Growing Your Business in Japan
Abenomics, Stimulus, and a Resurgent Japanese Export Market for Mid-Sized Companies
As 2015 begins, the Japanese government has approved $29 billion (¥3.5 trillion) in stimulus spending. It’s part of Prime Minister Shinzo Abe’s ongoing “Abenomics” initiative, designed to reinvigorate the world’s third largest economy and provide capital to small and mid-market Japanese businesses. Prime Minister Abe received a mandate in recent elections and is using this momentum to actualize his economic policies.
With inflation easing, the jobless rate falling, and trade deficits narrowing, the Daiwa Institute of Research reported recently that they feel the recession in Japan may have ended. Some economists sight a growth trend that began at the end of 2014 when corporate investment and exports began to accelerate. The government expects the economy to expand at least 2.7 percent in 2015, pointing to a revival of regional economies and towards improved social welfare for the citizenry. Meanwhile, real gross domestic product is predicted to grow 1.5 percent in the current fiscal year.
On January 14th, the Japanese government unveiled a record-high 2015 general account draft budget of ¥96.34 trillion or about $1-trillion U.S. At the same time, tax revenues (projected to reach ¥54 trillion {$444 billion} this fiscal year) should be at their highest level since 1991, due to a robust comeback by large companies in recent months. Many economists believe Prime Minister Abe’s blueprint for economic resurgence has resulted in an increase in national morale and that there is much cause for economic optimism in the year ahead.
Abenomics, named for Prime Minister Shinzo Abe, is based on a “three arrows” principal that includes fiscal stimulus, structural reforms, and easing of monetary policies. This combination of government spending, reflation, and growth policies, is designed to reanimate Japan’s moribund economy and promote private investment. Prime Minister Abe has acted quickly on the first two “arrows,” with the announcement of the generous stimulus bill and by appointing Haruhiko Kuroda to lead the Bank of Japan, giving him a mandate to utilize quantitative easing to achieve a targeted 2 percent annual inflation rate.
Some cite Toyota’s recent and sizeable operating profits as a sign that economic policies are having a positive effect and that resultant hikes in exports might be altering the actual domestic psychology of Japan where economics are concerned. Prime Minister Abe wants to increase wages, make Japan more competitive, invest in R&D, and provide a fiscal structure that can be sustained over time. Declining oil prices and higher wages should promote increased spending by consumers and increased profits for businesses. These additional earnings will promote renewed interest in investment and will foster the growth of capital expenditures.
On January 15th, the Bank of Japan stated that wage gains of at least 1 percent will be required in fiscal 2015 to keep Japan’s consumer spending and its economic resurgence alive. A failure to achieve this goal could result in BOJ not meeting its ambitious target of 2 percent inflation, thereby necessitating additional stimulus. Prime Minister Abe has been in meetings with labor and business leaders to orchestrate the needed pay increases.
Medium-sized businesses will receive ¥1.2 trillion in much needed support through the new stimulus package including ¥600 billion for the promotion of regional industries, small businesses, and public works. Ongoing recovery efforts are being positively assisted by Abenomics policies and by the recent recovery in Japanese exports, mostly to the United States where the economy, while not fully recovered, has shown marked and continuing improvement. A weakened yen and escalating stock prices, aided by monetary easing and Abenomics, have also greatly benefited exports.
The Lost Decade
Following the burst of the Japanese asset price bubble in the ‘90’s, Japan’s economy fell on hard times. Unemployment was on the rise and GDP growth was lethargic. In 1997, an increase in value added tax rates caused economic deflation and deepened the recession. Sales tax hikes caused consumption to nosedive and government revenues dropped by ¥4.5 trillion. In the depths of the global recession, Japan weathered a 5.2 percent GDP loss in 2009. This is much more severe than the world real GDP growth average of 0.7 percent in the same year.
During this time period, exports shrank by 27 percent. The consumption tax rate was increased to 8 percent in 2012 by the Diet of Japan under Yoshihiko Noda’s government in attempt to balance the nation’s budget. The ongoing economic and political emergence of China was a catalyst in the eventual instigation of Prime Minister Shindo Abe’s Abenomics policies. Abenomics is thought to be derivative of fukoku kyohei (enrich the country, strengthen the army), a Meiji-era program.
