Japan, ranking third globally in GDP, is a highly attractive destination for global companies looking to expand. However, the low prevalence of English in Japan poses a significant challenge, as most locally sourced information remains in Japanese. This creates a barrier for foreign companies looking to enter the Japanese market, making it difficult to access local insights. For successful market entry, foreign companies must thoroughly understand the advantages and challenges of the Japanese market, including points for business establishment and procedural nuances. This guide, created by a leading Japanese executive search firm, is tailored for executives, strategic planners, and business development professionals in foreign companies considering expansion into or within Japan. It offers:
An overview of the latest trends in the Japanese market
Essential procedures for market entry
Key strategies for successful market penetration in Japan
By reading this comprehensive guide, foreign companies will gain invaluable insights into making a successful market entry into Japan.
Overview of the Japanese Market in 2023
As the world's third-largest economy following the United States and China, Japan offers significant business opportunities across various industries, making it an attractive market for foreign companies. Initially dominated by Western enterprises, the Japanese market has seen a recent influx of companies from Asia, including China, South Korea, Hong Kong, and India, indicating its appeal as a global business hub.
Demographic Highlights
According to statistics from Japan's Ministry of Internal Affairs and Communications (as of October 20, 2023), Japan's population stands at 124.477 million. The only age group showing an increase is those aged 75 and above. Japan faces significant concerns with its aging population and shrinking workforce, creating demands across sectors such as pharmaceuticals, medical technology, robotics, advanced manufacturing solutions, travel, and financial services.
Under 15 years old | 14,311,000 |
15-64 years old | 73,953,000 |
65 years old and above | 36,212,000 |
Including 75 years old and above | 19,819,000 |
Japan's Most Populous Prefectures (Top 10 in 2023)
Based on the "Resident Register Population" from the Ministry of Internal Affairs and Communications (as of January 1, 2023), Tokyo leads as the most populous prefecture, followed by Kanagawa and Osaka.
Top Prefectures by Population
1 | Tokyo | 13,842,000 |
2 | Kanagawa | 9,212,000 |
3 | Osaka | 8,784,000 |
4 | Aichi | 7,513,000 |
5 | Saitama | 7,381,000 |
6 | Chiba | 6,310,000 |
7 | Hyogo | 5,460,000 |
8 | Hokkaido | 5,140,000 |
9 | Fukuoka | 5,105,000 |
10 | Shizuoka | 3,634,000 |
Combining Tokyo, Kanagawa, Saitama, and Chiba prefectures, the population exceeds 36,000,000, forming Japan's central metropolitan area. Tokyo, as the heart of government, business, education, information, media, fashion, and culture, is home to many Japanese and foreign companies. Consumers in Tokyo are often the first to encounter foreign products, foods, and fashion, with consumer trends typically emerging from the capital.
Understanding Japanese Business Culture for Successful Market Entry
A critical aspect of market entry in Japan is grasping the nuances of Japanese business culture, which is essential for establishing and maintaining successful business relationships within the country.
The Importance of Business Cards
In Japanese business culture, possessing a business card is a fundamental requirement. For foreign companies, it's advisable to have bilingual business cards printed in both English and Japanese. Relationships are highly valued in Japanese business dealings. Japanese companies often adopt a long-term approach to building business relationships. Business cards are exchanged during initial meetings as a means of sharing names, contact details, and titles, laying the foundation for future interactions.
Hierarchical and Group-Oriented Decision Making
Japanese society is acutely aware of age and hierarchy, with a strong inclination towards collective decision-making. Therefore, it is important to understand that reaching a consensus in Japan can take longer compared to Western business cultures. This group-oriented approach to decision-making is pivotal in Japan, and recognizing this can be instrumental in navigating the Japanese business landscape effectively.
Current Trends in the Japanese Market
Industries Poised for Growth in Japan
Identifying industries with business opportunities is crucial for successful market entry in Japan. There are several fields in Japan still ripe for growth, with key focus areas being:
Industries Adapting to IT Developments: Sectors that can successfully adapt to IT advancements are set to thrive
Industries Providing Essential Goods and Services for an Aging Society: With the increasing population of those aged 65 and above, industries focusing on the elderly are vital for growth
IT Industry
Japan exhibits a high demand for technology and innovation, especially in robotics, AI, automotive technology, and environmental tech. The Japanese IT services market, already exceeding 6 trillion yen in 2022, is expected to surpass 7 trillion yen by 2027. This expansion highlights a growing shortage of IT professionals, with a forecasted deficit of 790,000 by 2030.
