IT World View: Japan

Every other week, TechRepublic brings you a country profile that explores the IT and business communities in other countries. This week, Kevin Rayburn examines the resurging market of Japan.

Every two weeks TechRepublic profiles a country, looking at its emerging technology leaders and providing an overview of how business works there. This week we review Japan, the economic powerhouse of Asia, now slowly recovering from the latest of several recessions in the 1990s.

Japan is the world's second largest market for IT equipment and services (telecommunications, computers, peripherals, software, and multimedia). The country’s new policies of deregulation and courting foreign investors are opening new opportunities for U.S. IT firms that were previously unavailable in Japan’s once-closed domestic market.

After abandoning its self-imposed isolation from the world community in 1854, Japan quickly grew into a formidable industrial and military power. Then came World War II and the massive destruction of its cities and manufacturing facilities. Displaying resilience and ingenuity, the nation bounced back—this time as a democracy—to become one of the world's great high-tech economic powers.

Japan is the second largest exporter of semiconductors, holding 40.5 percent of the world market. (The U.S. holds 41.7 percent.) Semiconductors account for 70 percent of the total Japanese electronic components market. Japan is also the second largest exporter of business machines. With companies such as Sega and Nintendo, Japan also dominates the world games software market. In PC sales, companies such as NEC, Fujitsu, and IBM dominate the domestic market. The PC market share for U.S.-affiliated companies was approximately 35 percent in 1997, but it’s growing. Japan is weak in global business software sales, and companies such as Microsoft have gained a strong foothold in the Japanese domestic market. Japan continues to be highly innovative in marketable IT applications. This year, for instance, it introduced the world's first video cell phone and is aggressively developing flat panel display devices for the market.

Deregulation of the Japanese telecommunications sector is attracting MCI, AT&T, PSINet, AOL, GTE, and other U.S. firms in droves to fill the growing market demands for telephony, wireless, and Internet services. The country is aggressively building a fiberoptic backbone and plans to have every school, business, and government office connected by the year 2010. By that year, the U.S. State Department estimated that the Japanese IT market will be worth $1.23 trillion.

Seeing the lucrative potential, many American firms are clamoring to enter the Japanese market despite ongoing bureaucratic obstacles to setting up operations there. The U.S. State Department ranked electronic components, computers and peripherals, computer software, and telco equipment as the top four nonagricultural sectors for U.S. exports and investment in Japan.



Cultural and business pointers
The Japanese are doers, but how they go about doing things differs greatly from no-nonsense American approaches. The Japanese value harmony, group participation, and politeness. It is essential for any Western businessperson to become educated in the complexities of Japanese culture. Surface confrontations and outright refusals are to be avoided in business dealings. Yes does not always mean yes in Japan; it could mean maybe or even no. Noncommittal responses are common among Japanese businessmen. Even so, it is important for a U.S. businessperson to be honest and direct, while not appearing to be overbearing. What counts is building relationships and committing for the long term.

"Giri" is the Japanese concept of mutual social obligation. Building relationships should precede the first sale. Mutual trust, confidence, loyalty, and commitment are what Japanese businesspeople value. There are many noncontractual, nonlegal commitments that go with doing business in Japan. Business parties in longstanding relationships are expected to grant favors to each other. Even with their strict adherence to polite etiquette, the Japanese realize that not all foreigners fully understand their customs. Maintaining formality and politeness is always the safest bet. Bowing is the traditional and customary Japanese greeting, but Western-style handshakes are becoming more common.

Always use the suffix “san” when addressing any man or woman. Mr. Toshiba, for instance, would be addressed as Toshiba-san. Remove your shoes and use good table manners when in a Japanese home or restaurant. Knowing how to use chopsticks is advisable. Exchanging small gifts, such as company pens, clothing, or American or Scotch whiskey is common practice. (Quality and attractive gift packaging are also important.)

Exchanging business cards is not just mandatory; it is regarded as a solemn ritual and is carried out with formality and careful, respectful examination of the cards. A large supply of business cards printed in both English and Japanese is a must. Appointments should be made in advance and punctuality is important. A "visit" can typically mean appointments over the course of several days. Business relationships take time to cultivate, and consistent follow-ups are vital. Using a professional interpreter at business meetings is recommended, even though it can be expensive.

