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Things to consider when you want to start your business in Japan as a non-Japanese

Even after the big earthquake that struck Japan in 2011, the number of non-Japanese companies in Japan continues to increase. When the National Tax Agency JAPAN released their annual report for 2015, it showed that after 2011, the number of foreign corporations has increased by 16% in two years.



There are many reasons to open business in Japan. As many expats living in Japan say, the most attractive point for them to settle in Japan is the feeling of safety. Especially for women and those who have children, they say it is the best part since they don’t need to worry when roaming around. Also, the public transportation system such as trains and subways, especially in Tokyo area provide you easy access from town to town with inexpensive transportation fees and safety.

For those who are willing to start up their business in Japan, there must be more than safety and convenience of transportation there.

The report from “World Economic Forum” reveals that in terms of global competitiveness, Japan is ranked 6th in the world. It is the 2nd highest ranked among Asian countries.

If global market is your target, Japan’s ‘Business sophistication rank’ and ‘Market size rank’ of Japan may not seem interesting, but for sure it is very inspiring to get more ideas for your business. Even world famous unique tech creators like Apple Inc. is willing to move their research and development center in Yokohama, Japan (based on the article from The Wall Street Journal Japan, released on March 26, 2015). That tells you something, right?

Starting Up Your Business in Japan

To start up your business in Japan, there are many things to be considered. First, you should know the system of Japanese laws and regulations regarding the establishment of a company.

1. Incorporated

There’s four types of corporation in Japan. Weigh the advantages and disadvantages by looking through the comparison table.

Example of establishing small K.K. procedures and how many days it will take for each process

2. Visa, Residence and Tax

If you want to live in Japan and become a director or a partner at your own company, there will be a big issue of acquiring Investor/Business Manager Visa. Although, you don’t have to live in Japan to open your business in Japan. There’s three ways to do it.

Representative office: The establishment of representative offices doesn’t require registration, but they cannot open bank accounts by the name. Branch office: Having branch in Japan requires registration. Subsidiary company: The procedures and conditions of establishing a subsidiary company is as same as establishing a Japanese company.

If you can find a Japanese company to establish Joint Venture, that could also be an alternative.

Taxation is also an important thing to consider when choosing the type of company you are establishing.

3. Human Resource

If you are willing to hire someone, the government will require you to do things for the workers you are going to hire, but will also support you with recruitment. Laws and Regulations The Japan has laws regarding the protection of workers such as minimum standards on working conditions and minimum wage. The laws apply to all companies in Japan, regardless of whether the worker and the company is Japanese or non-Japanese.

Recruitment

If you are looking for Japanese workers, there are government-run employment agencies called “Hello Work”. They have offices throughout Japan. They provide both employers and employees with support of matchmaking for free.

Social Security System/Insurance

Everybody residing in Japan is part of the Japan insurance system such as the public health insurance and pension insurance.

There are four different kinds of insurance systems that companies are obliged to take part in.
  1. Worker’s Accident Compensation Insurance
  2. Employment Insurance
  3. Health Insurance and Nursing Care Insurance
  4. Employee’s Pension Insurance
To avoid double insurance, there are agreements that have been signed between countries.
Japan has social security agreements with Germany, the U.K., South Korea, the U.S., Belgium, France, Canada (except Quebec), Australia, the Netherlands, the Czech Republic, Spain, Ireland, Brazil, Switzerland, and Hungary. Any person insured in the pension system of one of these countries who is sent to Japan is exempted from enrolling in the Japanese pension system upon submitting the appropriate notification at a Pension Office or other appropriate agency. Japan has already signed agreements with Italy and India, and governmental talks are underway with Luxembourg, Sweden, China, the Philippines, and Turkey. Preliminary talks are also underway with Slovakia, Austria, and Finland.
Excerpt from Social security agreements between Japan and other countries

Social and Labor Insurances procedures when setting up a company and hiring staff

4. Finding partner

Finding good partner is very important. If you can find a tax and accounting firm who is knowledgeable about both Japanese and international business and taxation as your partner/consultant, you can concentrate on your business without worries.

On next article, we are going to tell you about taxation related with foreign company or foreigner, and the trend on taxation in borderless age.


In Japan, Certified Public Accountants and Tax Accountants are specialists providing accounting and tax support to companies operating in Japan. Certified public accountants enjoy a monopoly on the performance of audits under the Certified Public Accountant Law, while tax accountants have a monopoly on tax agent services, preparation of tax documentation and tax consultations.

Founded in 1989, Moores Rowland Asian Pacific network member - Nagamine & Mishima / JCA Accounting, are established, Tokyo based teams of bilingual professionals. Just what English speaking business owners need to set up operations in Japan.

In Japan, resident companies are taxed on their worldwide income, but non-resident companies are taxed only on Japanese-source income. A company that has its principal or main office in Japan is considered to be resident.

Capital Gains Taxation

Capital gains are taxed as ordinary income at the standard corporate tax rate, with capital losses generally available as a full tax deduction. A non-resident corporation is subject to Japanese corporation tax on any gains realized on the transfer of shares in a Japanese company if the nonresident corporation transfers 5% or more of the shares in the Japanese company during a fiscal year and owns 25% or more of the shares in the Japanese company at any time during the three-year period prior to the end of the fiscal year of the transfer (often referred to as the “5/25 rule”).