Healthcare and Medical Device Industry
The pharmaceutical industry in Japan is anticipated to see further growth, with more foreign companies planning to establish substantial operations. Japan's aging society offers ample opportunities in the medical and healthcare industries. Companies providing new medical devices, treatments, and healthcare solutions have significant potential. As health concerns increase among the population, the demand for pharmaceuticals is expected to rise.
Logistics Industry
The pandemic has boosted e-commerce demand, with Japan's domestic B2C e-commerce market reaching approximately 19 trillion yen. The increase in parcel deliveries and the issue of long working hours for truck drivers are notable concerns. With new regulations on driver's overtime coming in April 2024, the logistics industry is facing potential labor shortages. Hence, improvements in loading efficiency and transport route optimization through IT are eagerly anticipated.
Post-COVID Trends in the Japanese Market
The impact of the COVID-19 pandemic on Japanese business society suggests that remote work will continue to be a norm. However, this new working style comes with challenges, such as the need for proper equipment, network infrastructure, internal communication, progress management, and digitalization of paper documents.
In this context, foreign companies have ample opportunities to offer technology and services to the Japanese market. The entry of foreign businesses into Japan can accelerate the digital transformation (DX) and efficiency of the Japanese economy and society, leading to further growth.
Latest Overview and Trends in the Japanese Market
Rapid aging and a decreasing workforce population are ongoing challenges
Many foreign companies have their headquarters or major branches in Tokyo
Building trust and achieving consensus in business takes time in Japan
The healthcare and medical device industries are expected to grow due to the increasing elderly population
The demand for IT technology and digital transformation has risen across all industries due to the pandemic's impact
Advantages and Disadvantages of Entering the Japanese Market
First, let's explore the advantages of foreign companies entering the Japanese market.
The Appeal of Japan's Investment Environment for Foreign Companies
According to the Ministry of Economy, Trade and Industry's "Report on the Promotion of Globalization for Japanese and Foreign Companies in Fiscal Year 2023," Japan ranks as the third most attractive investment destination in Asia for foreign companies. The appealing points are organized based on responses from 98 foreign companies, categorized by type of operation:
Type of Operation | Attractive Points | Comments from Foreign Companies |
R＆D | Excellence in technological and product development capabilities of research institutions. | "The high-tech development in the biotechnology sector and the advanced scientific and technological advancements in the pharmaceutical field are attractive." |
Regional Headquarters | High availability of skilled professionals (managers and specialists). | "I feel that Japan is abundant with excellent talent." |
Sales | Presence of numerous asset managers and operational bases. | "There are more asset managers available now. Large banks and major asset management companies have many branches." |
Strengths of Japan's Investment Environment for Foreign Companies
Well-Developed Infrastructure
One of the key strengths of Japan's investment environment is its well-developed infrastructure. As a long-lived and advanced nation, Japan boasts a perfect public transportation network across all regions, facilitating easy and quick travel. This efficient mobility enables effective business expansion and smooth intra-regional movement. Additionally, Japan's advanced communication infrastructure ensures speedy information transmission. These factors combine to offer a stable economic foundation and rapid business operations, making Japan an attractive investment destination for foreign companies.
Market Potential
The potential of the Japanese market is another allure for investment. Japan's GDP ranks high globally, indicating significant economic strength. This robust GDP, with room for further growth, suggests expanding business opportunities as previously mentioned in "Current Trends in the Japanese Market."
Moreover, Japanese consumers tend to highly value the quality of products and services. With a consumer culture that prioritizes quality over price, this presents a significant opportunity for foreign enterprises. Even at a higher price point, offering high-quality products and services can lead to success.
Social Stability
The stability of Japanese society is another strength of its investment environment. Japan enjoys political stability and boasts high standards in social infrastructure development and legal systems. This stable environment allows companies to expand their business with confidence and facilitates long-term investments.
Challenges of Japan's Investment Environment for Foreign Companies
After understanding the merits, it's important to recognize the challenges foreign companies may face when entering the Japanese market.
Limited Prevalence of English
In Japan, Japanese is the dominant language for official and business communications. Most legal documents and contracts are prepared in Japanese, and formal procedures are predominantly conducted in the same language. Estimates suggest that less than 10% of the population in Japan is fluent in English. This language barrier can pose significant challenges in smooth negotiations and transactions.