Business discussions are very formal and are usually preceded by tea. Japanese alcoholic drinks such as sake and shochu are acquired tastes, so you might want to stick to beer. Pouring drinks is a formalized ritual. It’s important to let the hostess pour your drink; pouring your own is impolite, although you may pour for the host. Tips are not expected.

The Japanese expect high-quality products. It is very difficult to regain their confidence once their expectations are dashed. Yet even superior products competitively priced can fail in the Japanese market if cultural sensitivities are ignored. Indifference to local business practices can be misinterpreted as a lack of commitment on the part of a foreign business, leading to misunderstandings, bad feelings, and loss of opportunities.

Drawbacks to investing in Japan
Japan's economy is deeply rooted in a complex system of business and political bureaucratic ties. The government issues thousands of required licenses, permits, and approvals to tightly regulate business activity in Japan. As a promoter of domestic industry, the Japanese government traditionally has been highly protectionist, discouraging foreign competition. Attitudes began to change after bad loans and inflated real estate values caused the Japanese banking crisis of 1991, which helped throw the economy into deep stagnation and a series of recessions. Business began to call for deregulation to stimulate growth and to promote foreign competitiveness.

Since 1985, the Japanese government has tried to reverse some of its protectionist ways, deregulating sectors of the economy, increasing imports, promoting foreign investment, and dismantling barriers that have prevented foreign businesses from entering the Japanese market.

In its 1999 World Competitiveness Year Book, Switzerland's International Institute for Management Development (IMD) pinpointed some of the reasons for Japan's recent economic stagnation. IMD ranked Japan much lower in competitiveness than a few years ago (fourth in 1995 and 1996; falling to ninth in 1997 and to 18th in 1998; rising slightly to 16 in 1999). (The U.S. is ranked first, Singapore second).

The cost of living is ranked 46 of 47 nations, or second highest in terms of the cost of consumer goods, excluding housing. The negatives of the Japanese market according to the IMD included: high industrial electrical costs (rated 44 of 47 nations analyzed), slow real growth in average annual industrial production (40th), high domestic debt (37th), and high government "consumption expenditures" as a percentage of GDP (42nd). Overall, the IMD's ranking of the health of the Japanese domestic economy has fallen markedly, from number 6 in 1995 to number 29 in 1999.

Despite Japan's overall global economic success, the Japanese themselves are often their own harshest critics. When the IMD surveyed Japanese executives, they ranked their country last in terms of entrepreneurship, noting that, "Managers generally lack a sense of entrepreneurship." The Japanese executives ranked themselves last or close to last in several more categories including: creation of new firms (47th), openness to foreign bidders on public sector contracts (47th), slowness of companies and government to adapt quickly to economic changes (46th), availability of finance skills (43rd), strictness of immigration laws that prevent importation of foreign labor (47th), and lack of sufficient university education that meets the needs of a competitive economy (45th).




State of the Japanese economy
Japan is Asia's dominant economic force, representing almost three-quarters of the entire Asian economy. Japan's gross domestic product (GDP) of about $5 trillion (U.S. dollars as of 1995) makes it the world's second largest economy—larger than Germany, France, and the United Kingdom combined. Japan is America's largest overseas trading partner. In March 1998, Japan's total annual exports were worth $409 billion. Its imports were valued at $206 billion. Yet the nation is in the midst of its longest post-war recession, part of an ongoing slump in the 1990s in which land prices fell, industrial production and retail sales declined, and the Japanese stock market stagnated. A series of government economic stimulus packages generally has had little effect on the situation.

According to the U.S. State Department, Japan's economy has also been hurt by continued overregulation in such sectors as telecommunications, energy, transportation, and construction. This has discouraged competition, new business formation, and foreign direct investment. Japan’s wounded financial industry has suffered nearly $600 billion in bad loans (one-sixth of the GDP) and is reluctant to grant even small loans to local businesses to help them stay competitive.

There are some signs, however, that the worst may be over. Private consumption, which represents about 60 percent of GDP, is slowly recovering, and the government of Japan has invested billions in new plans and policies to stimulate domestic industry. But its most striking and effective policy change, many Japan analysts said, is its newfound willingness to deregulate once-state-run sectors of its economy and openly court and attract direct foreign investment. Despite ongoing legal and bureaucratic complexities that hinder foreign investment in Japan, many American companies are setting up successful subsidiaries there, according to the U.S. State Department. American firms are finding that weak local competition caused by Japan's domestic recession is making the country an attractive place to do business.