Japan’s Crucial Middle Market
The middle market of Japan is an essential component of the nation’s economy. It employs a quarter of the workforce and generates at least one-third of Japan’s gross revenues. Beyond that, the middle market has refused to buckle under the extremely adverse economic conditions of recent years. Japan’s mid-market companies have proven themselves to be more productive and more competitive than their peers internationally.
The nation’s larger companies do hinder the recruitment capabilities of mid-sized firms, so they don’t employ as many workers. Still, they match the big companies in revenue production, indicating that they outshine them when it comes to the productivity of individual workers. In the aftershock of disastrous Tohoku earthquake; in the worst days of the economic crisis, middle-market revenues fell 7.5 percent. This is far less than large companies whose revenue plummeted 10 percent and more. Mid-market executives believe goods and services have seen increasing demand compared to the rest of the national economy over the last three years.
With the present day opportunities that exist for mid-sized exporters, it’s surprising that only 26 percent of those companies earn in excess of 10 percent of their revenues from foreign markets. In total, only 42 percent have actual investments beyond Japan. This will change soon as forward-thinking younger firms lead the way. Statistics show that 38 percent of mid-market firms which are 10 years old or less, earn in excess of 10 percent of their revenues from foreign sources.
The acquisition of adequate talent seems to be a hindrance for mid-sized businesses interested in export markets. Japan’s large companies have historically siphoned away the best available personnel. Less than half of Japanese mid-market firms are believed to be truly committed to nurturing top-level employees over the course of their whole working career. Securing suitable staffing for export ventures abroad is also perceived as a major impediment, preventing many Japanese mid-sized firms from exploring the potential profitability of exporting.
Successful Japanese mid-market firms share certain identifiable characteristics that can elevate them above their competitors. These include the flexibility to adapt to fluctuating market conditions, having management that is not oppressively bureaucratic, and possessing a willingness to invest and innovate. Despite the prominence of Japan’s highly visible large firms, the middle market is essential to the country’s economy. Studies have also shown that mid-sized companies have the potential to be the most competitive on an international scale. The simple fact that they are able to survive and thrive in the aggressive Japanese market provides a built-in advantage when it comes to operating on a global scale. The crucial role of mid-market firms cannot be underestimated when it comes to Japan’s economic recovery.
Mid-Market Exporting Opportunities
Though obstacles do exist, the benefits of exporting are evident. Aside from the advantages exporting can bring to a company, exporting creates jobs, adds to tax revenues, and stimulates a nation’s economic growth. Mid-sized firms that export can grow more rapidly because they don’t rely solely on domestic markets and experience less idle manufacturing time. Ultimately, these firms can make more money.
Sometimes mid market firms interested in exporting lack the adequate resources needed to compete, necessitating joint ventures and/or collaborations with competitors. This presents its own set of difficulties. Finding suitable trade partners and assessing foreign markets are difficult undertakings for companies lacking in export experience. SIS International Research can be of invaluable assistance in helping Japanese small and mid-market firms understand foreign trade opportunities through in-depth worldwide market analysis, competitive intelligence, focus group market testing, and through helpful ongoing dialogue as transitions are made towards trading internationally. In this way, uncertainties are alleviated and expenditures are reduced.
SME’s (small and medium-sized enterprises) obviously lack a larger company’s network of trade partners abroad.
SIS offers SME”s access to essential market information that makes export decisions easier and more effective. We can also assist in identifying product modification needs for new markets and in pinpointing appropriate distribution networks for firms new to exporting. Where expert advice and data gathering are critical, SIS is an important ally in your ongoing campaign to successfully integrate exporting into your business operations. Our expert consultation and guidance can assist you with questions concerning tax systems, laws and regulations, advertising, accounting, administration, and recruiting. Successful companies from around the globe count on SIS focus groups, desk researchers, and market analysts to quickly arrive at the answers and information most needed to facilitate problem solving and to transcend complex cultural issues.
With an aging and declining population, and with lackluster domestic sales, the expansion of mid-market business into globalized markets is crucial to the economic health of Japan. While 60 percent of the nation’s large companies trade in foreign markets, only 25 percent of SME’s operate internationally. The biggest Japanese companies have been branching into new markets consistently. Considering that SME’s have a large number of firms in Japan and a huge bloc of employees, it has become crucial from the perspective of policy that these companies engage in international expansion.