Complexity of Administrative Procedures
Market entry in Japan involves navigating numerous regulations, permissions, certifications, and procedures, often extending beyond what is typically required in countries like the UK or the USA. Foreign companies may find it challenging to deal with these complex procedures. Japan's societal structure, characterized by close public-private cooperation and bureaucratic influences, contributes to this complexity.
High Business Costs
Operating costs for foreign businesses in Japan are generally higher compared to other countries. This includes expenses such as labor and real estate costs. Commercial real estate rental or purchase costs are particularly high, making office or retail space acquisition more costly than in other nations.
Investment Models for Foreign Companies Entering Japan
According to the Ministry of Economy, Trade and Industry's "Report on the Promotion of Globalization for Japanese and Foreign Companies in Fiscal Year 2023," there is significant interest in the forms of investment that foreign companies consider ideal when entering or expanding in Japan. The report highlights that "Business Alliances with Japanese Companies" (73 companies) are the most favored investment form, followed by "Investment through Corporate Acquisitions" (37 companies). Notably, there was no interest in "Investment through Minority Share Acquisition."
When considering market entry into the mature and conservative Japanese market, many companies opt for partnerships with Japanese firms. Comments like "Business alliances are the optimal way to establish partnerships without significant investment (USA, Service/Retail)" and "The Japanese market is challenging for unique foreign entries due to its mature and conservative nature (Norway, Transport/Logistics)" underline the preference for alliances. These alliances are seen as a way to mitigate risks and overcome the challenges of entering the Japanese market. It appears that the key to successful market entry in Japan lies in developing flexible and effective partnership strategies.
Forms of Market Entry for Foreign Companies in Japan
When foreign companies enter the Japanese market, they typically choose one of the following forms: "Representative Office," "Branch Office," or "Subsidiary." Let's focus on these primary entry forms.
Representative Office
What is a Representative Office?
A Representative Office in Japan is a simple form of market entry, involving a physical office space without the need for formal registration. It's not intended for commercial activities or local profit generation and doesn't hold capital, exempting it from corporate tax. Activities like market research, information gathering, purchasing goods, and advertising are permissible, but direct sales operations are not. Registration is not required, and banking accounts or property rentals in the name of the Representative Office are typically not feasible.
When to Choose a Representative Office?
This form is suitable for companies aiming to conduct market research or establish presence without engaging in sales in Japan. It's ideal for situations where the future of business growth in Japan is uncertain, or when a company wishes to avoid paying taxes in Japan while engaging in PR, advertising, or maintaining contact with Japanese business partners.
What to Consider When Choosing a Representative Office?
The activities of a Representative Office are limited to providing information to the overseas parent company, advertising, market research, basic investigation, and the purchase and storage of assets for the parent company.
Branch Office
What is a Branch Office?
A Branch Office functions as an extension of the parent company, allowing commercial activities based on the parent company’s capital. Profits and expenses generated by the branch are managed by the parent company and integrated into its annual accounting. Additionally, a Branch Office in Japan is required to declare and pay corporate tax, which is calculated based on the profits generated by the branch. For foreign companies conducting continuous business in Japan, registration is necessary, making the establishment of a Branch Office a convenient option for setting up a business base in Japan.
When to Choose a Branch Office?
A Branch Office is ideal when formal registration as a legal entity and a Japanese bank account are required to transact with Japanese customers. It's the appropriate choice for those not wishing to hold separate capital in Japan.
Considerations When Choosing a Branch Office
A Branch Office must have at least one representative residing in Japan. This representative acts as the face of the branch and manages its operations.
Subsidiary
What is a Subsidiary?
A subsidiary in Japan is an independent company established under Japanese law and owned by a foreign enterprise. Although a foreign company can be the sole shareholder of its Japanese subsidiary, it's also possible to have other shareholders, regardless of whether they are corporate or individual, Japanese or foreign. When a foreign company establishes a subsidiary (a Japanese legal entity), it does so under forms like a stock company (Kabushiki Kaisha) or a Limited Liability Company (Godo Kaisha), as per the Japanese Companies Act.
When to Choose a Subsidiary?
Choosing to establish a subsidiary is suitable when dealing with Japanese enterprises is necessary, or when the parent company wishes to avoid disclosing its information, desires separate accounting practices, and expects substantial revenue and profit locally in Japan.
