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Doing Business in Japan:
Lessons from Noh

By: Paul J. Scalise

Just as one has to be quietly patient when watching a Noh play, so foreign investors must take the time to find their way in Japan. Do not be misled by all the figures showing spikes in foreign direct investment since 1998. 

If the old saying is true—that you should never judge a book by its cover—then ask yourself what a few numbers might have to offer and prepare yourself for a surprise. 

In recent years, the potential Japan investor might be intrigued by the sharp increase in foreign direct investment (FDI) into the world’s second largest economy. 

The annual inward flow of FDI, as reported by Japan’s Ministry of Finance, never exceeded 800bn yen (US$1=119.8JPY, US$6.7bn) before 1998. In 1998, FDI totaled 1300bn yen, and then almost doubled to 2400bn yen the following year. 

Could it be that Japan is finally experiencing the much anticipated third opening—a change of such magnitude as to merit comparison with the Meiji Restoration of 1868 or the post-war reconstruction of 1945-52? 

The FDI increase would certainly suggest that the recent spate of high-profile mergers and acquisitions (M&A) activities is more than just a freak occurrence. 

After all, Vodafone, bought more than 15% of Japan Telecom, Japan’s third largest telecommunications operator, as part of a strategy to take majority control of J-Phone, Japan Telecom’s fast-growing mobile phone subsidiary. 

French automaker, Renault, took a controlling stake (37%) in one of Japan’s largest automakers, Nissan, that turned the company’s once lagging global competitiveness around in record-breaking time. 

And who could forget American brokerage Merrill Lynch when it snapped up bankrupt Yamaichi Securities only to face dire financial complications itself? 

On the surface, these anecdotes suggest change is certainly on the horizon. But it’s the Merrill Lynch example that reminds us that the road to reform is a bumpy one. 

So what’s the take-home message for doing business in Japan? Just one word: patience. The usual chestnuts apply, of course—determination, common sense, a degree of cultural sensitivity—but the crucial factor in this “how-to-do-business-in-Japan-and-succeed” equation isn’t all about bowing correctly or whether or not you should eat sushi with a fork and knife. 

It’s about navigating the abundance of red herrings on the informational highway, while at the same time being able to map out macro trends, examine how they influence a particular sector, and pray that your timing at the sector level meets more than just your expectations. It has to meet your required rate of return too. If you are looking for an easy ride in this country, think again. 

Unlike most of Asia, Japan is not an emerging market; regardless of what the FDI numbers may suggest, business opportunities are not necessarily bursting at the seams.

Mature, industrialized economies face their own problems from slowing GDP growth to solidified infrastructures and wage rates to vested interests who are determined to protect jobs. Many foreign investors thought that reading a few business gurus, having wads of cash, and thinking “big picture” was more than enough to ensure a financially viable business plan. 

It wasn’t. 

The "Bubble" Japan: Cliché or Cutting Observation?

B ack in the 1980s, much of the conventional wisdom on doing business with Japan was based on one-dimensional imperatives. “If the Japanese have free reign in our markets,” some reasoned, “we should have free reign in theirs.” 

If Japanese consumers didn’t want American products, it was the fault of the government, the political institutions, or the regulatory system—almost never the foreign producer unable to impress Japanese consumers. 

Compounding the problem was a vague sense that Japan seemed an unstoppable economic juggernaut. It didn’t matter how they got there, how efficient their business methods were, or even how sustainable their managerial decisions seemed in the long-run. What mattered was the wonder of it all—the breakneck speed at which events unfolded before our eyes. 

The country’s stock and real estate markets rose to unprecedented levels—defying both traditional stock valuation techniques and common sense. 

In business, companies like Sumitomo, Mitsubishi and Sony were identified as pernicious cash cows intent on buying up America’s national symbols from Pebble Beach to New York’s Rockefellar Center to Hollywood’s Columbia Pictures. And in finance, Japanese banks, the world’s largest, were expanding abroad without much care for risk analysis, due diligence, or asset screening. 

To quote former Wall Street investment banker Eugene Dattel, “The Japanese tendency to overpay caused hordes of (foreigners) to visit Japan to sell assets.” 

But as Japan’s trade surpluses reached historical post-war highs, the economic context was lost on most Americans. Trade frictions were suddenly the subject of family dinner-table conversation and political paranoia, not rational discussion. “They’re buying up everything!,” exclaimed US Rep. James A. Traficant, Jr. (Dem-OH), and he certainly wasn’t alone in that assessment. Angry congressmen joined in the melee by smashing up Sony television sets on Capitol Hill. 