Main Allowable Deductions and Tax Credits

In order to file for tax privileges - including deductions for business expenditure, tax loss carryforwards and accelerated depreciation- companies must apply for a blue return at the beginning of a tax year. Various tax incentives are available for certain business activities including: investment in productivity improving assets (PIAs, or depreciable assets used for any revenue-producing activities), increasing wages and salaries (from 1 April 2013 to 31 March 2018), for qualifying companies doing business in certain zones and for qualifying R&D activities. Resident companies may receive dividends distribution reduction depending on their shareholding percentage and time held.

Other Corporate Taxes

Other taxes include: stamp duty (JPY 200-600,000), municipal fixed assets tax (levied at 1.4%), a real estate acquisitions tax (ranging from 3% to 4%) and inheritance tax (progressive rates up to 50%). Registration and licence tax is levied where certain property is registered, at a rate from 0.1% to 2% of the taxable basis or at a fixed amount.

Our international tax team at Moores Rowland Asia Pacific can advise on cross border issues involving the US, UK or Asia. Feel free to reach out to us at anytime.

Visa categories and requirements in Japan

If you would like to live in Japan, it is necessary to get a visa that is most appropriate for your intended activities in Japan.

There are 27 types of visa in Japan and the requirements as well as the authorized activities are different for each of them.

It is therefore necessary to first determine one type of visa that will allow you to do what you would like to pursue in Japan, and for which you can satisfy the requirements of that particular visa.

It is not possible to get a visa to do the activities that are not listed in the following table. For example, you can't get a working visa for a simple labour work such as construction worker or a waiter/waitress. Inn most cases, it is required to have a hosting organization (company, entity, or some kind of business related organization), or inviting person (commonly known as a "visa sponsor") to be able to get a visa in Japan, such as a school in case of a student visa or an employer in case of a working visa.

There are also requirements to meet as to successfully obtain a Japanesevisa. So even if you find a Japanese employer, you will not be able to come to work in Japan if you don't meet these requirements. These 27 Japanese visas can be divided into 3 main groups:

  1. Working visa: Those which allow you to work
  2. Non-working visa: Those which don't allow you to work
  3. Family related visa: Those granted according to the family status


  4. One person can get only one type of visa at a time, so if you are eligible for more than one (engineer visa and spouse visa for example), you will need to choose one visa type among your options, we can advise on the best type of visa for you. Now, let's examine the definition of each type of visa and its requirements that will allow you to determine the type of visa that you qualify for.

    Working visa

    Working visas only cover the kind of work that requires high level of professional knowledge or skills. It is therefore not possible for foreigners to engage in manual / simple labour under a working visa, unless they have the visa granted according to the family status (spouse/child of Japanese national, long term resident, etc.), a trainee visa, or are part-time workers on student or dependent visas.

    For example, there are no work visas for; hair-dressing, massage therapists, waiter/waitress, salesclerk, construction workers, etc.

    The most typical working visas to work in private companies are the following 5 types.

    Visa type Authorized activities Requirements
    *Engineer / Specialist in Humanities / International Services Engineer: Working in the fields of physical science, engineering or other natural science.

    Specialist in humanities: Working in legal, economic, social fields or in the human science.

    International services: Working in translation, interpretation, language instruction, public relations, international trade, fashion design, interior design, product development.
    Engineer:University degree in the corresponding field or 10 years of professional experience

    Specialist in humanities: University degree or 10 years' professional experience in the field

    International services: 3 years' professional experience in the field except for interpretation / translation or language instruction that only require a university degree.
    *Intra-company Transferee Expats of foreign companies or the subsidiary companies of Japanese firms located overseas Must have worked more than one year in the said office in overseas
    *Skilled Labor Foreign cooking, architecture or civil engineering characteristic to foreign countries, processing precious stones, metals or fur, training animals, piloting aircrafts, instructing sports, sommeliers... 3-10 years' professional experience (number of years depending on the type of work) in the corresponding fields (including the period of training)
    *Business Manager Starting or investing into a business in Japan, or managing business on behalf of other investors Physical, dedicated office space in Japan and 5 million yen investment into the business for new application. 10 million yen sales and 5 million yen expenses for renewal.
    Introduced in May 2012, the Highly Skilled Professional visa is intended to attract workers who are likely to contribute to Japanese economy.

    *>Highly Skilled Professional Points are given according to the applicant's educational level and professional background, income and academic achievement. If you accumulate 70 points or more in the point evaluation, a special visa status is given which includes the following preferential treatment:
    • Possibility of engaging in multiple activities that cover different visa categories
    • 5 year visa granted
    • Faster access to Permanent Resident visa
    • Preferential processing of Immigration procedure
    • Possibility to work on full-time basis for the spouse under certains conditions
    • Possibility of bringing your parents to Japan under certains conditions
    • Possibility of hiring a domestic helper under certains conditions
    For more detail, please refer to this page and the Immigration's website.
    The following are the types of working visas granted to those who have certain status, knowledge, or skills.