Opinions vary on the success of the Japanese government's attempts to restructure its economy. In a May 1, 1998 article in Asiaweek magazine, Richard Koo, chief economist at Japan's Nomura Research Institute, said he sees signs that Japan is abandoning some of its stifling old-boy network ways of doing business. "That's changing Japanese capitalism from ground zero," Koo said. "I have become optimistic on Japan for the first time in nearly 10 years."

But there are those who say Japan has been too slow to change. In the same Asiaweek article, Meiji University economics professor Takagi Masura said the political leadership has been reluctant to tinker with tradition. "The government," Masura said, "is still making a list of 642 items to deregulate 15 years since they started talking about them. Why? Many people in the ruling party and the bureaucracy are reluctant to have vested interests disappear."

Even so, many U.S. trade officials see substance in the Japanese government's liberalization of its regulations for foreign business, especially in the financial sector. In a recent Forbes magazine special section, U.S. ambassador to Japan Thomas Foley cited the country's so-called "Big Bang" policies that are making Japanese financial transactions more transparent and allowing U.S. financial firms to gain a foothold in the once-closed market. Foley cited as recent examples of success GE Capital's joint venture with Toho Life Insurance, Merrill Lynch's takeover of Yamaichi's retail securities business, and Salomon Smith Barney's merger with Nikko Securities.

The U.S. and Japanese governments continue to negotiate to dismantle various Japanese barriers to foreign investment and trade. Recent efforts include the U.S.-Japan Framework for a New Partnership tentative pact signed in 1993 by President Clinton and then Prime Minister Kiichi Miyazawa, which led to a U.S.-Japan Enhanced Initiative on Deregulation and Competition Policy in June 1997—an accord—meant to open the Japanese market to foreign competition in several sectors, including telecommunications.

Although it observed a slow but gradual economic recovery for Japan, the U.S. State Department noted in its 1999 Country Commercial Guide to Japan that even a slowly growing Japan remains a huge market full of opportunity. As the destination of nearly $70 billion of U.S. exports, Japan continues to be America's largest overseas market.

"Despite all of the macro gloom-and-doom stories, at the micro level, in terms of the activity of American companies, there is actually more now than we've seen in quite some time," said Glen Fukushima, president of the American Chamber of Commerce in Japan, quoted in a May 1998 article in Asiaweek. "The behavior of quite a few of these firms seems to indicate that they think the future of the Japanese economy is pretty good."



Support for American firms in Japan
Japan's government imposes few formal restrictions on foreign direct investment in the country and has removed most of the legal restrictions on exports to Japan.

Even so, Japan continues to be a difficult market in which to set up shop. Archaic labor laws and many bureaucratic obstacles prevent easy access, yet many American firms with ingenuity have found success there. Despite its difficulties, the market is simply too lucrative to ignore. The U.S. State Department noted that American companies remain extremely competitive across the whole spectrum of high-tech industries in Japan, including computers, semiconductors, and software. Most large American high-tech companies have offices in Japan and are able to introduce new products quickly. With the relaxation of import restrictions, Japanese consumers are benefiting from a greater selection and continue to look to the U.S. for new products and trends.

More than 200 U.S. Fortune 500 companies have a direct commercial presence in Japan, as do 45 of the 50 leading U.S. exporters, according to the U.S. State Department.

The Japan External Trade Organization (JETRO), Japan’s main agency for promoting and implementing trade policy, touts the many American success stories it has witnessed in Japan. Although it was first set up in 1958 to promote exports, the agency has shifted gears in recent years to increase imports and attract direct foreign investment into the country. JETRO has 80 overseas offices in 58 countries. Also promoting foreign direct investment is the government's Japan Investment Council (JIC), established in 1994.

According to JETRO, foreign direct investment in Japan is growing fast, from $2.78 billion in 1990 to $5.53 billion in 1997.

Japan's government offers some tax incentives and other inducements to foreign exporters seeking to do business in Japan. JETRO offers a number of advisory services for American firms considering the Japanese market.

