Smart Companies Are Eyeing Japan

Ever since Japan's economic bubble burst in 1990, it has become almost fashionable for Western companies to bypass the country. Mesmerized by faster growth and easier access, they have shifted their focus to China, Thailand, and other Asian countries. This shortsighted view may now be changing, if ever so slightly. The past year has shown a spurt in foreign direct investment into Japan. Could it be that some smart U.S. companies, smelling competitive advantage, are bucking a trend to their own benefit? We think so.

Without much fanfare, a window of investment opportunity is making Japan one of the most attractive markets in Asia. With depressed asset prices, rents lower than Hong Kong's, a yen cheaper by half compared with two years ago, and a rebounding economy, Japan has quietly begun to look good again. Japanese consumers (with per capita purchasing power 80 times that of their Chinese counterparts) are hooked on discount products from overseas. Downsizing companies are shedding both high-quality employees who are willing to work for foreign companies and high-quality subsidiaries now available for purchase by American, European, or other Asian companies. Small software firms are selling out to those in Silicon Valley, while others are doing joint ventures again.

For the big multinationals there remain classic arguments to invest in Japan. By competing seriously there, they deny strong Japanese rivals a sanctuary market to amass profits to buy market share in the global marketplace. Being there also allows a company to scope out competitors' plans and products. And winning notoriously finicky Japanese consumers with superior design, quality, and service can be a significant key to success elsewhere.

Despite all the talk of Greater China, Japan today is the world's second-largest economy and will remain so for decades. The Japanese economy is also one where sacrifice and patience can often lead to serious profits. With much of the investment flowing into China turning out to be profitless to date, this is a major attraction for investors. Difficult as Japan may be to crack, the payout can be considerable once a foreign company gains its niche.

Without question, Japan has a long way to go before it is as open to foreign investment as Europe and the U.S. It must further deregulate the economy, ease tax and land-use policies, and learn to treat foreign companies simply as competitors, not strangers outside the family. Rupert Murdoch's recent drubbing at the hands of the clannish Japanese broadcast community is a case in point. Yet there is no denying that Japan's attractiveness vis-a-vis the rest of Asia has improved. Bravo to those companies who discover it first.

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