TOKYO -- Japanese entrepreneurs striving to grow startups have joined economists, market participants and business leaders in wondering what Prime Minister Fumio Kishida's talk of "new capitalism" means for government policy.

Many hoped some light would be shed on June 7 when Kishida unveiled policy guidelines outlining his economic policy. But this involved broad themes, not details or proposed measures.

For startups, described by him as the "practitioners of new capitalism," the document had encouraging words. It called them "the engine of economic growth and innovation" and set a target, though no date, for increasing their number tenfold.

"By creating an environment in which these startups can be born and take off, we aim to realize a 'second founding period,' following Japan's post-World War II period of business startups," the premier said. The guidelines said the government seeks to "expand investment in venture capital in Japan and abroad."

The statements were welcomed as a sign the Kishida administration is committed to tackling issues impacting the startup sector. "I feel that the government will support us in many ways," Atsuya Maeda, head of marketing at social media startup Penmark, told Nikkei Asia. "The trend is definitely moving in our direction."

However, others aren't nearly as sanguine, as there's no sign of specific measures to help startups, some of which face a funding crunch amid deteriorating global economic conditions. And there won't be guidance soon from a government five-year action plan; it was initially scheduled for release in June, but has been pushed back to the end of the year.

For many startups looking for reform and transparency in the tax system and fresh incentives for entrepreneurs, "new capitalism" appears to be a wide-ranging set of policies without a map.

Kishida has a lot on his agenda beyond drawing the map. He is charged with boosting the world's third-largest economy, which shrank in the first quarter of 2022 and continues to swing between growth and contraction. Japan faces rising inflation, with April's rate hitting a seven-year high. Wage growth remains sluggish, and a weakening yen continues to decline. These factors could hurt Kishida's ruling party as it heads into an upper house election on July 10.

Shortly before he came into office in October, Kishida told a press conference: "The fruits of growth have been concentrated in the hands of a few. The fruits should be enjoyed by as wide a range of people as possible."

And after becoming premier, Kishida defined new capitalism as a "virtuous cycle of growth and redistribution," suggesting that deregulation under previous administrations created division and inequality.

He has floated a redistribution idea, of raising the capital gains tax on dividends and profits from sales of stocks of 20%, which is much lower than Japan's progressive income tax rate that rises to 55% for the highest earners. His remarks led to a sharp slide in Japanese stocks, and made "Kishida shock" trend on social media. The issue then disappeared from public debate.

In a high-profile speech in London in May, the prime minister urged investors to "invest in Kishida," putting his focus on growth and making no mention of redistribution.

Japanese Prime Minister Fumio Kishida delivers a speech at the Guildhall in London on May 5.   © Reuters

Some see the shift in Kishida's tone and removal of his more controversial policies from the agenda as exposing his lack of political clout.

"Keep things kind of quiet and moving along... that's Kishida," said Timothy Langley, founder of Tokyo-based political consultancy Langley Esquire. "He is just walking on eggs."

Langley told Nikkei Asia that one issue with new capitalism is that "despite the main rhetoric being focused on wealth redistribution and inequality, most of the measures seem to have less substance and little punch."

Kishida, who has said his "ability to listen is better than anyone else," has incorporated some demands from the industry into the latest policy guidelines. The goal to increase startups tenfold was floated by Keidanren, Japan's most powerful business lobby.

And advocates of more help for startups credit him for overseeing the launch of a 10 trillion yen ($75 billion) university fund in March. The vehicle, funded entirely by the government, invests in stocks and bonds with an aim to distribute the returns to universities for funding research in key areas like artificial intelligence and biotechnology.

Many startups in Japan have their roots in university research. In the 12 months ended October 2021, the number of startups launched from universities had its biggest annual jump, increasing 401 to 3,306, according to the Development Bank of Japan. Investment in startups in 2021 grew 46% from a year earlier to 780 billion yen ($5.8 billion), according to data provider Initial.

But Japan has had limited startup success compared with the biggest economies. In 2021, venture capital investment was less than 1% of the U.S. and 5% of China, according to Japan's Venture Enterprise Center. According to CB Insights, Japan has six unicorns -- companies with a valuation of $1 billion or more. That was fewer than India, Singapore and South Korea had, and the same number as Indonesia.