The OECD (organization for Economic Co-operation and Development) is an international group of 34 countries committed since 1961 to promoting international trade and economic progress. Small and mid-sized companies employ nearly 70 percent of employees in most of these nations. Private equity markets have provided the means to acquire much needed venture capital for these companies, most notably in Japan, Italy, Germany, Iceland, and New Zealand. New efforts have been undertaken to improve the ability of these nations to assimilate and incorporate the latest business-beneficial technologies. Internally, however, it is innovative and bold management from within that is needed to steer small and mid-sized Japanese firms to success. SME managers may require additional training, advice, and consultant services to prepare them to lead their firms into the 21st century.
Complex Management Culture in Japan
One problem faced by mid-market Japanese firms is retaining top management talent. Understandably, the most sought after leaders tend to work for large, prestigious firms. Much importance is attached to the respect that Japanese society affords such individuals and companies. People who work for large firms are often treated with more courtesy and attentiveness than those in the employ of smaller companies. Even bank loans can be more difficult to obtain.
Some believe that the founder-culture of Japanese firms can make it difficult for them to develop effective managers. Historically, they have not succeeded as global competitors, especially in the service industry where
they have been far outpaced by countries such as Holland and South Korea. Unlike western companies that groom their best talent lead for leadership roles using shares and stock options as an incentive, Japan has no culture of operating this way. Thus, when their founders depart, many firms are required to attract talent by publicly listing.
When Japanese companies list early in this way, they often elect to operate in the fashion of larger companies. They lose what separates and distinguishes them as smaller firms and they institutionalize, taking on a corporate bearing and a culture with little room for error, experimentation, or failure.
Looking back to the 1950’s and ‘60’s, entrepreneurship and creativity were not encouraged. Echoes of the past still reverberate today as mangers are incentivized by meeting output and efficiency goals and are beholding to an antiquated point-system for advancement. In this way many potentially good managers and leaders are left behind. Today, however, some young entrepreneurs are boldly leaving larger companies to forge their own international business ventures. Starting small, with the right guidance they expand slowly and test various markets as they go. Done methodically, these modest ventures can eventually evolve into prosperous, large-scale successes. This kind of business climate can suffocate creative entrepreneurial incentive. Under such conditions most mid-sized and smaller firms lose their desire for international outreach and return to domestic focus only.
Because of this, it’s mostly the big players who thrive while mid-market firms have remained locked in stagnant, local-oriented business pursuits. Again, it is the innovators and those willing to play by new rules that are reaping the spoils of the new and exciting arena of SME exporting around the world. New times demand new ways of thinking.
Japanese Exporting – Some interesting Areas of Success and Innovation for Mid-Market Firms
Business is good on several fronts. Japanese exports to the rest of Asia were up 8.1 percent last fall from the previous year as China and Vietnam continue to demand Japanese metals and electrical components. Sales to China were particularly strong (up 8.8 percent), though there are some concerns about an economic slowdown there in 2015. Large automotive companies enjoyed robust recent sales in Saudi Arabia and Britain, opening the door for smaller, niche companies to follow-up with auto parts and accessories exporting. India has also been demanding more Japanese steel, further bolstering export strengthening. Economic uncertainty and potential recession in the EU has slowed exports there as Japanese firms wait to see how things will transpire.
Thailand is definitely a nation of interest to mid-market Japanese exporters with investment as high as it has been in eight years. KBank and 15 other associate financial institutions have assisted with finances for Japanese firms investing in Thai high technology and service sectors. Typical company investment size has ranged from Bt50
million to Bt100 million. At present there are nearly 8,000 Japanese companies invested in Thai business. Japanese investors have been impressed with Thailand’s quality facilities and integrity when it relates to intellectual property rights. A consortium of small and mid-sized construction companies were sent to Thailand in late 2014 by Japan’s Ministry of Land, Infrastructure, Transport, and Tourism to visit construction locations, meet area industry groups, and government officials, all in the interest of promoting increased expansion of private business there. While in Thailand, this same Japanese group will also meet with construction interests from Vietnam. Thailand is seen as a gateway nation to further exportation in the Asean region. This year, plastics, auto parts, cosmetics, food and beverages, jewelry, construction materials, paper, and printing products will be focused areas of promotion.
