On behalf of the Japanese government, the Ministry of Economy, Trade and Industry (METI) is committed to the promotion of leading medium enterprises (LMEs). The government has determined that LMEs have the potential to energize Japan’s economy. Consequently, the government is promoting large investments of LMEs, and supporting wage increases for LME employees, through measures such as subsidies and tax incentives.
Defined for the first time in law
The term “medium enterprise” has been widely used in Japan for a long time. However, the term had no definition in Japanese law, where until recently the only legal classifications were
“small and medium enterprises (SMEs)” while all other companies were automatically classified as large enterprises, with no separate, legal classification for medium enterprises.
In September 2024, however, the Japanese government enacted a law that reclassified some companies that had previously been classified as large enterprises. For the first time, companies
with 2,000 or fewer employees are now, defined in law as “leading medium enterprises (LMEs),” and policies to support them have been duly established.
| Industry sector | Companies to which any of the following applies | |
|---|---|---|
| Capital | Employees | |
| 1) Manufacturing and industries other than 2) to 4) below. | 300 mil yen or less | 300 or fewer |
| 2) Wholesale Trade | 100 mil yen or less | 100 or fewer |
| 3) Services | 50 mil yen or less | 100 or fewer |
| 4) Retail Trade | 50 mil yen or less | 50 or fewer |
Why are we only hearing so much about LMEs now? Unlike large enterprises, LMEs are mostly located outside metropolitan centers. They are drivers of local economies and so have not had
the profile of their larger, urban-based counterparts. However, business results over the past 10 years shows that LMEs to have higher domestic sales and capital investment than large
enterprises.
Japan’s largest companies are global enterprises that are shifting investments overseas in search of growth. LMEs are also expanding abroad, but their focus on domestic growth is
boosting Japan’s economy. In an April 2024 Nikkei Shimbun interview, Ken Saito, then the minister of METI, explained the focus on LMEs in legislation and policymaking. He said there are
many LMEs throughout Japan with strong growth potential, but they need support in areas not addressed by policy.
LMEs have high growth in net sales and capital investment
Ten-year growth in domestic sales (nonconsolidated)
Ten-year growth in overseas sales (local subsidiaries)
Ten-year growth in domestic capital investment
Source: Data compiled from METI’s “Basic Survey of Japanese Business Structure and Activities” and “Basic Survey on Overseas Business Activities” for fiscal years 2012 to 2022.
A unique Japanese food company, an employee-friendly software provider, and others emerging
A 40-minute drive from Nagano Station takes you to a European-style hilltop restaurant and food shop. Adjacent to this is the head office of an exemplary LME: St. Cousair, a producer and seller of food and wine.
President and CEO Ryota Kuze, photographed at his office in Shinanomachi, Nagano Prefecture, is leading St. Cousair’s growth.
St. Cousair began promoting its retail brand in 1999 after establishing itself as a producer and retailer of products such as wine and jam. When growth plateaued in 2013, it capitalized
on the growing worldwide popularity of Japanese food and embarked on global expansion with a new venture: Kuzefuku & Co., which sells original products made with Japanese ingredients,
such as soy sauce and miso. This venture and St. Cousair’s dynamic management style with its unique product development; and partnerships with regional food makers to develop foods such
as smoked pickled daikon tartar sauce, made by adding mayonnaise to a famous dish from Akita Prefecture, propelled St. Cousair to consolidated sales of ¥19.1 billion in the fiscal
year ended March 31, 2024-a fivefold increase from 10 years earlier.
President Ryota Kuze maintains an eager focus on overseas markets for St. Cousair’s growth over the next 10 years. The company is pursuing the acquisition of food manufacturers with
sales networks in the United States and is working to boost its production capacity in Japan.
The president of another LME is also looking overseas for the next stage of his firm’s growth. President Yoshihisa Aono was 26 when he and his partners founded Cybozu, a developer of
enterprise software. The company is headquartered in Nihonbashi in downtown Tokyo and has expanded to boast 1,321 employees by the end of the 2024 calendar year and consolidated sales of
¥29.6 billion for fiscal year ended December 31, 2024.
