Provincial cities in Japan have without exception fallen into a vicious cycle where population decline causes a reduction of public services, which further decreases the population and weakens local economies. This is explained by a failure to adapt to the forces of globalization, specifically price competitiveness with China and other developing economies in East Asia. About 100 years ago, the economist Alfred Weber used the term “agglomeration” to explain that reducing transportation costs was a fundamental principle in allocating resources and maximizing profits. Japan’s small- and medium-sized enterprises (SMEs), found primarily in rural areas, were once part of a national industrial structure that was based largely on that principle, but recent advances in transportation and information technology have rendered Weber’s argument obsolete. As Japan’s large firms continue to expand production networks throughout Asia, the SMEs have been left behind and are struggling to survive absent the traditional industrial model. This has created a structural problem in the economy, which the central government is trying to address with a revitalization strategy for depressed regions. Today, the key for Japan’s SMEs is innovation, which will prove essential to reducing income disparity across regions and increasing the productivity of the Japanese economy as a whole.
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