In a striking revelation presented by the Tokyo Shoko Research Company on January 14, the economic landscape of Japan is facing severe turbulence, as the country recorded a staggering 10,006 business bankruptcies in 2024, reflecting a 15.1% increase from the previous yearThis marks the first time in over a decade, since 2013, that the number of bankruptcies has crossed the 10,000 thresholdThe trend of rising bankruptcies among businesses has persisted for three consecutive years, predominantly affecting small and medium-sized enterprises (SMEs) which accounted for 10,004 of these casesThe spiraling costs fueled by the depreciation of the yen, coupled with an acute shortage of labor, have created untenable pressures on corporate operationsMoreover, the conclusion of the special measures levied during the pandemic, regarding the deferred payments of social insurance and taxes, has further exacerbated the financial burdens on businesses, leading to a sharp surge in bankruptcy cases

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Interestingly, despite the rise in bankruptcies, the total amount of debts incurred has actually seen a decline of 2.4%, settling at approximately 23.435 trillion yen.

So, what are the primary drivers behind this alarming uptick in business insolvencies?

Currency Devaluation

One of the pivotal factors is the depreciation of the yen, which has substantially increased import costsThis situation has particularly impacted businesses reliant on imported raw materials and components, creating a profound strain on their profit marginsThe manufacturing sector, notably, has been struggling as companies are now confronted with soaring costs for essential imports.

To illustrate, take the case of an automobile manufacturing firmThe recent dip in the yen's value has led to a significant spike in the prices of imported metals like steel and aluminumThis price surge triggers a cascade of effects; production costs soar, profit margins shrink, and eventually, the financial strain can become insurmountable, potentially culminating in bankruptcy.

Labor Shortages

The issue of human resource shortages has become markedly pronounced in 2024, particularly within the construction and service industries

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Japan's demographic crisis, marked by a rapidly aging population, has exacerbated the scarcity of labor supply, leaving companies scrambling to find sufficient employees to maintain operationsThis dearth of labor has invariably hindered both production efficiency and service delivery.

For example, the construction sector faces not only rising costs of building materials but also the implications of the '2024 Problem', related to stricter overtime regulations, further limiting available manpowerAs a result, project timelines are thrown into disarray, escalating costs and culminating in a massive 13.6% increase in bankruptcies within the sector, accounting for 1,924 cases.

End of Special Measures

During the pandemic, the Japanese government introduced several exceptional measures to allow businesses to delay the payment of social insurance premiums and taxes as a means to alleviate fiscal pressures

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However, as these special provisions came to an end in 2024, businesses were mandated to reconcile these deferred fees, which translated into a considerable financial burden, compounding existing challenges.

Consider the many small and medium-sized enterprises that relied heavily on these deferrals to stay afloat during the pandemicOnce the safety net was withdrawn, they found themselves confronted with the daunting reality of repaying significant sums all at once, placing their financial viability in jeopardy and resulting in a dramatic escalation of bankruptcy cases.

Sector-Specific Challenges

When examining the performance of various industries, a clear pattern emergesThe service industry experienced a remarkable 13.2% jump in bankruptcies, totaling 3,329 cases, the first time since 1990 that the sector has exceeded the 3,000 markThe dual impact of the pandemic coupled with broader economic uncertainties has sharply curtailed consumer spending, leaving businesses fraught with operational difficulties.

For instance, within the restaurant industry, many establishments face dwindling patronage amid rising costs, resulting in many small eateries being unable to sustain their operations and leading to closures.

In the construction industry, along with reporting a 13.6% rise in bankruptcies to 1,924 cases, the challenges stem from the aforementioned material cost increases and labor shortages

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Not only are construction projects delayed due to insufficient manpower, but they also suffer from rising costs—resulting in businesses that cannot keep up eventually succumbing to financial pressures.

The wholesale sector demonstrated a dramatic 26.4% spike in bankruptcies, amassing a total of 1,214 casesMuch like other sectors, wholesalers are grappling with stagnating market demand accompanied by hefty inventory backlogs, and the further complication of rising import costs from currency depreciation has all but eliminated their profit margins.

On the other hand, industries such as finance, insurance, and real estate reported a decrease in bankruptcy filings, likely due to their relatively insulated position during the pandemic and the effectiveness of financial support measures instituted by the government, which helped stabilize many firmsFor instance, financial institutions adapted their lending strategies and provided indispensable support to businesses and individuals, thereby mitigating the risk of bankruptcies.

The broader implications of this drastic increase in bankruptcies are troubling for Japan’s economy as a whole