The government-owned Japan Development Bank (JDB) offers low-interest, long-term loans for foreign-affiliated firms that invest in certain sectors. Foreign companies investing in certain regions, such as Okinawa and Hokkaido-Tohoku, are eligible for similar loans by local development-finance corporations. Japan has IT incubators and IT research and development parks where companies and university researchers test new products and ideas. However, Japan does not have a concentrated high-tech industrial technopolis similar to Silicon Valley. It also has no free trade zones or free ports.

Major firms in Japan
Deregulation of the Japanese telco market has prompted major American telco companies to open subsidiaries or invest in Nippon Telegraph and Telecommunication (NTT), the world's largest telecom. Recent U.S. entrants into the market include MCI, AT&T, PSINet, AOL, GTE, IBM, GE, and more.

Many American IT firms tend to form subsidiaries rather than open branches in Japan. IBM, Packard Bell, Intel, Hewlett-Packard, Compaq, Microsoft, and OPS (Internet services) are a few examples. Cirrus Logic Inc., a California-based software-rich integrated circuits design company with 1998 net sales of $954 million, opened its Japan subsidiary, Cirrus Logic K.K., in 1989. The successful subsidiary now accounts for 20 percent of the corporation's worldwide group sales. Robert V. Dickinson, the subsidiary's president and representative director, explained in an interview for JETRO why the subsidiary approach has worked for Cirrus Logic in Japan.

"We formed a subsidiary instead of having a branch or a representative office because we wanted to do business in the Japanese style, rather than being a completely foreign entity," Dickinson said. "In Japan, it's much more important to be seen as being part of the Japanese environment. Customers perceive a certain sincerity, sensitivity, and desire to accommodate their needs, and this works to your advantage. With the deep relationships that are required on a technical level, there isn't any substitute for having people located here that work in the Japanese language. It's a lot different from trying to support somebody from 5,000 miles and eight time zones away. The nature of our products is such that what we are selling is in fact technical expertise—we call it an intellectual property business. We print intellectual property on silicon.

"Look at the world today for the businesses we're in, and ask where the intellectual capital is. It's primarily in two places—the U.S. and Japan. We expect Japanese firms to continue to play a very important role in high-technology markets for the foreseeable future.

"Japan is intimidating to a lot of companies. They understand that it's a difficult market, so that may inhibit them from really getting involved. The way you operate successfully here is to acknowledge that there are differences but also recognize that there are similarities: You're not starting from zero—you're starting with some ability to operate here. The basics are still the same. You have to have good products, you have to build relationships with your customers, you have to support them, you have to deliver. And you have to have patience: It takes a certain amount of time to get access to customers, for them to build up enough confidence to commit to using your product. A lot of companies have difficulty here, because they expect success to come easily and quickly. When it doesn't, then they become disillusioned and they tend to pull back. But over time you learn to understand the rhythm of the situation."

For the complete interview and other success stories of American IT companies in Japan, check out JETRO's Success Stories section on its Web site.



Software industry
"At present Japan has the second largest software market in the world, next to [the U.S.]," said Tadashi Sugimoto, a representative with the Japan Information Service Industry Association (JISA) in Tokyo. "The market has possibility of continuous growth in future; as we all know the importance of software in business are being critically enlarged."

The software market in Japan has been different from that of the U.S. Reliance on mainframes has meant Japanese businesses favored custom software made by domestic software firms, which have tended to concentrate on this domestic sector, preferring not to compete against Microsoft and others for global market share in prepackaged PC software. As mainframes become obsolete and PCs proliferate in Japan, however, a huge market is opening for Microsoft and other foreign companies in Japan.

"It is said that foreign software companies, including Microsoft, Oracle, SAP, etc., has a share more than 50 percent in software products market in Japan," Sugimoto said. "Once the software products suit consumer needs, no barriers exist to disturb their inflow to a market in Japan. This tendency is more clearly recognized in import of system software. As for application software, foreign software enterprises need more energy for their work than indigenous software houses due to difference of business custom between Japan and abroad."

