TOKYO (BLOOMBERG) - Growth is reaching the smaller corners of Japan, a change from the early days of Abenomics.
Total profits at small and medium-sized companies are at a record high, while both small manufacturers and small service companies are the most upbeat in years as the economy's growth run stretches to the longest in more than a decade.
While these companies still face a host of problems, and many are struggling to offer workers pay rises, their improving fortunes is bullish for Prime Minister Shinzo Abe as he heads into a national election on Sunday.
For years his policies were seen benefiting mostly large, listed exporters and their shareholders, which hasn't always played well with voters.
"The benefits of economic growth are slowly spreading," said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. in Tokyo. "Construction and real estate related companies are doing well with demand rising ahead of the Olympics. The hospitality sector is also benefiting from the surge in tourists."
In the early days of Abenomics the prime minister introduced in 2013, monetary easing sent the yen tumbling, swiftly pushing profits to record levels at big exporters such as Toyota Motor Corp.
But most smaller companies, which were more focused on the domestic market and more likely to suffer from higher import bills, were left behind.
The picture is changing with Japan's expansion likely to have reached an expected seventh straight quarter in the July-September period. Exports have grown by double digits in six of the past eight months, and domestic demand is strengthening.
"It's not just the dollar-yen rate and external demand, but domestic demand is also having an effect," said Yusuke Miyairi, an economist at Nomura Securities Co.
Miyairi points to electronic parts, machinery and labour-saving technology as areas where robust demand is benefiting smaller companies. Olympics-related demand is also driving the construction sector, while a years-long tourism boom is supporting smaller services companies, according to the Shinkin Central Bank Research Institute.
But the nation's worsening labor shortage is especially hard on smaller companies, and it could get worse for them quickly, warns Yasutoshi Nagai, chief economist at Daiwa Securities Co. He says some small companies are already being forced to raise wages more than larger ones in an effort to attract workers.
"Small and medium-sized companies are suffering from a lack of labour, so if the labour market gets any tighter than it is now, they really won't be able to secure employees," he said.