    Diplomat / Official Personnel of the Embassies and Consular Offices, Diplomatic Missions, Government personnel and their families. The application goes through the Ministry of Foreign Affairs, and not the Immigration bureau.
    Professor Research and education at University or equivalent educational institutions.
    *Instructor Instruction of foreign languages or other education at elementary schools, junior high schools, high schools, etc.

    *Instructors in the private language schools must apply for the "Specialist in Humanities / International Services" visa.
    Artist Artistic activities that generate sufficient income to support the artists life in Japan (painter, sculptor, photographer, writer, composer, songwriter, etc...)
    Religious Activities Missionaries sent from foreign religious organizations.
    Journalist Journalists who signed the contracts with foreign media organizations, including freelance journalists.
    *Legal / Accounting Services Attorneys, certified public accountants or other specialists with legal qualifications.
    *Medical Services Physicians, dentists or other medical specialists with Japanese qualifications.
    *Researcher Research conducted under a contract with public or private organizations in Japan
    *Entertainer Theatrical performances, musical performances, sports or any other show business.

    Non-working visa

    It is possible to work under a non-working visas, but only if you work below the limited hours per week (except for temporary visitor and trainee visa holders), and if you obtain permission from the immigration office.
    *Students Students enrolled in universities, vocational schools (senmon gakko), high schools, junior high schools, elementary schools or Japanese language schools.The visa application is submitted through the school and the time of application is limited.
    *Trainee Training to lean and acquire technology, skills or knowledge at public or private organizations in Japan.
    This status is granted only if the candidate is to engage in a job requiring the technology, skills or knowledge obtained in Japan after returning to the home country.
    *Technical Internship Internship after training under trainee visa
    *Dependent Spouses or children of people staying in Japan under the work visa and non-working visa (except for temporary visitors and trainees).
    Cultural Activities Cultural or artistic activities that provide no income.
    Studies or researches of Japanese cultural or artistic activities.
    University students on internship without remuneration.
    Temporary Visitor Tourism, vacation, sports, family visit, participation to seminars, conferences or reunions. It is possible also to have business meetings, sign contracts, engage in PR activities and conduct market research.
    The following status of residence is granted case by case, and the possibility or not to work is determined for each case.

    Designated Activities Activities specifically designated for each case.
    Housekeepers for diplomats, students on internship, working holiday, Long Stay for sightseeing and recreation
    These visas are subject to requirements that are determined by considering the impact on the industries and society in Japan, and to adjust the quality and/or quantity of the entrants.

    Family Related Visas

    These visas have no restriction on the activities to be engaged, so it is possible to work in any field or industry. You are free to change jobs or to have more than one activity.

    Spouse or Child of Japanese Nationals Spouses and children of Japanese nationals
    Long Term Residents Refugees, descendants of Japanese nationals, people caring for their children with Japanese nationality, people divorced from Japanese nationals, etc.
    Permanent Residents (Indefinite) *Note Visa granted to those who have stayed certain conditions regarding the length of time spent in Japan, income, tax payment, etc. For more detail, please refer to this page.
    Spouse or Child of Permanent Residents Spouses and children of Permanent Resident

Japan: Legal environment

Business Contract

General Observation
You must state precisely in the contract the obligations of the vendor and the methods of quality control.
Law Applicable to the Contract
You must be particularly vigilant about the law applicable to the contract and the methods of conflict resolution. Indeed, Japan is not a signatory to the Vienna Convention on International Contracts. Click here to see the list of signatory countries. The Japanese legal system is not easy for a foreigner to understand so you are advised to choose international law or a system of settlement by arbitration. The laws and courts of America, England and Switzerland provide fair justice and are understandable in English, which is likely to be accepted by your Japanese supplier.
Advisable Incoterms
Choose FOB or CIF, or more. Click here to get further information about incoterms. Avoid EXW if you do not want to be involved in organizing domestic transport in Japan, as this is quite a complex operation.
Language of Domestic Contract
Japanese, English
Other Laws Which Can Be Used in Domestic Contracts
The laws and courts of America, England and Switzerland provide fair justice and are understandable in English, and are likely to be accepted by your Japanese supplier.

Intellectual Property

National Organisations
The following bodies are responsible for the regulation of intellectual property: Japan Patent Organisation (JPO) and the Japan Patent Information Organisation (JAPIO).
Regional Organisations
Intellectual Property Rights Experts Group (IPEG), intellectual property resource of each member economy of the APEC community
International Membership
Member of the WIPO (World Intellectual Property Organization) Signatory to the Paris Convention For the Protection of Intellectual Property Membership to the TRIPS agreement - Trade-Related Aspects of Intellectual Property Rights (TRIPS)
 

National Regulation and International Agreements

 
Type of property and law Validity International Agreements Signed
Patent   Patent Law of 1999 20 years, renewable Patent Cooperation Treaty (PCT)
Trademark   The Trademarks Law of 1997 is the basis of trademark protection, but the Unfair Competition Prevention Law enforced by the METI provides additional protection. 10 years, renewable every 10 years Trademark Law Treaty Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks
Design   Design Law of 1997 15 years  
Copyright   Copyright Law of 2006 Berne convention For the Protection of Literary and Artistic Works Convention for the Protection of Producers of Phonograms Against Unauthorized Duplication of Their Phonograms Rome Convention For the Protection of Performers, Producers of Phonograms and Broadcasting Organizations WIPO Copyright Treaty WIPO Performances and Phonograms Treaty
Industrial Models   Utility Model Law of 1997 10 years  