From this din, the so-called “Japanology industry” grew. A small, relatively obscure cottage industry of “old Japan hands” of one decade was now a full-blown professional punditry machine by the end of the next. Book titles like Understanding the Japanese Mind, Making Sense of Japan, and Doing Business the Japanese Way were part and parcel of the sort of head-to-head competition that either dreams, or in most cases, nightmares were made of. 

Today we may call it “public policy studies”, “inductive research” or “area studies”, but the fact is that a lot of the economic literature on Japan, both foreign and domestic, was pandering to a well-recognized insecurity. 

Attention was focused on the differences to explain away the achievements, or in the Japanese case, to justify them. What those differences were seemed the subject of untested hypotheses more than any quantifiable, empirical methodology. But few seemed to care. 

Take, for example, one of the most common stereotypes: homogeneity. Much of the comparative business literature was (and is) premised on the false assumption that the Japanese people are a homogeneous ‘race’ and possess a unified culture, language and ethnicity. 

Never mind the scores of non-Japanese Japanese residing in the country (e.g., Ainu, Chinese, Okinawans, Burakumin, children of mixed ancestry, and foreigners) that constitute 4-6 million people out of 125 million population and that are comparable to the representative ratio in the United Kingdom.

The point of the matter is that much of the propaganda commonly trotted out by many Japanese business leaders was taken at face value and repackaged for foreign consumption. 

For example, we were told that Westerners and Japanese value different kinds of social relationships; that both cultures play different language games with different sets of rules; that while Americans may value independence and individuality, Japanese businesses value mutual dependence and interconnectedness. These facets supposedly explained, in part, not only why Toyota built better cars than Ford, but also why Japanese consumers refused to consider buying “American” cars at all. 

What’s interesting about the assumption is that most of the Western business community and their advertisers seemed less concerned about whether or not it were true—and by extension countering it from the bottom-up—than simply lobbying the US Beltway to force changes at the political level from the top-down. 

If homogeneity really were a matter of course, you have to wonder why varying regional differences in the stereotype existed at all. Tokyoites, for example, are supposedly spendthrift: the saying “Edokko wa yoigoshi no kane o motazu” (Tokyoites don’t hold on to money overnight; they spend it on the day they earn it) is often cited as proof positive of the capitol’s uniqueness. 

Conversely, people in Osaka are supposedly obsessed with making money and eating gourmet food, whereas Kyoto people, besides being obsessed with possessing beautiful clothes, are self-designated aristocrats who look down on all other Japanese, especially Tokyoites, as country bumpkins. 

Moreover, each city has its own distinct dialect instantly recognizable to the native Japanese ear. None of this sounds particularly ‘homogenous’ and has served some Japanese companies well. When Kirin Beer, for example, launched its Kirin Lager Classic in 2000, the company made the astute business decision to target southern Japan first, exploiting national consumer patterns for their own benefit. The tactic worked well. 

Yet, under the tutelage of some of the business gurus of the West, the world has come to accept Japanese homogeneity and still thinks in terms of “us” versus “them.” 

This is not to suggest that all business literature on Japan is necessarily wrong. There are helpful observations. Take simple business etiquette, for example. Going to Japan without a meishi, or business card, is comparable to attending the Austrian Ball buck naked. In Japan, meishi are to be studied in earnest; the names of one’s business counterparts to be studied in earnest; the names of one’s business counterparts to be memorized and their cards prominently placed on the table for further reference. 

Indeed, there is the oft-repeated parable of a Westerner losing an important deal because he was picking his teeth with his Japanese counterpart’s meishi. 

Make no mistake: business cards are extremely important in Japan. But picking your teeth during a business meeting does not exactly engender the kind of trust and professionalism one would expect in any situation. Learning the preliminary facts and customs behind any potential client, business partner or would-be subsidiary is simply good practice, not the “silver bullet” to clinching the deal. 

Another piece of common-sense advice prevails here: communications do play a crucial role in any business decision. 

If it isn’t abundantly clear to recent visitors, Japan is no Sweden in terms of foreign language skills. While major documents have an English translation, the devil usually lies in the Japanese details. Not being able to read them or even being aware of their existence leaves the foreign businessman vulnerable. 

Post-Bubble Japan: Navigating Though Rougher Waters

To be sure, investing in Japan has sometimes been compared to water flowing uphill: so many forces act to prevent the flow that strong incentives are needed to overcome them. Still, it’s not impossible. 

Just examine the list of foreign companies and brands that succeeded: Starbucks, Coca Cola, Haagen-Dazs, the Gap, Microsoft, Disneyland, McDonald’s, and yes, the doyenne of American housekeeping, Martha Stewart. 

