We interviewed Japan-based executives from 20 multinational companies for our white paper ‘The Challenge for Multinationals in Japan’. We asked what they see as their biggest challenges and opportunities in the Japanese market, and to share their winning leadership strategies for the future.
In the first of three extracts from the white paper, we start with what they had to say about some of the basics about Japan: the market, the business environment, and, crucially, the consumer.
Setting the scene
Across a wide range of industries, Japan is too big a market to ignore, and too important not to get right. For many MNCs though, after many years of investment, success in Japan remains elusive.
Ranked the third-largest global economy by GDP, the Japanese economic powerhouse has attracted MNCs for decades for its market size, purchasing power and growth potential. The consumer base is sophisticated, knowledgeable, and has a deep understanding and appreciation for premium/luxury brands, as long as the quality is truly superior.
“Niche markets in Japan are still much bigger than entire smaller emerging markets.”
Japan is also described by many of the executives we spoke to as a trusted, reliable and profitable place to do business, due to its fair and transparent market, legal, and regulatory environment.
A financial services executive pointed out the broader potential for MNCs in Japan to make progress in the rest of Asia. This is because of the massive amount of “capital in-country that really needs to be deployed offshore to make use of it appropriately”.
Following the global financial crisis, the Abe administration focused on reviving the Japanese economy through a mix of monetary and other policies. The Financial Services Agency has taken a progressive, industry-friendly approach and is widely seen as a fair and transparent regulator.
While Japan is politically stable, there has been increased volatility in the region related to North Korea’s nuclear threat and the US government’s “America First” rhetoric related to trade deficits.
One fundamental change and major theme amongst business leaders is the growing geopolitical complexity of Japan within the region.
The prevailing post-war bilateral focus on Japan/US relations over the past decades has evolved into “Japan within the context of the two Koreas, China, and South East Asia”. These new complexities require a more sophisticated strategic view, but at the same time add many new opportunities.
Pressures and challenges
With its stable currency and political leadership, Japan is viewed as a good place to hedge against the volatility of the larger APAC market. And while Japan’s regulators are fair and transparent, they can also be bureaucratic and slow.
An insurance company executive concluded simply, the Japanese market “is critical for global growth”. An executive at a professional services firm concurred: “there are great business opportunities in Japan if the right talent and leadership are in place.”
Still, doing business in Japan is not without its challenges. An issue at the top of all executives’ minds is Japan’s rapidly aging population and declining birth rate. Both contribute to a challenging labor environment.
“Japan is a fast-aging society, although nobody yet truly grasps exactly what this will mean in 20 years.”
A professional services executive added that Japan’s restrictive labor immigration policies are impacting labor availability and forward planning. He noted that Japan will have to liberalize its strict immigration policies and companies will have to invest in labor-reducing technologies.
The executives we interviewed across several different industries commented that future success depends on adapting to drastically-changing consumer preferences and values.
There was a clear message that Japanese consumers now expect quality service at a much faster speed, regardless of industry.
No matter what the product, the service, or the sector, building rock-solid brand equity and trust is paramount. The Japan CEO of a major luxury explained that, in his market, especially with digitalization and the rise of e-commerce channels, the core to success remains relationships centered on the customer experience.
Historically, the Japanese have demanded attentive, hands-on customer service, but attitudes are slowly changing. A financial services executive commented, “In the past, Japanese customers favored face-to-face service. Recently, we’ve found more Japanese accept and even prefer non-face-to face interaction. We expect this change in preferences to accelerate more dramatically in the near future.”
The younger generation is also more interested in how companies manage their environmental, social and governance factors. A luxury fashion brand executive explained, “Millennials are more concerned with a company’s ethical business practices, while older customers are more focused on the customer service experience.” He shared his insights that it is crucial to cater for the needs of Millennials to attain sustainable demand. While current spending power lies with non-Millennials, Millennials will become our core customers of the future.
"Japanese consumers now expect an ever-increasing quality service at a much faster speed, regardless of industry."
Customers still expect to receive products and services of the highest quality, but now they want them faster. In a related point, a professional services firm executive observed that Japanese customers are becoming more accepting of Western tools and solutions, including digital technology.
An executive in the life sciences industry agreed, noting that patients are relying less on their doctors and expect faster treatment. “The market is going to be almost entirely digital and social network-driven in the future.” His company is investing heavily in adding a direct to consumer/patient dimension to their traditional B2B digital communications platforms.
For a highly technologically-advanced society, Japan is surprisingly slow to innovate, and a conservative corporate and investment culture has hampered tech start-ups. Slowly, though, thanks to globalization and demographic change, the Japanese market is beginning to place more emphasis on productivity and efficiency. Still, the pace of this change is not in step with the global business community.
In the next part of our focus on Japan, we explore the hidden cultural rules of doing business in Japan and a workforce that plays by different rules.
Read our white paper ‘The Challenge for Multinationals in Japan':
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