The U.S. State Department noted that U.S. software is very well received in the Japanese market, especially products from Microsoft, Lotus, Oracle, Netscape, and Sun Microsystems. As PCs and PC networks expand, the Japanese computer market is expected to grow at least 12 to 15 percent annually through the year 2002. U.S. products tend to be more advanced than Japanese products, and as a result, imports from the U.S. are growing at roughly 17 percent per year. From 1996 to 1998, the total Japanese software market has grown from $9 billion to almost $12 billion.

Although Japanese application software is competitively weak on the global market, Japan's video game software dominates worldwide. Nintendo and Sega hold 97 percent of the world market in this sector.

Software piracy, especially for business applications software, is a staggering 80 percent (in 1993), according to the Business Software Alliance. BSA estimated that software publishing and distribution industries lost $2 billion to application software piracy in Japan. A major goal of Japan's Software Information Center (SOFTiC), supported by the Japanese government, is to ensure that all software used in Japan is registered and legally protected. "Software is protected by copyright law and patent law, almost as same as in U.S.," said Kohei Kamigane, managing director and secretary general of SOFTiC. "BSA Japan is working for protection of business use software from piracy, and ACCS [Association of Copyright for Computer Software] is also working mainly for video game software field, joining with police office [in enforcement].” Japanese anti-piracy enforcement, according to Kamigane, includes cease and desist orders, the awarding of damages, and criminal penalties.

Kamigane added that Japan is a signatory to the World Intellectual Property Organization copyright treaties that cover software, and it will soon ratify those treaties.

The Japanese workforce
The Japanese workforce is the world's most educated. As of 1989, the country had attained the world's highest literacy rate, 100 percent.

In July 1999, the Japanese labor force stood at 65 million, according to the Japanese government. Most of these (83.5 percent) were company employees, with only 11.2 percent of Japanese workers self-employed. Another 5.1 percent were categorized as "family workers."

Japan has a very low unemployment rate, which has risen slightly from 3.4 percent in 1996 and 1997 to 3.8 percent in 1998, according to Japan's Ministry of Labor. Even with a recession, Japanese businesses have avoided massive layoffs as a cost-cutting option because it’s counter to the notion of the implied social contract and to the idea of guaranteed lifelong employment. Instead, many companies have reduced payrolls through voluntary retirements, buyouts, freezes on new hiring, or transfers of personnel. Companies invest heavily in employee training with the expectation of lifelong loyalty from employees. In return, workers who remain committed to companies are promoted for seniority rather than job performance. Layoffs and forced leaves have increased because of the severe economic strains on some companies, but firms still tend to favor reduction of work hours, hiring cuts, and other measures over outright terminations. To cut costs, some Japanese firms have started new factories in less-developed Asian countries with cheaper labor.

Japanese workers remain among the world's most productive, but their productivity still lags behind American workers. Labor unions represent only 24 percent of workers, and strikes, which are rarely disruptive, tend to be ritualized and highly controlled during annual spring wage negotiations. Strikes have decreased during the recession. Another major expense for Japanese companies is the fringe benefits they are expected to grant workers, including low-cost housing for both single and married employees, recreation facilities, low-interest home loans, and hefty bonuses.



The IT workforce
Japan is noted for its highly skilled IT workforce, a high percentage of which receives training at U.S. universities. In the JETRO interview, Dickinson explained the benefits his company receives from Japanese IT workers. "Recruiting is a high-priority activity for us," he said. "We think people, particularly technical people, are what makes our company work. Our philosophy is to put priority on technical competence over English language ability. We've found that if somebody has basic skills in English—which many people do today—their facility will improve with practice. We definitely don't want to hire somebody that speaks fluent English but has nothing to say. Recruiting good people in Japan is not as difficult as it was, say, 10 years ago. We're aware of the fact that if you want to attract and keep good people, you have to provide them with challenges and have an environment that they enjoy working in."

Salaries and benefits
The average annual wage in Japan is 421,000 yen or $48,477 [U.S.]. Japan's Ministry of Labor does not provide wage and salary statistics for the IT sector, but it does for other related sectors. Workers in the transportation and communications sectors, for instance, earn $49,861 [U.S.], slightly higher than the overall average wage.

Although these are good salaries by world standards, Japan's high cost of living continues to hurt the average family. The recession of the last eight years has stagnated or reduced wages, and prices have increased steadily.

