Japan's succession problem: how the country is safeguarding heritage through business

In Japan, March marks the end of the financial year; a time to assess the achievements of the current year and prepare for the year ahead. One issue that surfaces during this period is the increasing difficulty faced by small and medium-sized enterprises (SMEs), where even profitable businesses are forced to close due to the challenge of finding successors to run them when the current owners retire.

A 2024 survey shows that 52.1% of companies reported having no successor. Additionally, the Small and Medium Enterprise Agency estimates that by 2025, approximately half (1.27 million) of SME and small business owners over the age of 70 will have no successor to manage their operations; a third of all Japanese companies. If the trend continues, the country could face the loss of around 6.5 million jobs and a decline of approximately JPY22 trillion (Japanese yen) in GDP.

The situation is particularly dire for traditional industries that rely on long-standing craftsmanship and expertise. The number of workers in the craft industry has dropped by over 75% from over 280,000 in 1983 to around 60,000 in 2016. Meanwhile, the value of what the sector produces also declined from JPY540 billion to JPY96 billion, a drop of more than 80%. Additionally, the number of bankruptcies among businesses with a history of over 100 years is expected to hit a record high of more than 145 in 2024. This is driven by shifting consumer preferences, a shrinking domestic market and a lack of successors.

When businesses in traditional industries close, they take with them invaluable skills and knowledge, assets that are challenging to recover once lost. In order to address this issue, Japan is implementing initiatives including successor-matching programmes, industry revitalization through inbound tourism and international market expansion, and the use of AI to preserve and transfer specialized knowledge. These efforts are crucial in ensuring that centuries-old expertise is safeguarded while Japan’s SMEs continue to thrive.

One of the efforts to tackle the increasing number of business closures due to the absence of successors is the creation of a nationwide matching service. The service aims to connect business owners seeking successors with individuals and organizations interested in inheriting existing businesses. These services are offered by both public and private entities, including the Ministry of Internal Affairs and Communications (MIC), local governments, companies and industry organizations.

MIC, in collaboration with local authorities, provides four key support initiatives to facilitate business succession:

By offering targeted support across different stages of the succession process, these initiatives play a crucial role in ensuring the continuity of local businesses and preserving economic stability.

The National Traditional Industry Succession Support, a general incorporated association, identifies a shrinking market as a key factor behind succession challenges in traditional industries. The organization is actively working to expand market opportunities and ensure the industry's sustainability.

According to the association, while Japan's traditional craftsmanship and products may seem commonplace to locals, they are often seen as unique and highly appealing to those outside of the country, including international tourists. Recognizing this potential, the association provides support for marketing and branding strategies to those taking over traditional businesses. Equipping successors with the knowledge and tools to attract inbound demand allows them to leverage their existing skills while reaching new customer segments.

Furthermore, in line with the Traditional Industries Law enacted in 1974, the Agency for Cultural Affairs promotes government-certified traditional crafts by displaying the Japan Traditional Craft Product logo on products. To qualify for this certification, products must be handmade using traditional materials and techniques, and originate from a designated region. As of April 2022, a total of 237 products across Japan had received this certification.

When businesses close due to the absence of successors, it is not only the enterprises that vanish; valuable skills and knowledge developed over generations are also lost. Traditionally passed down through direct mentorship, these techniques become at risk of extinction when no one remains to inherit them.

In recent years, AI has been being leveraged to preserve and transfer specialized knowledge in traditional industries to future generations. One notable example is the work being done by Dentsu, a leading marketing agency. The company has successfully trained AI to assess the quality of tuna by analyzing the cross-sectional view of the tail, which is a skill traditionally mastered by experienced connoisseurs. The AI now achieves a 90% accuracy rate in matching expert evaluations, safeguarding this unique knowledge. Additionally, LIGHTz has conducted in-depth interviews with Nambu ironware artisans to document their thought processes during production. The company used it to train AI to map how they assess quality and necessary work in each process. By converting their empirically acquired techniques into structured data, the company aims to help safeguarding and systematizing this valuable craftsmanship for future reference.

Traditional industries do more than produce regionally tailored goods. They serve as living repositories of history, passing down invaluable skills and cultural knowledge through generations. Efforts to preserve and sustain these industries not only safeguard cultural heritage, but also strengthen the resilience of modern society. By blending traditional craftsmanship with innovative technologies, these industries drive both cultural preservation and create new values through forward-thinking innovation.