Despite battered markets, there's interest in startups this year. Events continue in Tokyo's coworking offices, sometimes drawing hundreds of attendees. Established companies have created internal units, whose managers are tasked with finding new ideas through partnerships with startups.

"Our main business is threatened by the move toward carbon neutrality," said a director of a gas company in Toyama Prefecture attending a pitch contest in Tokyo. "To keep growing, we need to find new sources of revenue."

A startup pitch event at a co-working space in Tokyo in May, (Photo by Wataru Suzuki)

But the outlook for initial public offerings by startups has dimmed compared with a robust 2021.

Last year, 136 companies went public on the Tokyo Stock Exchange, the most since 2006, with 93 of them listing on the startup-focused Mothers board. Fueling demand for shares of the relatively unknown, often loss-making companies were retail investors often looking for the first day pop on the IPO price.

With the market woes, conversations among founders, venture capital firms and bankers have recently turned to delaying IPOs and cutting costs to survive. The need for policy support for startups is growing as a stock market downturn dries up funding.

In the first five months of 2022, Japan saw 34 listings. That's on par with the 35 in January-May 2021, but global economic and security problems and worries have kept most of the new listings small. As of June 16, only four had a market capitalization of more than 10 billion yen ($75 million), which CB Insights says is less than one-quarter of the average valuation of a "mid-stage" startup in Asia. There were 10 startup IPOs on Mothers, and seven on the Growth board that replaced Mothers in an April market restructuring.

The relative ease of listing in Japan is not stopping some entrepreneurs from leaving the country. Naohito Yoshida said he moved to Singapore to start cryptocurrency gaming startup Digital Entertainment Asset because regulations were too strict in Japan.

His idea of setting up the business as a unit of another Mothers-listed company he founded was met with opposition from the company's auditor, he said, because laws on accounting treatment for crypto were unclear. "The auditor said no. That is why I moved to Singapore," Yoshida said.

Among the hurdles that Japanese startups face is resistance to adopting digital technology at many big companies and local governments in Japan, which can be costly and time consuming for young startups. The experience is especially vivid for foreign businesspeople who have previously dealt with digitally-savvy governments.

Raul Alikivi, the founder of an Estonian startup that plans to launch a fintech business in Japan, said he was shocked to discover some tax reports in Japan can only be submitted from a Windows PC and not a Mac.

"The administrative burden of setting up a subsidiary in Japan is 10 times heavier compared with what we had to do in Estonia," he said. "The excitement about startups is definitely there. But there are some practical things which still need improvement."

Raul Allikivi, right, is a co-founder of Estonian fintech startup G-Bank Technologies. (Photo courtesy of company)

Kishida's predecessor as prime minister, Yoshihide Suga, in his first year in office set up a Digital Agency to speed up digital adoption in the public sector. The move was aimed at consolidating authority spread across different ministries and boost the government's own engineering capabilities. The agency has faced setbacks, such as the departure of an executive hired from the private sector, but has also made progress such as rolling out a smartphone app to show a user's COVID vaccination status.

There has also been expansion in the areas the government is looking it. Terms related to cryptocurrency, like blockchain and web3, were included in the June 7 policy guidelines -- a big shift in attitude for a government that has been either hostile or uninterested in crypto for years.

Jun Hasegawa

"It is significant that Web3 was included in the government policy," said Sota Watanabe, founder of blockchain startup Astar Networks and a leading proponent of more policy support for startups. "But changing the tax system and regulations is the starting point. We need action to make the changes as soon as possible, instead of just celebrating our attitude toward change."

To Yasuhiro Yamakawa, president of shared office space operator CIC Japan and associate professor of entrepreneurship at Babson College, if Kishida "could demonstrate the entrepreneurial thinking of learning by doing rather than spending time to create a system, overseas investors would see that Japan has changed ... Specific actions will raise our credibility."

By itself, increasing the ranks of startups tenfold won't be of much help to Japan's sector.

Jun Hasegawa, founder and CEO of payments startup Opn, said lifting the startup population in Japan may be important for the overall chance of success for the sector. "But increasing the number will not lead to an increase in the success rate if you don't build an ecosystem for startups to grow," he said.