Legal Framework of Business

Equity of Judgments

Equal Treatment of Nationals and Foreigners
While there is no legal basis for discrimination against foreigners in the Japanese legal system, not being able to speak Japanese may lead to a lack of equity.
The Language of Justice
Japanese
Recourse to an Interpreter
There are no guidelines to ensure effective communication between judges, lawyers and non Japanese-speaking defendants. No standard licensing or qualification system exists for court interpreters and trials proceed even if no translation or interpretation is provided for the accused.
Legal Similarities
The system is modeled on European systems with Anglo-American influences.
 

The Different Legal Codes

 
The Constitution of Japan (Nippon-koku-kenpo, 1946) Foundation of the State, rights of individuals, right of possession
The Civil Code (Minpo, 1896) Contract law, right of possession
The Code of Civil Procedure (Minji-sosho-ho, 1996) Company law
The Criminal Code (Keiho, 1907, revised in 2004) Criminal law
The Code of Criminal Procedure (Keiji-sosho-ho, 1948) Criminal procedures
Companies Act (2005) which replaces the former Commercial Code (Shoho, 1899) Corporate status, rights of managers, commercial agents’ rights, etc.
 
Checking National Laws Online
Japan (Lexadin, the World Law Guide) Yoshida & Partners
Other Useful Resources
Japan Law Blog
Country Guides
Practical Law Company, Guide to doing business in Japan: legal system

Learn more about Lawyers and Legal in Japan on Globaltrade.net, the Directory for International Trade Service Providers.

 

The Jurisdictions

 
The Supreme Court Final appellate court (second appeal, named “Jokoku” in Japanese) To access the website of the Supreme Court and get further information about the organization of the Japanese legal system, click here.
8 High courts Territorial jurisdiction of the eight major cities in Japan Intermediate appellate courts (first appeal, named “Koso” in Japanese)
2 Intellectual Property High courts Special branches of the Tokyo and Osaka High Courts. Handles only cases relating to intellectual property in first instance and appeals (only in Tokyo) against decisions made by district courts or by the Japan Patent Office. To access the website of the Intellectual Property High Court of Tokyo, click here.
50 District courts Territorial jurisdiction First instance (exercising general jurisdiction over all actions, criminal, civil) and appellate jurisdiction over the decision of the Summary courts. Between one and three judges depending on the cases
438 Summary courts First instance over civil cases involving claims for amounts not exceeding 1,400,000 yen and criminal cases for offences punishable by fines or lighter punishment and other offences, such as habitual gambling and embezzlement. The summary court cannot impose imprisonment or graver punishment as a general rule. When the summary court deems it appropriate to impose a punishment exceeding the limit, it must transfer the case to the district court. Single judge court
77 Family courts First instance, dealing comprehensively with domestic relations cases and juvenile delinquency cases
 
 

Court Officials

Practicing attorneys
They are registered with a regional bar association affiliated to the Japan Federation of Bar Associations. Attorneys at law (bengoshi) are distinguished from attorneys at foreign law (gaiben) who are lawyers from foreign countries licensed to practice law in Japan. For more information, consult the Bengoshi Law. Gaiben can only give advice pertaining to the law of their home jurisdiction. They are generally involved in intermediating between foreign clients and Japanese lawyers, intermediating between foreign and Japanese clients, or assisting Japanese clients with foreign legal matters. For further information, visit the web pages of the Ministry of Justice devoted to Gaiben and consult the Foreign lawyers law. Some attorneys, called Benrishi, are specialized in the field of intellectual property. Click here to find a list of specialized practices.
Lower court judges
Career public servants appointed for a renewable ten-year term
Public prosecutors
Public servants who serve until retirement

Learn more about Legal and Compliance in Japan on Globaltrade.net, the Directory for International Trade Service Providers.

International Dispute Resolution

Arbitration
Recognized under Japanese law as a legitimate method for settling disputes, used specifically in the field of international transactions
Arbitration Law
Law N°138 of 2003, modeled on the UNICITRAL Model law on international Commercial Arbitration
Conformity to International Commercial Arbitration Rules
Party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Party to the Geneva Protocol on Arbitration Clauses. Party to the Geneva Convention of the Execution of Foreign Arbitral Awards.
Appointment of Arbitrators
Free determination of the number (minimum three) and the method of appointment by the parties.
Arbitration Procedure
After hearing the parties, the arbitrator makes an award. No appeal is allowed against an award except if it has been made on false evidence. In this case, it can be annulled by the law.
Permanent Arbitration Bodies
Japan Shipping Exchange (Sectors Covered: Maritime disputes) Japan Commercial Arbitration Association (Sectors Covered: International transactions) National Committee of the International Chamber of commerce ( ICC) (Sectors Covered: International transactions) Japan Intellectual Property Arbitration Center (Sectors Covered: Disputes involving intellectual property and resolution procedures for “.jp” domain names)

The demographic features of the population of Japan include population density, ethnicity, education level, health of the populace, economic status, religious affiliations and other aspects regarding the population.

