotel bankruptcies reached 802, the highest since the fiscal year 2000.

Regarding the reasons for bankruptcy, cash flow issues were the most significant, and the number of SMEs that went bankrupt due to this reason also set a record since the fiscal year 2000. Previously, the Japanese government provided support for corporate cash flow during the pandemic by introducing interest-free, unsecured loans. Many SMEs relied on these interest-free, unsecured loans to weather the crisis. However, since the peak of loan repayments began last April, many SMEs have faced cash flow difficulties. The combination of surging prices and labor shortages has also contributed to the current record high.

Amid the continuous depreciation of the yen, domestic goods in Japan are also increasing in price. According to a survey result released by the Japan Imperial Databank at the end of last year, in 2023, Japan saw a price increase for 32,395 types of food, breaking the record set in 2022 (25,768 types). The main reasons for the food price increase are the high raw material prices and labor shortages leading to rising labor costs, and the increased costs are also passed on to downstream businesses and the final consumers.

Compared to food, the most significant price increase is in energy prices, represented by electricity. Currently, Japan's energy structure is still dominated by fossil fuels and other traditional sources, accounting for more than 70% of the total energy structure. Due to Japan's resource scarcity, it largely relies on imports to maintain its energy operations, leading to its energy supply prices being heavily influenced by changes in the international market. The fluctuation in energy prices directly affects the operations of SMEs.

The latest data from Japan's Ministry of Health, Labour and Welfare shows that in February, the real wages of Japanese workers decreased by 1.3% compared to the same period last year, marking a continuous decline for 23 months. Amid the decline in real wages, Japan's Consumer Price Index (CPI) accelerated to 2.8% in February, the fastest growth rate since November last year. In fact, since April 2022, the inflation rate has exceeded the Bank of Japan's 2% target every month. This means that workers in SMEs are facing higher prices while their real wages remain stagnant.

In addition to business operating costs, the issue of having orders but lacking labor has also become a bottleneck restricting the development of Japanese companies, especially SMEs. In fact, the "labor shortage" phenomenon caused by insufficient manpower has already begun to emerge in Japan. The aforementioned survey shows that in the fiscal year 2023, there were 313 bankruptcy cases caused by labor shortages, mainly concentrated in the construction, service, and transportation industries.

What is the impact of the Bank of Japan's policy adjustments?The head of Tokyo Shoko Research also predicted that from this summer, the number of corporate bankruptcies in Japan may continue to increase. In addition to the aforementioned reasons, attention should also be paid to the impact of the latest policy adjustments by the Bank of Japan on the operations of small and medium-sized enterprises (SMEs).

On March 19th, the Bank of Japan announced several policy adjustments, including the cancellation of the highly watched negative interest rate policy and the abandonment of the Yield Curve Control (YCC) policy. The Bank of Japan has raised the benchmark interest rate from -0.1% to 0-0.1%. This is the first time the Bank of Japan has raised interest rates since 2007, marking the end of an eight-year era of negative interest rates. The Bank of Japan is also the last central bank globally to abandon negative interest rates.

Therefore, for Japanese SMEs, the central bank's rate hike means that loan interest rates will increase, which also becomes a challenge for subsequent business operations. However, it is currently believed by outsiders that although Japan's ultra-loose monetary policy, which has been maintained for about 11 years, is beginning to normalize, the subsequent rate hike process is expected to be slow due to the still uncertain inflation outlook.

On April 9th, Bank of Japan Governor Haruhiko Kuroda stated that the baseline scenario is that trend inflation will tend towards 2% in the next 1.5 to 2 years, and the possibility of inflation being significantly lower than the baseline forecast is quite low.

After the latest wage data was released, Hirofumi Suzuki, Chief FX Strategist at Sumitomo Mitsui Banking Corporation, expects that the Bank of Japan will wait until early autumn to further adjust its monetary policy, with a possible rate hike occurring in October of this year.