In Part 1, we analyzed the diverse and changing state of the small business sector. In Part 2, however, the focus is on analyzing recent problems affecting SMEs.

In Chapter 1, we analyze trends in business conditions in the small business sector. Given its diversity, it is impossible to treat certain aspects of small business, such as trends in business confidence, management and capital investment at SMEs, in the same light, but it nevertheless remains true to say that with the economy as a whole in the midst of a prolonged slump, SMEs generally faced extremely difficult conditions in 1998. It is in this context that we examine trends in management, capital investment and employment over the year in this chapter.

Chapter 2 provides an analysis of the financing environment facing SMEs. Due to the extremely severe state of the Japanese economy, many firms are confronted with the problem of contracting sales and deteriorating corporate earnings. Moreover, the rapidly changing financial environment is intensifying competition among financial institutions, which are now in the process of improving profitability and putting their finances on a sounder footing, and are hence more cautious about lending to businesses. In this chapter, we analyze the current circumstances of SMEs, which are consequently suffering deteriorating cash flows and financing difficulties. Also touched upon is the reluctance to lend or credit crunch that arose from the latter half of 1997.

In Chapter 3, we analyze trends in the small business sector in the context of the world economy. As corporate activities grow increasingly globalized, Japanese firms become increasingly exposed to trends in the global economy, and SMEs are no exception. This chapter therefore describes the impact on Japans SMEs of the East Asian currency and financial crises triggered by the collapse of the Thai baht in July 1997 and the subsequent economic slump in the region, and also provides an overview of recent trends in imports and exports and the position of overseas affiliates in which Japanese SMEs have a stake.

In Chapter 4, we examine the new challenges facing the small business sector. We also describe two important issues of long-term significance currently faced by SMEs-deregulation and the spread of information technology-and consider the Y2K problem, which represents a challenge not just for the small business sector but also for society as a whole.