Corporate taxes
The Japanese have a relatively heavy tax burden. The top marginal tax rate is 50 percent, the corporate tax is 37 percent, the inheritance tax is 70 percent, and the capital gains tax is 26 percent. The situation is better for local branches of foreign firms, which are generally taxed only on corporate income derived from within Japan. By contrast, domestic Japanese corporations are taxed on their worldwide income. According to the U.S. State Department, local branches of foreign firms are also subject to a local inhabitants tax on the same basis as a domestic firm. Corporate tax rules classify corporations as either foreign or domestic, depending on the location of the head office, without regard to the place of incorporation. The U.S.-Japan Tax Treaty provides for the avoidance of double taxation.

According the U.S. State Department's recent guide to business in Japan, dividends distributed by a domestic Japanese firm are subject to a 20 percent withholding tax. The U.S.-Japan Tax Treaty reduces this tax to 10 percent for American shareholders. A 5 percent consumption tax (general excise tax) is levied on all goods sold in Japan.

The Japan Tariff Association touts its low or zero tariffs on imports, especially in IT sector products such as software and computers. Tariffs on some non-IT products remain high, but they are decreasing as Japan strives to meet its obligations as a member of the World Trade Organization (WTO). More information on the corporate tax situation in Japan can be found at the U.S. State Department’s Country Commercial Guides FY 1999: Japan in the Investment Climate section.

The movement of goods and services
Japan's physical infrastructure is fully developed, with a comprehensive network of roads, highways, railroads, airports, harbors, warehouses, and telecommunications systems. A highly efficient rail network connects all major cities. Regular flights to the U.S. originate at Japan's four major international airports in Tokyo, Kansai (near Osaka), Nagoya, and Fukuoka. Other international airport projects are planned for Chubu and Kansai. There are major seaports in Tokyo, Yokohama, Osaka, Kobe, and Hakata. Congestion on small city streets and at seaports remains a problem. Japan's countless small stores, restricted in size due to astronomical real estate prices, need constant restocking, causing traffic jams as trucks clog inner-city streets. According to the U.S. State Department, the nation's port practices remain inefficient by global standards due to complicated import processing procedures, although this situation is slowly improving. Still, Japan continues to heavily invest in capital improvements and spent more than $100 billion on roads and other new infrastructure in 1998.



Telco infrastructure
Japan has an excellent telco infrastructure, but until recently its domestic system has been under the unchallenged control of Nippon Telegraph and Telecommunication (NTT), the world's largest telecom with $71 billion in annual sales (AT&T is no. 2 at $51 billion; 1997 figures). In addition, Kokusai Denshin Denwa Co., Ltd. (KDD) was the only carrier to offer international communication services.

Beginning in 1985, the Japanese government set a course to slowly deregulate the Japanese telco market to allow both domestic and foreign competition to NTT and KDD, as well as to allow some joint investment in NTT. Still, foreign ownership of NTT is restricted to 20 percent by the government. As government control of NTT has dropped from 100 percent to about 60 percent and competition has increased, telco services have improved.

In 1997, the government implemented its Second Info-Communications Reform to further deregulate the telco services sector, promote network interconnection, and continue NTT's restructuring. Still, NTT retains a monopoly on the local telco networks, even with the entry of 121 new telco service providers, known as "new common carriers" (NCCs). NCCs are competing aggressively with both NTT and KDD for the long distance markets. Restrictions on foreign equity participation in KDD have been lifted, further opening access to the long distance telco market. The U.S. State Department predicted that with further liberalization of the market this year, NCCs will provide an unlimited source of business opportunity for U.S. firms. Other deregulations designed to attract foreign investment include removal of restrictions barring overseas companies from entering Japan's radio and cable TV markets. Competition has meant lower rates for consumers. In response to the merger of two large NCCs, KDD and Japan's second largest international carrier, DDI, entered an alliance to provide integrated international and domestic long distance services at lower rates.

Japan has continued its successful and aggressive plans to have every home and office connected to its extensive fiberoptic cable backbone. NTT's goal is to have every office in the major cities connected to the fiberoptic network by the year 2000. NTT has an even more ambitious goal: To meet the objectives of the government's Fiber to the Home project, which aims to connect every Japanese business, government office, school, and home to fiberoptics by 2010. NTT is also replacing all analog switches with digital switches.

