Among OECD countries, Japan - together with Italy - has the highest proportion of small and medium sized enterprises (SMEs). According to data published by the Management and Coordination Agency, in the manufacturing sector alone in 1996 were operating 665,540 SMEs - defined as enterprises with less than 301 regular employees. These firms accounted for 99.7 per cent of the total of Japanese manufacturing enterprises. In the same year, manufacturing SMEs employed 7,311,993 people, or the 62.1 per cent of the total. This literature review examines the role of small firms in the Japanese economy and the legislative framework. It looks at collective representation and bargaining, working and employment conditions, arbitration procedures, size and sector considerations. It concludes with policy implications.