Considerations When Choosing a Subsidiary
Setting up a subsidiary requires significant funding, and careful planning for capital procurement is essential. It’s crucial to evaluate the financial implications and resources needed for establishing and operating a subsidiary in Japan.
Key Considerations for Foreign Companies Entering the Japanese Market
Securing Bilingual Talent
One critical aspect to consider when entering the Japanese market is the challenge of securing bilingual talent. As mentioned earlier, individuals fluent in English are a rare commodity in Japan. Many such talents are already employed by domestic global companies or other foreign corporations, making it difficult to find linguistically skilled personnel. Utilizing executive search firms with networks of bilingual professionals can be an efficient way to recruit without incurring unnecessary costs. It’s important to note that not only language skills but also business and industry-specific knowledge are required, necessitating a careful recruitment process.
Japanese Work Culture
Another crucial aspect for foreign enterprises entering Japan is understanding the unique business culture and work ethic. This includes differences in management and HR policies, which require adaptation by companies entering Japan. For example, the process of termination differs; Japan typically requires a period of notice, whereas immediate dismissal is common in Western countries. Similarly, values around overtime and work culture vary, and misunderstanding these can lead to operational challenges. Success for foreign companies in Japan hinges on fully understanding and adapting to the Japanese management style.
The Importance of Localization
Japanese consumers have unique preferences and purchasing behaviors. In most cases, foreign companies entering Japan need to redesign and redevelop their products and services to align with local tastes and needs. As previously discussed in "Challenges of Japan's Investment Environment for Foreign Companies," the low prevalence of English also plays a role. Products, marketing materials, promotional campaigns, and website content must be adapted to Japanese to meet local needs and preferences effectively.
Strategies for Successful Market Entry of Foreign Companies in Japan
Developing a Localized Marketing Strategy
One of the reasons many foreign brands have struggled in the Japanese market is the lack of sufficient localization in brand-level and marketing efforts. Japanese is a unique language distinct from English, and preferences and behaviors often do not align with global trends. Therefore, more than just translation, a localized approach is required. Especially in branding and product localization, the involvement of a team fluent in Japanese is crucial.
Re-evaluating Your Brand
Is the approach to your brand name and product packaging appropriate and effective in Japanese?
Are the expressions and messages conveyed suitable in the Japanese language?
Assessing Product Fit with Japanese Consumers
How is your value proposition received in the local market?
Analyzing Competitors
What is the competitive landscape like? (Japanese consumers typically have high loyalty to brands they like, making it challenging to disrupt established relationships with competitors in the Japanese market.)
Building Trustworthy Partnerships and Leveraging Networks
Strategic collaboration with local (Japanese) partners is a critical factor in achieving success. Utilizing the network of local partners can help swiftly and smoothly address legal procedures and cultural challenges. For example, working with an executive search firm that is well-versed in the Japanese market can provide one-stop solutions from sharing business goals and management challenges to proposing and implementing organizational and recruitment strategies.
Finding the Right Talent for Business Startup
One of the most challenging and crucial aspects of starting a business in a new market is finding the right talent. Experienced and skilled professionals can significantly support the entire process of establishing your first business venture. For instance, retainer searches by executive search firms are ideal for situations requiring C-level executives or senior management (like CEOs, Sales Directors, Country Managers), or when detailed reports on market mapping and talent searches are needed for recruitment strategy decisions.
As discussed, entering the Japanese market requires bilingual talent with a deep understanding of the Japanese market and language. Securing reliable local partners and the right talent is key to successful market entry in Japan. Utilizing executive search firms with strong networks of excellent bilingual talent across industries can be highly beneficial in developing and executing organizational and recruitment strategies.
Success Story of a Foreign Company Entering Japan in Collaboration with an Executive Search Firm
We interviewed Japheth (Jay) Worthy, an Associate Director at Apex, a leading executive search firm in Japan that has partnered with numerous foreign companies. The interview sheds light on the complex process of foreign companies entering the Japanese market and the pivotal role executive search firms like Apex play in this journey. It reveals that success is not only defined by establishing subsidiaries or increasing sales but also involves strategic decisions and changes in business direction.
*Apex is a member of Kestria, the world’s largest executive search alliance.
Case Study of a Foreign Medical Technology Company Reevaluating Its Decision to Enter Japan with Apex's Support
Q1. Can you share any examples where Apex contributed to a company's successful entry into the Japanese market?