History

For information on historical demographic data in Japan prior to 1945 refer to:
  • Demographic history of Japan before the Meiji Restoration
  • Demography of Imperial Japan

Population

Based on the census from October 2010, Japan's population was at its peak at 128,057,352. As of October 1, 2015, the population was 127,094,745 making it the world's tenth-most populous country at the time. It had declined by 0.8 percent from the time of the census five years ago, the first time it had declined since the 1945 census. Japan's population size can be attributed to high growth rates experienced during the late 19th and early 20th centuries.

Since 2010, Japan has experienced net population loss due to falling birth rates and almost no immigration, despite having one of the highest life expectancies in the world, at 85.00 years as of 2016 (it was 81.25 as of 2006). Using the annual estimate for October of each year, the population peaked in 2008 at 128,083,960 and had fallen 285,256 by October 2011.[6] Japan's population density was 336 people per square kilometer.

Based on 2012 data from the National Institute of Population and Social Security Research, Japan's population will keep declining by about one million people every year in the coming decades, which will leave Japan with a population of 42 million in 2110.More than 40% of the population is expected to be over age 65 in 2060. In 2012, the population had for six consecutive years declined by 212,000, the largest drop on record since 1947 and also a record low of 1.03 million births.[9] In 2014, a new record of population drop happened with 268,000 people.In 2013, more than 20 percent of the population are age 65 and over.

The population ranking of Japan dropped from 7th to 8th in 1990, to 9th in 1998, and to 10th in the early 21st century. In 2015 it dropped further to 11th place, according to both the UN and PRB. Over the period of 2010–2015, the population shrank by almost a million.


For many decades, Japan’s high-technology companies, nourished by innovative products and prominent consumer electronics brands, were the envy of the global sector. But that is rapidly changing. More recently, these companies have been losing ground around the world, undermined by a reluctance to make the aggressive moves and hard choices necessary to compete in new markets and against emboldened attackers.

Recent McKinsey research shows that Japanese high-tech companies lost a decade between 2000 and 2010 (Exhibit 1) and on current trajectory could see their global market share drop by 20 percent from 2008 to 2013. That represents a cumulative loss of more than $30 billion in potential revenue. Japanese companies have a global presence and reputation, but most remain surprisingly dependent on Japan’s domestic market for revenue, while struggling to capture a reasonable share of dynamically growing emerging markets. Our analysis shows that Japanese high-tech companies, as a group, still generate more than 50 percent of their sales in the home market, growing by a mere 1 percent annually, compared with growth of 5 to 10 percent in the developing world and 2 to 3 percent in other developed markets. As a result, Japanese companies will see their global market share decline rapidly even if they successfully defend their current share in each market.

Japanese high-tech players experienced a lost decade between 2000 and 2010.

But the situation is potentially worse. Japanese companies are also losing share in major products within key geographic markets. Between 2005 and 2009, these players’ share of LCD-TV unit shipments grew to 100 percent, from 96 percent, in Japan but fell to 30 percent, from 40 percent, in North America. Also, total unit-volume growth in Japan during this period was very small relative to growth in North America and elsewhere. The pattern is similar for a number of other products, such as servers—success in Japan but failure abroad. For PCs and mobile phones, share declined even in the critical Japanese home market.

In addition, Japanese companies have almost no position in the critically important software and IT services markets outside of Japan. As a result, they will probably miss out on almost half of the absolute expansion in the global high-tech market between 2008 and 2013. Most of the growth will come from the United States and Europe, where Japanese companies have a limited presence. Market share changes little in these incumbent-dominated geographies, and most major movements that do occur reflect large-scale mergers and acquisitions. Unless Japanese companies join the party, they will be locked out of some of the most attractive growth and profit opportunities.

As a result of focusing on the wrong geographic markets and losing share within many of them, Japanese companies are sliding down the ranks of the leaders in units sold across a range of product sectors. In 2004, these companies held the number-one and -two spots in LCD TVs, but by 2009 their South Korean rivals Samsung and LG had taken a commanding lead. Similarly, Japanese companies occupied three of the top five slots in the global PC market in 2004, but only one in 2008. This rapid loss of leadership in important product categories in consumer electronics may be disastrous in the context of the winner-takes-all dynamic of the high-tech sector, where the top one or two players in each submarket tend to capture all the value.

Models for success

So what can these Japanese companies do to regain their edge? We looked closely at more than 20 global high-tech leaders to understand the sources of their success—category growth, market share gains, or M&A. We found four distinct models that Japanese companies could pursue (Exhibit 2).

In pursuing growth, Japanese high-tech companies can look to any of four distinct models for success.

World-class operators

Some companies win by identifying fast-growing product categories and geographic markets and grabbing share through an intense focus on operational excellence. They constantly apply lean-production techniques to manufacturing, the supply chain, and go-to-market operations and move as much of the value chain as possible to local markets. They also pursue dominant scale in their target markets by investing massively in capacity (for example, in semiconductor manufacturing).