Japan is spending more than $30 billion a year on telco infrastructure improvement. Japan's communication needs are also being partly met by seven satellites.

Rather than using fiberoptics, many of NTT's competitors are opting to install X-type digital subscriber line (DSL) technologies to meet consumer demand. This is creating an opportunity for U.S. companies to introduce their xDSL technologies and products to Japan.

Deregulation is opening up the wireless side of the market as well. Japan's wireless market value accounts for about 30 percent of the $24 billion Japanese telco market. Prodded by the U.S. government, Japan has deregulated radio communications terminals (all terminals and pagers) and increased consumer options so that buyers can purchase wireless terminals from retail stores or rent them from carriers. As a signatory to the WTO's Agreement on Basic Telecommunications Services, Japan has begun to allow complete foreign equity ownership of facilities-based carriers, including wireless communications service providers. Opportunities for U.S. firms to sell wireless equipment in Japan also have increased.

According to Japan's Ministry of Posts and Telecommunications, the nation as of 1996 had 61.5 million phone subscribers, more than 10 million radio paging subscribers, and 21 million portable and auto cell phone subscribers.

The U.S. State Department estimated the demand in Japan for telco equipment (excluding fiberoptic cables) at $33 billion in 1998 and $37 billion in 1999. Demand for all telco services is currently estimated at $100 billion a year. The fastest growing subsector of the telco market is wireless phone systems and services. At the end of 1997, the total number of cellular phone subscribers was approximately 30 million.

Although PC and Internet use in Japan lags well behind U.S. usage, the markets for these sectors are growing fast. According to 1998 figures in the Computer Industry Almanac, Japan has 32.8 million computers in use, ranking it second to the U.S., which has 129 million computers in use.

The Computer Industry Almanac ranked Japan second in the world in total number of Internet users (about 14 million). (The U.S. is ranked first, with more than 90 million users.) A more recent survey by Nikkei NetBusiness, reported in the Sept. 10, 1999 edition of AsiaBizTech, put the number of online users in Japan at more than 18 million. There are 2,600 registered Internet service providers (ISPs) in Japan, according to Asia Network Research (ANR), a Malaysian based research institute.

It’s easy to become an ISP in Japan, according to ANR. With basic technical skills, initial funding, and a marketing plan, ISP startups register with Japan's Ministry of Posts and Telecommunications office, where they only have to meet minimal criteria.

Japan continues to lead in innovative applications of telco technologies. NTT is installing 100,000 units of next-generation public pay telephones throughout the country that will enable users to send and receive e-mail by using special ISP-issued cards. In May 1999, Japanese component vendor Kyocera Corp. unveiled the first video cell phone, able to transmit a caller's picture and voice simultaneously.



Office space costs
Tokyo office space is the most expensive in the world. At $131 a square foot (or $1,414 a square meter), office space in the center of Tokyo ranked as the most expensive in a July 1999 survey by the global real estate firm CB Richard Ellis. The West End of London ranked second at $124 a square foot. Farther from the center of Tokyo, office space costs still ranked as the third highest at $114 a square foot. By comparison, rents in midtown Manhattan were $54.14 a square foot.

Major cities
Japan squeezes most of its nearly 130 million people into about 30 percent of its habitable land along the coast—a space roughly the size of Arkansas. Almost all of it is urban. Much of Japan's eastern coast is a megalopolis, an unbroken string of gigantic cities that stretch south from the largest, Tokyo, with more than eight million residents. At 337 persons per square kilometer, Japan's population density ranks fourth among nations with a population of 10 million or more. (Bangladesh ranks first, with 836 persons per square kilometer.) Sharing the space are 73 million motor vehicles, according to Japan's Ministry of Transport.

Despite overcrowding, Japan's cities are remarkably clean, modern, and cosmopolitan. Tokyo's nightlife, cultural scene, and shopping venues are famous the world over. Cinemas, theaters, bars, coffee shops, discotheques, nightclubs, jazz clubs, music concerts from classical to rock, and traditional Kabuki and Noh theaters abound.

Even in close quarters, the Japanese are among the world's healthiest people. The infant mortality rate of 4.3 per 1,000 births is one of the world's lowest, according to the United Nations. The Japanese have one of the longest average life expectancies at 80.8 years. (The world average is 59, according to the World Health Organization.)