A1. This may not be a traditional success story, but Apex was able to support an American orthopedics company that was considering establishing a subsidiary in Japan. Their products were already being distributed, but they were devising a plan to break away from their current distributor. After meetings and presentations on the Japanese market, they ultimately decided it was not feasible to proceed with their plan. Years later, this decision proved to be beneficial for their business.
Q2. What prompted the client to seek Apex's expertise for their market entry into Japan?
A2. Apex directly contacted them to get an update on their business situation. They met with us for a discussion because we were familiar with key players in their company, their distributor in Japan, and we shared some of the same connections in the Japanese orthopedics industry.
Q3. Can you elaborate on the challenges faced by this client while attempting to enter the Japanese market?
A3. The biggest challenge they, and others, have faced was negotiating with distributors. Japanese distributors tend to be traditional/conservative and family-run, and can be very challenging for companies they support that wish to set up a subsidiary.
Q4. Did the client discuss any specific cultural or business obstacles they anticipated or encountered when expanding into Japan?
A4. The client did not mention any because they wanted us to present on some of the cultural barriers. We highlighted the shallow talent pool due to the low birthrate, aging population, traditional lifetime employment practices, and the norm of passive job seekers.
Q5. Do you have any advice or messages that you would like to share with foreign companies considering entering the Japanese market?
A5. Yes, please take a look at the video below.
"According to recent surveys, Japan continues to be one of the global leaders in recruitment difficulty: More than three-quarters of employers reported hardships in filling key roles. With Japan's shrinking population in addition to the ongoing global talent shortage, the trouble with finding the right leaders for your organization is not going to decrease anytime soon.
This means you will need a partner that is committed to the task and can adapt to this challenging landscape. Of course, we can present those professionals who will bring a wealth of diversity, inclusion and equity but we pride ourselves in finding those who have been overlooked but have a great track record with high potential to bring the change you desire.
Our in-depth knowledge of the healthcare industry paired with our persistence and passion for what we do, means we can deliver not only the right professional for the job but the transformational leader for your organization.
Apex, and our partnership with a global alliance like Kestria, makes us truly fluent in finding leaders for the organization you have now and the one you will need for the future."
*In addition to the Healthcare industry, Apex specializes in Technology, Legal & Compliance, Human Resources, Finance & Accounting, and Consumer.
The American company in this case study was considering entering the Japanese market, but with Apex's support, they developed a flexible vision and ultimately made a different strategic decision. This case study demonstrates how the business was able to continue based on the decision informed by the specialized information on the Japanese market provided by a local executive search firm. Success requires not only sales expansion but also adaptation to market characteristics.
Key Takeaways
Latest Overview and Trends in the Japanese Market
Rapid aging and a decreasing workforce population
Many foreign companies have headquarters or major branches in Tokyo
Building trust and achieving consensus in business takes time
Growth expected in the healthcare and medical device industries due to the aging population
Increasing demand for IT technology across all industries due to the impact of the pandemic
Strengths of the Japanese Market
High level of technological and product development capabilities in research institutions
High availability of skilled professionals (managers and specialists)
Numerous asset managers and operational bases
Well-developed infrastructure
Market potential
Social stability
Challenges of the Japanese Market
Low prevalence of English
Complexity of administrative procedures
High business costs
Three Forms of Market Entry in Japan
Representative Office: No registration required, no corporate tax payment, no direct sales operations
Branch Office: Registration required, corporate tax payment necessary, a base for business operations in Japan
Subsidiary: An independent company (Japanese legal entity)
Key Considerations for Entering the Japanese Market
Difficulty in securing bilingual talent
Unique Japanese business culture and work values
Importance of localization
Strategies for Successful Market Entry
Developing a localized marketing strategy
Collaboration with Japanese executive search firms
Securing experienced bilingual talent
Gaining a clear understanding of the benefits and challenges of entering the Japanese market, along with the necessary procedures and strategies, is crucial. Overcoming the unique market and cultural barriers, as well as language challenges, starts with choosing the right local partners. Apex has been at the forefront of supporting the market entry and business expansion of numerous global and startup companies in Japan since 2010. Our teams, who are industry experts deeply understand the Japanese market, offer comprehensive support in acquiring talent, establishing official business operations, and managing essential procedures and functions. For expert guidance on your market entry into Japan, please contact us.