Between 1999 and 2009, the companies in this group generated total revenue growth of 15 to 20 percent a year, on average. Roughly half came from underlying market growth in the categories in which they compete (portfolio momentum) and half from market share gains. There was limited M&A. This group’s profitability fell over the period as competition intensified and markets shifted to the developing world’s more value-oriented customers, but the leaders continue to deliver operating-profit margins by 5 to 10 percent a year. Acer, LG, and Samsung are examples of leading companies in this category.

Category creators

The small number of companies in a second group shape new markets for themselves by developing and marketing innovative products and services. Above all, they emphasize creative design and engineering talent. From 1999 to 2009, these companies generated revenue growth of 20 percent or more a year, almost entirely though category growth. Successful category creators are also very profitable—those in our sample delivered an average of 15 to 20 percent annual operating profit during the period of our analysis. Many Japanese companies started out as category creators, but most were heavily hardware driven and had lost their innovative edge well before the period of our research. Today’s category creator concepts emerge primarily from the nexus of hardware, software, and services, and Japan lags behind global competitors. Apple, Google, and Research in Motion (RIM) are well-known companies pursuing this model.

Acquirers

Another group of companies don’t neglect underlying organic expansion but also aggressively pursue M&A to buy growth platforms in interesting product and geographic market segments. They do multiple deals each year and skillfully identify, acquire, and integrate promising companies both large and small. During the ten years from 1999 to 2009, these companies generated revenue growth of 10 to 12 percent a year, with the majority coming from acquisitions and the remainder from a mix of portfolio momentum and market share gains. Annual operating profits were relatively stable over the period, at 10 to 20 percent. This group includes many US companies, such as Cisco Systems and Hewlett-Packard.

Portfolio shapers

The companies in our last group emphasize profitability over growth and actively pursue both acquisitions and divestitures. They take a rigorous and disciplined approach to corporate-portfolio strategy, actively shaping their areas of business focus. Like the acquirers, they do multiple deals each year and have well-developed M&A-related skills and capabilities. Between 1999 and 2009, the companies in our sample generated revenue growth of only 1 percent a year, as the shrinkage of divestiture-related sales largely canceled out portfolio momentum and acquisition-related growth. Profitability grew substantially, however: over the period, most of these companies increased their annual operating-profit margins by five to ten percentage points. This group includes a large number of European and US companies, including IBM and Siemens.

What it will take to win

The leading Japanese technology companies in our sample appear to lack the strategic clarity and management willpower to pursue any of the winning strategies effectively, so they are falling behind in every kind of growth. Most tend to rely on moderate category expansion, fail to streamline their business portfolios, lose market share in core businesses, and do only a few (and domestic) M&A deals (Exhibit 3). From 1999 to 2009, the Japanese companies achieved average annual revenue increases of only 2 percent, because market share losses cancelled out category growth gains. Profitability—already low at an average of 2 to 3 percent in 1999—fell further during the period. Most players ended up in the 1 to 2 percent range in 2009.

Most Japanese technology companies rely on moderate category growth and make few M&A deals.

Senior managers of Japan’s high-tech giants urgently need to break out of their current strategic and operational inertia and take the bold steps required to leave a legacy of healthy global champions for succeeding generations. All the success models that global rivals use are possible for Japanese companies, but each of them must make its own hard choices.

Seeking the operational edge

Japanese companies that pursue market share gains and operational excellence must shift focus to growth markets, cut costs, and increase efficiency across the value chain. McKinsey analysis shows a correlation between market success and commitment to emerging markets (for example, the level of localization in value chains and product portfolios). Most Japanese companies operating in emerging markets have been content to take a passive go-to-market approach, relying on scaled-back developed-market products delivered through venerable but underperforming distributor networks.

To compete effectively, these companies will need to build up their local organizational capabilities and become insiders in the markets they are targeting. At the top of the list is improved local R&D and product design to address the needs of customers in emerging markets at attractive price points more effectively. In addition, companies should strengthen relations with regulators and government officials to understand and navigate local constraints more successfully. Downstream, these companies must develop multichannel go-to-market models, including call-center and Web-based operations, and they will need to review, restructure, and better manage their distributor networks in the developing world.

Achieving sustainable cost-competitiveness will require Japanese companies to restructure their operations across the value chain by outsourcing and offshoring key functions and maximizing the efficiency of the remaining operations in Japan. In some cases, they should even consider offshoring the headquarters of business units to shorten decision-making processes and expose senior managers to local market conditions. All these changes will probably require headcount reductions in Japan, but they will be necessary to stay competitive with foreign rivals. Many Japanese technology executives we speak with understand the necessity for these measures. Some have begun to move quietly in this direction, but Japan’s high-tech giants must do much more to get back in shape.

Innovation renewal

Companies seeking to regain innovation leadership and create new product categories must break free of their current hardware-centric models and find ways to collaborate within and outside the organization. The digitization of the electronics industry means that hardware is commoditizing much more quickly than in the past, while software capabilities are becoming more important than hardware-engineering ones. Today, successful and sustainable innovations usually originate in superior customer insights and creative business models rather than technical breakthroughs.

acquisitions of companies offering software solutions or specific customer applications could make sense. Similarly, building a portfolio of alliances on themes such as “smart” electricity grids, health care supported by mobile devices, or cloud-computing services could help jump-start innovation. In addition, Japanese companies seeking a second wind in innovation will probably also need to revamp their human-resources policies by introducing differentiated incentives and rewards to attract, motivate, and retain creative, talented staff.

