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
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
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.
The "Bubble" Japan: Cliché or
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
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
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
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
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
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
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
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,
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
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
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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