Exporting Nanotechnology
Nanotechnology exporting, as with many other aspects of Japanese business, is dominated by large companies and their subsidiaries. Upstart SME’s can find it difficult to locate sufficient investment capital needed to compete in this area. Needless to say, developing facilities to produce nanocarbon materials, and developing semiconductor nanotechnologies is expensive. However, for small and mid-market Japanese firms, this reality may be changing soon. Many of them are already active in nanotechnology development, and a program injecting $2.5 billion USD in creating innovative high-tech enterprises could alter the business-size dynamic going forward. Investors are keenly interested in companies that create niche products for nanotechnology. Huge, global firms are sometimes not interested in these specialized areas, as nanotechnology may be just one area they are involved in among many diversified projects. This creates a window of opportunity for the smaller company perceptive enough to fill these specific areas of need. Many will serve larger semiconductor companies, providing specialized equipment which is needed for electron deflection through picometer control, and nanometer lever control. It’s an example of large semiconductor companies looking to smaller firms for highly specialized technologies and related equipment.
Innovation Clusters
Recently, ¥1.7 billion was allotted for development of specialized innovation clusters, designed to facilitate programs which will assist in the development of new nanotech enterprises for small and medium sized businesses. Medical nanotechnology is the primary focus at this point, but if the cluster concept is successful it is likely that more avenues of investment will be forthcoming.
Innovation Clusters may increase in importance for their ability to kick-start new export business for SME’s globally. Long-range, they hold the potential to affect innovation and positively alter interactions with institutions and academic interests. In January of 2015, the Nanotechnology Exhibition and Conference took place at Tokyo’s,
Big Sight convention facility. The 5-day symposium hosted seminars, company showcases, one-on-ones meetings, and networking events designed to introduce EU innovation clusters to Japanese ones, with the emphasis on nanotech.
The World Wants Japanese Whiskey!
Not all exports from Japanese SME’s are high tech-oriented. The world is interested in many unique and previously hard-to-obtain things the land of the rising sun has to offer. When one thinks of Whiskey, it’s common to think of Scotland or Tennessee. However, Japanese whiskey has suddenly become very sought after as people clamor for new taste experiences and the sense that they are trying something new, sexy, and exotic. Trouble is, Japanese whiskey is hard to come by unless one is in Japan. Suntory and Nikka sell some whiskey internationally, but they are presently the only ones who export to the U.S.
It seems that Japanese distillers are concerned that the uninitiated won’t consume their product correctly. In fact, they are quite vigilant with their whiskey, demanding that it be served with specific foods and that it is diluted with very specific waters that has never been in pipes, or that the water has come from a particular temple. Large Japanese whiskey companies are extremely loyal to the customers in their homeland. Still (pardon the pun), it does draw awareness to yet another niche which might be filled by an enterprising small or mid-scale Japanese distiller willing to fill a demand others will not.
New Leadership Roles for Japanese Women
Businesses owned by women are on the rise in Japan. In 2014, female-owned small and mid-market businesses rose an astounding 24 percent. This may be due to womenomics aspects of Prime Minister Shinzo Abe’s plan for the economic resuscitation of Japan. Many women are returning to the workplace as PM Abe requested, but they
are foregoing traditional business models and are starting up small companies of their own. These aren’t women just finishing their education, either. The median age of these new business owners is 43.7 and most of them have husbands. Many have children in high school and college.
These industrious women are succeeding with less advantages than their male counterparts have enjoyed. Many are still caring for children and doing housework. They are managing to launch creative and successful businesses
after prolonged breaks for child-rearing, or having boldly left previous work they found to be unfulfilling. There is no reason to expect they won’t continue to ascend in the workplace and make significant contributions to Japan’s economic resurgence in the months and years to come. There is much opportunity for Japanese businesswomen on an international level, and they will surely bring their particular brand of talent and expertise to many innovative exporting initiatives in the future.
Exporting Success with SIS
Significant challenges face small and mid-market Japanese firms interested in exporting to the Asean region and beyond. Companies who elect to go it alone may well find the adversities insurmountable. It is necessary to forge a strong partnership with a firm that truly understands the complexities and realities of international trade. SIS International Research can help in countless ways. The world’s best companies, large and small, trust SIS to help them navigate deftly towards success in business, whether it’s market analysis to help you best position yourself for profitability in a foreign market, or competitive intelligence which allows a window into the successful ways other top companies have made international trade work for them.
Our desk research is exhaustive as we work to investigate and understand the markets you intend to penetrate, and our specialized focus groups provide you with unparalleled insight into the minds and hearts of your potential customers. There is NO substitute for the brand of world-class market research and expert consultation that SIS International Research can provide for your business. Allow us to be your gateway to profitable new worlds of success. It’s what we do best and we’re ready to work for you.