For the Economy, Public-Private Partnerships are the Best Bet for Sustainable Growth

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Can Japan break out of its long-term stagnation and embark on a trajectory of stable growth? This is sure to be an important year for the Japanese economy, which is at a turning point.

In December, the Bank of Japan (BOJ) raised interest rates further. Notably, interest rate hikes that increase the burden of borrowing will affect the everyday life of ordinary Japanese, as well as business operations. A wrong decision in this regard could lead to a slowdown in the economy. Therefore, assessed fairly, the additional interest rate hike is a sign that the Japanese economy is heading toward normalization.

Nevertheless, the Japanese economy still faces significant challenges. First, there is the prolonged trend of rising prices and the resulting negative impact on real wages.

Small and Medium-sized Enterprises Hold the Key

During the three years leading to 2025, high wage increases were achieved in spring labor negotiations. However, accounting for price fluctuations, real wages have remained negative. In fact, through October 2025, the last month for which we have data, they never turned positive.

Against this backdrop, the government's outline for tax reform for FY2026 includes a number of tax cuts to support households. One change raises the annual income threshold above which income tax is levied to ¥1.78 million JPY ($11,400 USD).

Of course, policies to increase take-home pay are necessary.

Nonetheless, what is most needed is to raise real wages to a positive level that exceeds inflation. Unless the current situation changes, it will be difficult to create a virtuous cycle in an economy driven by personal consumption.

Companies have not changed their stance on prioritizing wage hikes. As BOJ Governor Kazuo Ueda noted, "There is a high possibility that substantial wage increases will be implemented during the spring labor offensive." That reflects the fact that large companies are maintaining solid performance and have ample room to continue high levels of wage increases.

Nevertheless, it is the smaller companies that provide 70% of the jobs in Japan, and they continue to have problems. The "labor allocation rate" (ie labor's share of income), which indicates how much of profit is spent on labor costs, is in the 30% range for large companies. However, it is in the 70-80% range for small and medium-sized enterprises.

Improving productivity is essential for generating the funds needed for wage hikes. But that is not something that can be achieved overnight.

Sharing the Costs of Transactions

To broaden the scope of wage increases at an early stage, it will be necessary for small and medium-sized enterprises to appropriately pass on their increased costs within their transaction prices. This refers to the "price pass-through rate," which indicates the percentage of costs that small and medium-sized enterprises were able to reflect in the prices they charged customers. According to a survey by the Small and Medium Enterprise Agency, this rate was only 53.5% as of September 2025. Moreover, 16.8% of small and medium-sized enterprises were unable to pass on any of their increased costs.

From January 1, the name of the Subcontract Act officially changed to the "Small and Medium-sized Enterprise Contract Transactions Fairness Act (Subcontract Act)." However, the name was not the only thing to change. Unilateral pricing without consultation has been added to the list of prohibited acts under the Act.

*Ken Kobayashi, Chairman of the Japan Chamber of Commerce and Industry, in Tokyo on December 18. (©Sankei by Katsushi Sato)*

If trading partners are unable to raise wages and end up short of workers, or if capital investment stalls due to poor business performance, that will weaken the supply chain. It will then be none other than the large companies and other ordering entities that suffer. These larger entities must realize that covering the costs of SMEs is an investment essential for their own sustainable growth.

To achieve this, all Japanese companies must strengthen their earning power.

Leading With Public-Private Partnerships

Despite the impact of the Trump administration's high tariff policies, many Japanese companies are achieving solid results. It might be said that they have shown their true strength. But they are still not strong enough to compete in the global market.

In order for the Japanese economy to regain its vitality even as it adapts to having become a society with a declining population, it is essential for it to increase its international competitiveness through innovation. That includes technological innovation.

Companies should not be satisfied with the status quo. Instead, they should allocate funds for research and development, and for capital investment. That will help them shift from the "defensive management" style adopted to cope with Trump's tariffs to an "offensive management" strategy.

Pressure from the market, including activist shareholders, to return profits is bound to increase. Expanding investment for the sake of future growth will also require gaining market understanding. Meanwhile it goes without saying that a solid growth strategy is essential to clearly explain how the funds will be used and how the investment will improve profitability.

A Role for Government

The Takaichi administration has designated 17 strategic fields, including artificial intelligence, semiconductors, and shipbuilding. Furthermore, it is promoting a growth strategy in which the public and private sectors will work together to invest in these sectors. For Japan to counter China's increasing economic coercion, it is important for the public and private sectors to work together. That is the best way to draw out the potential of Japanese companies.

Public-private collaboration efforts are already beginning to produce results. A good example is Rapidus, a company involved in domestic research, development, design, manufacturing and sales of next-generation semiconductors and advanced packaging services. This company has achieved success in a short period of time with government support.

Under such a framework, private companies can draw up bold growth strategies, while the government provides necessary support. Through the accumulated effects of these efforts, 2026 could become the year in which the Japanese economy finally turns around.

Author: Editorial Board, The Sankei Shimbun

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