Many Japanese high-tech companies have their roots in the category creator model. But they have moved far away from it in culture and mind-set and may find it difficult to recapture the magic organically. That’s why we believe M&A will play a key role for companies choosing this path.

A growing need for cross-border deals

Japanese companies seeking growth through large-scale acquisitions will need a bolder approach to M&A, pursuing and completing deals that “move the needle.” To do so, it will be necessary to aim for bigger targets that would have a strong strategic, operational, and financial impact, as well as bid aggressively to win. Since most Japanese companies share similar strengths and limitations, most of these transformational deals will, by definition, be cross-border. To compete effectively for such high-profile deals, Japanese companies must upgrade their internal M&A skills, including faster decision making to enable quicker responses in the tricky world of deal negotiations.

Once a transaction closes, Japanese high-tech managers should act much more quickly and systematically than they have in the past to integrate the acquisition and actually capture synergies. Finally, Japanese acquirers will need to introduce more open and transparent governance structures and processes in areas such as the appointment and evaluation of C-level management to integrate world-class executives from acquired companies and to provide suitable incentives. The acquirer strategy will probably be a form of shock therapy for Japan’s inward-looking giants, but successful serial acquirers such as HP have shown that significant rewards come with the risks.

Profiting from active portfolio management

Companies that choose to shape the portfolio for profitability rather than growth will need to rethink hypothetical but unrealized synergies between businesses and overcome internal resistance to divesting underperforming units. As a start, these companies should introduce a more rigorous performance-management culture, supported by world-class managerial-accounting systems and processes, to create clarity on expectations and actual performance across their businesses. Then they will need to use this transparency to break through the emotional and cultural barriers to identifying and selling noncore assets—for example, white goods or semiconductors, depending on the company.

Like the acquirers, the portfolio shapers must upgrade their M&A skills significantly to ensure that they can complete deals in a timely manner while simultaneously maximizing the value created. Although the portfolio shaper strategy could deliver a lot of low-hanging fruit to most large Japanese tech players, it is in many ways the most challenging model to follow, requiring hard-nosed leadership willing to break long-standing internal taboos and to part with old friends. In some cases, the early stages of this strategy could end up shrinking a company as large underperforming assets are converted into smaller emerging businesses with better returns.


Economy - overview

Over the past 70 years, government-industry cooperation, a strong work ethic, mastery of high technology, and a comparatively small defense allocation (slightly less than 1% of GDP) have helped Japan develop an advanced economy. Two notable characteristics of the post-World War II economy were the close interlocking structures of manufacturers, suppliers, and distributors, known as keiretsu, and the guarantee of lifetime employment for a substantial portion of the urban labor force. Both features have significantly eroded under the dual pressures of global competition and domestic demographic change.

Measured on a purchasing power parity basis that adjusts for price differences, Japan in 2017 stood as the fourth-largest economy in the world after first-place China, which surpassed Japan in 2001, and third-place India, which edged out Japan in 2012. For three postwar decades, overall real economic growth was impressive - a 10% average in the 1960s, 5% in the 1970s, and 4% in the 1980s. Growth slowed markedly in the 1990s, averaging just 1.7%, largely because of the aftereffects of inefficient investment and the collapse of an asset price bubble in the late 1980s, which entailed considerable time for firms to reduce excess debt, capital, and labor. Modest economic growth continued after 2000, but the economy has fallen into recession four times since 2008.

Japan enjoyed an uptick in growth in 2013 on the basis of Prime Minister Shinzo ABE’s “Three Arrows” economic revitalization agenda - dubbed “Abenomics” - of monetary easing, “flexible” fiscal policy, and structural reform. Led by the Bank of Japan’s aggressive monetary easing, Japan is making modest progress in ending deflation, but demographic decline – a low birthrate and an aging, shrinking population – poses a major long-term challenge for the economy. The government currently faces the quandary of balancing its efforts to stimulate growth and institute economic reforms with the necessity of addressing its sizable public debt, which stands at 235% of GDP. To help raise government revenue, Japan adopted legislation in 2012 to gradually raise the consumption tax rate. However, the first such increase, in April 2014, led to another recession, so Prime Minister ABE has twice postponed the next increase, now scheduled for October 2019. Structural reforms to unlock productivity are seen as central to strengthening the economy in the long-run.

Scarce in critical natural resources, Japan has long been dependent on imported energy and raw materials. After the complete shutdown of Japan’s nuclear reactors following the earthquake and tsunami disaster in 2011, Japan's industrial sector has become even more dependent than before on imported fossil fuels. However, ABE’s government is seeking to restart nuclear power plants that meet strict new safety standards and is emphasizing nuclear energy’s importance as a base-load electricity source. In August 2015, Japan successfully restarted one nuclear reactor at the Sendai Nuclear Power Plant in Kagoshima prefecture, and several other reactors around the country have since resumed operations; however, opposition from local governments has delayed several more restarts that remain pending. Reforms of the electricity and gas sectors, including full liberalization of Japan’s energy market in April 2016 and gas market in April 2017, constitute an important part of Prime Minister Abe’s economic program.