The software industry suffers from chronic personnel shortages. Cybozu breaks the mold with flexible leave and work hour policies, and freedom in choice of workplace. Its policies have
contributed to attracting human resources and to its development of commercial groupware geared to remote and other work styles. Cybozu’s business model, which shifts to subscriptions,
and business strategy centered on its mainstay product Kintone, a cloud platform on sale since 2011 that enables workflow applications to be developed for each business without using a
programming language, have contributed to doubling the company’s sales over the past four years.
From the Cybozu head office in Nihonbashi, Tokyo, Representative Director and President Aono eyes overseas markets for the next stage of his company’s growth.
Aono’s dream is for Cybozu to become the world’s most widely used groupware provider. The Kintone sales target for Japan is ¥100 billion 10 years from now, but the worldwide sales target for the same time period is well above that. “LMEs with rich growth potential,” maintains Aono, “will eventually become Japan’s core businesses. We are looking to the government for support for such companies, helping to ensure a level playing field for Japanese and overseas firms.”
METI backs LMEs with a three-pillared policy that includes large-scale investment
METI’s policy to accelerate LME growth is based on three pillars: (1) subsidies and tax incentives to encourage large-scale investment in, for example, labor-saving measures; (2) tax
incentives for wage increases; and (3) tax incentives to foster mergers and acquisitions (M&A).
By August 2024, METI had received more than 1,300 applications for subsidies through preliminary and secondary rounds. Of these, 194 have been approved. The government’s supplementary
budget for fiscal 2024 earmarks funds for applications approved in a third round, which is to begin soon.
SHIRO is among the companies whose applications for funding have been approved. This LME, founded in Hokkaido and headquartered in Minato-ku, Tokyo, has achieved rapid growth on the
popularity of cosmetics made from natural ingredients, such as sake lees, rice bran, and Gagome kombu seaweed.
SHIRO will use its government subsidy to renovate the Sunagawa Park Hotel in Sunagawa, Hokkaido, the company’s birthplace. The 64 local citizens who owned the hotel transferred ownership
to SHIRO free of charge, asking only that the company restore it to bolster the city’s economy.
The company is, of course, already a key player in Sunagawa’s economy. It opened its only manufacturing complex there in April 2023. The Minnano-Sunagawa Factory houses a production
facility, a retail store, and a children’s play area. According to company president Takahiro Fukunaga, improving the local community in the belief that it will enhance SHIRO’s corporate
value and brand resonance is one of the reasons for restoring the hotel.
SHIRO will extensively renovate the once locally popular but vastly deteriorated Sunagawa Park Hotel starting in autumn 2025.
Plans for the restoration are centered on bettering the hotel’s customer draw with spa facilities and a SHIRO retail outlet. Of the total project cost of ¥2.7 billion, some ¥780
million will be covered by government subsidies.
Other government subsidies cover a range of businesses and business plans. These include subsidies to boost the production of leading-edge materials and components, such as semiconductor
manufacturing materials and electric vehicle batteries, and to develop tourism resources for overseas visitors to Japan.
Tax incentives to promote wage increases also benefit LMEs. Lacking the name recognition of large corporations, LMEs are hindered in attracting outstanding human resources. Government
tax incentives let them raise salaries and other benefits by up to 4%, of which they can claim 25% as a tax deduction. Large enterprises need to raise their wages by at least 7% to be
eligible for the 25% deduction. The tax incentives for LMEs are thus a competitive advantage.
Under the third pillar, support for business consolidation through M&As. They make M&As less risky for LMEs by facilitating the posting of losses from an M&A. This preferential measure
allows an LME to deduct up to 90% of the cost of a second-time share purchase and up to 100% of the cost of a third-time share purchase.
Even as it introduced these measures, the Japanese government was drafting a larger vision for LMEs. A government working group established to promote LMEs adopted a “Growth Vision for
Leading Medium Enterprises” at a meeting in February. This vision establishes (1) the role of LMEs; (2) the growth path for LMEs; and (3) the issues confronting LMEs in achieving
autonomous growth. It also considers matters to be undertaken by the public and private sectors regarding LMEs.
Government support is expected to accelerate the growth of LMEs in Japan. How likely is it that a global company such as Sony or Honda could appear from within their ranks? Global
investors and businesspeople are well advised to pay attention to the development of Japan’s LMEs.
