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If small and midsize enterprises are unable to properly pass on increased costs through their prices, wage increases will not spread. It is important to break away from deflationary business practices by revising the subcontract law and move toward the growth of the Japanese economy.
An expert panel of the Japan Fair Trade Commission and the Economy, Trade and Industry Ministry has compiled a report on the revision of the law. Based on this report, the government intends to submit a bill to the current Diet session to revise the law. This will reportedly be the first drastic revision of the law in about 20 years.
The law was enacted in 1956 during a period of rapid economic growth to protect small and midsize businesses. However, there are many industries in which multiple layers of subcontractors connected in a pyramid formation is the norm. Regulations should be strengthened in line with the times.
The report first called for stricter standards for the application of the subcontract law. Under the current regulations, the law is applied based on the amount of capital, but the number of employees was added as a new criterion by the report.
Under the current law, there have been a number of cases in which large companies have reduced their capital and are treated as small and midsize enterprises in order to evade the subcontract law.
For this reason, the ordering party in the manufacturing industry, for example, is subject to the law if it has more than 300 employees and its subcontractor has 300 or fewer employees. It is reasonable to deter large companies from attempting to evade the application of the law by intentionally manipulating their capital.
In addition, the report called for prohibiting large companies from unilaterally determining transaction prices without consulting with subcontractors.
The current law also prohibits large companies from imposing extremely low transaction prices on subcontractors. However, even if authorities try to detect such practices, it has been difficult to calculate what level constitutes “extremely low prices.” Under the new regulations, a large company will be prohibited from refusing price negotiations with small and midsize companies.
However, even if price negotiations take place, there is a risk that they will merely become a formality. It will be essential for the government to strengthen its monitoring system.
The report identified an economy in which prices do not change as a problem since the late 1990s, when the nation’s economy fell into deflation. This is because a business practice has taken root, in which even if small and midsize enterprises seek to pass on their increased costs through their prices in transactions with large companies, their requests are not easily accepted.
With prolonged high prices, small and midsize companies are struggling to pass on increased costs through their prices. There is a strong need to shift to a growth-oriented economy in which both prices and wages increase.
Therefore, the report also called for a change in the term “subcontractor,” which has taken root over the years. The government reportedly intends to change the term to “small and midsize contractors” so that large companies and small and midsize firms can face each other on an equal footing.
While it is difficult in some respects for new terminology to take root at the initiative of the government, it is understandable that the government wants to emphasize the need for a change in awareness. The business community as a whole should repeatedly make efforts to correct unreasonable business practices.