In October 2015, Japan and 11 trading partners reached agreement on the Trans-Pacific Partnership (TPP), a pact that had promised to open Japan's economy to increased foreign competition and create new export opportunities for Japanese businesses. Japan was the second country to ratify the TPP in December 2016; the United States signaled its withdrawal from the TPP on January 23, 2017, and as of April 2017 the agreement has not gone into effect.
GDP (purchasing power parity)$5.405 trillion (2017 est.)
$5.325 trillion (2016 est.)
$5.27 trillion (2015 est.)
note: data are in 2017 dollars
GDP (official exchange rate)$4.884 trillion (2016 est.)
GDP - real growth rate1.5% (2017 est.)
1% (2016 est.)
1.1% (2015 est.)
GDP - per capita (PPP)$42,700 (2017 est.)
$41,900 (2016 est.)
$41,500 (2015 est.)
note: data are in 2017 dollars
Gross national saving27% of GDP (2017 est.)
27.2% of GDP (2016 est.)
27% of GDP (2015 est.)
GDP - composition, by end usehousehold consumption: 55.9%
government consumption: 19.5%
investment in fixed capital: 23.5%
investment in inventories: 0.2%
exports of goods and services: 17.8%
imports of goods and services: -16.8% (2017 est.)
GDP - composition by sectoragriculture: 1%
industry: 29.7%
services: 69.3% (2017 est.)
Population below poverty line16.1% (2013 est.)
Labor force67.77 million (2017 est.)
Labor force - by occupationagriculture: 2.9%
industry: 26.2%
services: 70.9% (February 2015 est)
Unemployment rate2.9% (2017 est.)
3.1% (2016 est.)
Unemployment, youth ages 15-24total: 5.1%
male: 5.7%
female: 4.5% (2016 est.)
Household income or consumption by percentage sharelowest 10%: 2.7%
highest 10%: 24.8% (2008)
Distribution of family income - Gini index37.9 (2011)
24.9 (1993)
Budgetrevenues: $1.678 trillion
expenditures: $1.902 trillion (2017 est.)
Taxes and other revenues34.3% of GDP (2017 est.)
Budget surplus (+) or deficit (-)-4.6% of GDP (2017 est.)
Public debt223.8% of GDP (2017 est.)
222.2% of GDP (2016 est.)
Inflation rate (consumer prices)0.4% (2017 est.)
-0.1% (2016 est.)
Central bank discount rate0.3% (31 December 2015)
0.3% (31 December 2014)
Commercial bank prime lending rate1.5% (31 December 2017 est.)
1.48% (31 December 2016 est.)
Stock of narrow money$6.426 trillion (31 December 2017 est.)
$5.651 trillion (31 December 2016 est.)
Stock of broad money$8.917 trillion (31 December 2017 est.)
$8.023 trillion (31 December 2016 est.)
Stock of domestic credit$13.63 trillion (31 December 2017 est.)
$12.11 trillion (31 December 2016 est.)
Market value of publicly traded shares$4.895 trillion (31 December 2015 est.)
$4.378 trillion (31 December 2014 est.)
$4.543 trillion (31 December 2013 est.)
Agriculture - productsvegetables, rice, fish, poultry, fruit, dairy products, pork, beef, flowers, potatoes/taros/yams, sugarcane, tea, legumes, wheat and barley
Industriesamong world's largest and most technologically advanced producers of motor vehicles, electronic equipment, machine tools, steel and nonferrous metals, ships, chemicals, textiles, processed foods
Industrial production growth rate1.4% (2017 est.)
Current Account Balance$175 billion (2017 est.)
$188.1 billion (2016 est.)
Exports$683.3 billion (2017 est.)
$634.9 billion (2016 est.)
Exports - commoditiesmotor vehicles 14.9%; iron and steel products 5.4%; semiconductors 5%; auto parts 4.8%; power generating machinery 3.5%; plastic materials 3.3% (2014 est.)
Exports - partnersUS 20.2%, China 17.7%, South Korea 7.2%, Hong Kong 5.2%, Thailand 4.3% (2016)
Imports$625.7 billion (2017 est.)
$583.5 billion (2016 est.)
Imports - commoditiespetroleum 16.1%; liquid natural gas 9.1%; clothing 3.8%; semiconductors 3.3%; coal 2.4%; audio and visual apparatus 1.4% (2014 est.)
Imports - partnersChina 25.8%, US 11.4%, Australia 5%, South Korea 4.1% (2016)
Reserves of foreign exchange and gold$1.217 trillion (31 December 2016 est.)
$1.233 trillion (31 December 2015 est.)
Debt - external$3.24 trillion (31 March 2016 est.)
$2.83 trillion (31 March 2015 est.)
Stock of direct foreign investment - at home$268.4 billion (31 December 2017 est.)
$238.4 billion (31 December 2016 est.)
Stock of direct foreign investment - abroad$1.548 trillion (31 December 2017 est.)
$1.363 trillion (31 December 2016 est.)
Exchange ratesyen (JPY) per US dollar -
111.1 (2017 est.)
108.76 (2016 est.)
108.76 (2015 est.)
121.02 (2014 est.)
97.44 (2013 est.)
Fiscal year1 April - 31 March