If that list isn’t encouraging enough, consider all the ubiquitous foreign luxury goods: Rolex, Coach, Prada, Chanel, and Louis Vuitton, with the latter company demonstrating the power of branding. When the company’s new Ometesando (Tokyo) flag-ship store opened that first day, 1,400 eager Japanese customers were already lined up for hours on end. The strength of the Louis Vuitton brand name was reflected in that day’s 125 million yen (US$1m) of sales at the new store alone. 

What’s their secret? 

To better understand the drivers, you again have to consider the context. Not all brand names do well in Japan, anymore than all foreign companies that decide to invest in Japan suddenly hit pay dirt. But as the successful companies have learned, doing business in Japan is not the same as doing business in Asia. It’s a developed, not developing country—with its own set of prospects, pride and problems, not to mention highly developed preferences. 

For most of the 1990s, Japanese political leaders have experimented with slowly relaxing the official government barriers to market entry. Reform measures have ranged from privatization to market deregulation. It has witnessed the partial liberalization of such facility-intensive industries as telecoms, transportation services, and utilities. 

The Large Scale Retail Law has been revised making Japan a popular outlet for Tower Records. And in some areas, such as banking, insurance and the non-financials, liberalization has meant the introduction of the so-called “Big Bang”—a process that afforded Merrill Lynch the opportunity to buy Yamaichi Securities, as mentioned earlier. 

But at the same time as structural reform is slowly spilling across the national tatami mat, Westerns would do well to remember that not every sector has met with lucrative opportunities. 

Retail reform may have led Toys ‘R’ Us to open 120 stores nationwide and reach 4.5bn yen (US$33.8m) in annual revenues this year, but electricity deregulation has failed to provoke even tepid competition from new entrants despite the wide gap between marginal incumbent prices and new entrant generation costs. 

Before its bankruptcy, Enron Japan couldn’t persuade even a small handful of industrial electricity users away from incumbent suppliers such as Tokyo Electric Power Corp (TEPCO). The question is why. 

Comparative case studies between Toys ‘R’ Us and Enron may be helpful to illustrate the point. Their outcomes are not necessarily the result of “cultural differences” as they are the varying structural barriers to market entry on a sector-by-sector basis, the power of political interests in maintaining the status quo and conflicting public policy initiatives that often muddy the speed and direction of reform itself. 

It’s important to remember that whereas the first Bush Administration was successful in pressuring the Japanese government in the late 1980s to liberalize the so-called Large Retail Store Law (1974), a law that effectively precluded the speedy construction of stores over 500m2, the current Bush Administration’s ability to influence lower lead times in the planning and constructing of non-incumbent power plants in the electricity market has fallen on almost deaf ears. 

Part of the reason, one suspects, is that local Mom & Pop stores fail to muster the same kind of influence over the ruling Liberal Democratic Party as cash-rich utilities companies do. But another—perhaps more persuasive—difference lies in the nature of the two products themselves; whereas Toys ‘R’ Us could leverage its foreign suppliers to bring down local manufacturing cartels once it gained a foothold in the market, Japan’s electricity industry is essentially a closed market for a homogenous product. 

No matter how much you legally liberalize the market, Enron could never transmit cheaper electricity from mainland Russia or Korea, let alone convince local authorities that aesthetically unappealing generators that potentially polluted the environment justify the marginally lower cost of its generation. 

Toys ‘R’ Us, on the other hand, compounded the low costs of its procurement efficiency by offering a much larger variety of products than available in the traditional Japanese store. 

To put the point as soberly as possible, the breadth and range of vested interests – whether political constituents or long-term policy objectives – are often an important factor in holding back foreign entrants from successfully benefiting from changing market structures. 

It may be that reform is the one thing necessary to help Japan raise itself out of the economic funk of the past decade, but unless the country faces almost imminent crisis, the possibility that sweeping change will attract even greater FDI seems unlikely, let alone engender high profits. 

Which brings us back to the very beginning of this essay: what explained the sudden increase in Japan’s FDI? 

Well, there was a degree of foreign capital entering the market. But because FDI also includes the acquisition of goodwill, and not just fixed capital, the meaning of FDI is misleading. Naturally, deregulation has made headways in some sectors, but not all. 

The Japanese are generally proud of their post-war economic achievements and the protective system that produced them. 

Yet the take-home message for potential new entrants to the Japanese business world is to be skeptical of promises of reform and rely on quantifiable results. Patience is a virtue in sadly short supply on the professional punditry circuit. 

“Patience Holds the Key. . .” Paul J. Scalise. Asian Chemical News, 15-19 January 2003, pp. 10-13. 

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