Universities in Japan
Japan has more than 1,100 institutions of higher learning, including about 500 universities. Top institutions include:
  • University of Tokyo
  • University of Kyoto
  • Doshisha University (Kyoto)
  • Keio University (Tokyo)
  • Waseda University (Tokyo)

Five of Japan's universities were listed in the 1999 Asiaweek survey of the 35 Best Science and Technology Institutions in Asia: Tokyo Institute of Technology (third), Nagoya Institute of Technology (12th), Science University of Tokyo (13th), Muroran Institute of Technology (18th), and Tokyo Denki University (20th).

Although the Japanese have a reputation for high-tech know-how, their educational system is considered weak in competitive training in IT and other technical fields. One reason: Despite some changes, the Japanese university system still rewards seniority rather than young talent. Many of the best and brightest of Japan's technical students study abroad. (There are 10 times more Japanese university students in the U.S. than there are American students in Japanese universities, according to a National Academy of Sciences report.) There is a brain drain in talented technical faculty, who also teach abroad in large numbers. Japan does not heavily subsidize basic university research as the U.S. government does; instead, it depends mainly on industry to fund more practical, goal-oriented research. As a result, Japan has been criticized for lagging in contributions to basic scientific discovery. Also, the equipment in most university laboratories does not compare with that in Japan's corporate laboratories, according to the National Academy of Sciences.

In a recent speech, Takashi Kosugi, Japan's minister of education, science, sports, and culture, said the country's reliance on rigid testing of students before they enter universities is harmful to student motivation and limits their prospects to pursue interests outside the core curriculum. The system, he said, is just not geared to meet the needs of a changing global economy, especially in IT fields.

Former National Academy of Sciences president Frank Press also noted that there are no industrial liaison programs in Japanese universities and that U.S. firms complain that their relations with Japanese university professors are sometimes "mediated" by Japanese firms.

Japan is making some changes, including programs to attract foreign science and engineering fellows to Japanese labs.



Japan is a constitutional monarchy with a parliamentary democracy system. Although he carries the designation Head of State, the emperor occupies a largely symbolic office. Legislative power resides in the bicameral parliament known as the Kokkai or Diet. Its upper and lower houses have 252 and 500 elected members, respectively.

The actual head of government, the prime minister (currently Keizo Obuchi), is elected by the lower house, which is the more powerful of the Diet's two chambers.

Japan has many English language dailies and weeklies as well as magazines. Newspapers include:

The broadcasting system in Japan is divided into the public sector, represented by NHK (Nippon Hoso Kyokai, the Japan Broadcasting Corporation) and the commercial sector. Publicly funded NHK operates four national radio stations, four television networks, and more than 60 TV stations. It also operates the international shortwave radio channel Radio Japan, broadcast in 22 languages including English.

Japan has thousands of television stations owned by 177 commercial broadcasting companies.

Japan's strengths for foreign IT investors include a loyal and skilled workforce, growing domestic telco markets, PC and software services, proximity to other developing Asian markets, increased deregulation and liberalization of the economy, and a highly developed physical and telco infrastructure.

Its weaknesses include a university system lagging in educational and technical innovation, a still-complex government bureaucracy, a business network that favors domestic companies, poor investment in basic scientific research, a still not fully transparent financial system, an aging workforce, and high office rents and cost of living.

In an interview with JETRO, Mark Newton, chief representative of the Japan Branch Office for the Internet services firm OPS Corp., reiterated the notion of having patience when starting in the Japanese market. "The most important point," Newton said, "is to carry out market research on the potential of your firm's products in the Japanese market. Once you have determined that the market here is worth cracking, the next step is to adjust the products to the Japanese market, if that appears to be necessary, and then get one's name known in the industry. For a small company, my advice would be to send out press releases, as this may result in some newspaper articles, especially in the industrial newspapers. One should carefully study whether setting up a joint venture or a network of agents (resellers). Determining what other foreign companies in the same industry have done here to establish a presence is helpful in deciding on what approach to take. Even if a company has an excellent product, patience is called for in many cases as it can take time to break into the market."

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Kevin Rayburn is a freelance writer in Louisville, KY. He also edits research and alumni publications at the University of Louisville. He is a former medical, education, and financial reporter for Business First of Louisville.

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