Commercial due diligence in Japan

If you are going to invest in a company with international expansion plans, you want to make sure that their product or service has good chances of being successful in the countries where you have ambitions.

This of course is also important for Japan. Only with the right knowledge about demand, competition and regulations it is wise to invest in market entry.

Business opportunities in Japan

Japan, the world’s third-largest economy, is a global hub for innovation, technology, and consumer markets. With a highly urbanized and affluent population, Japan offers significant opportunities for businesses. However, its unique cultural and regulatory environment requires thorough preparation.

Key Market Numbers

Japan’s economic strength and high standard of living make it an attractive but competitive market. Below are key statistics:

Population: Approximately 125 million (2023).
GDP per capita: Around $40,000 USD (2023), indicating high purchasing power.
Urbanization: Over 91% of the population lives in urban areas, with Tokyo being the world’s largest metropolitan area.
Economic Structure: Services contribute around 70% of GDP, followed by manufacturing and agriculture. Key industries include automotive, electronics, robotics, and advanced materials.
Ageing Population: Japan has one of the oldest populations globally, with 29% aged 65 or older, creating opportunities in healthcare, robotics, and senior-friendly products.

Language and Documentation

Language and cultural understanding are critical for success in Japan.

Official Language: Japanese is the official language, and proficiency in it is essential for effective communication in most sectors.
Language Considerations: While English is used in some business contexts, especially in international companies and among younger professionals, Japanese is the preferred language for marketing, negotiations, and consumer-facing materials.
Packaging and Documentation: Product labels and manuals must be in Japanese, complying with stringent regulations. Non-Japanese materials are often seen as unprofessional or inaccessible, especially in consumer-focused industries.

Consumer and B2B Buying Behavior

Japan’s consumers and businesses exhibit unique behaviors influenced by tradition, quality expectations, and technological adoption.

Consumer Behavior: Japanese consumers prioritize quality, reliability, and brand reputation. Sustainability is becoming increasingly important, particularly among younger generations. Online retail accounts for approximately 13% of total sales (2023), with Rakuten and Amazon Japan being dominant platforms.
B2B Buying Behavior: Japanese businesses emphasize trust, long-term relationships, and attention to detail. Decision-making processes are often hierarchical and time-consuming, requiring patience and persistence. Personal meetings and formal presentations are highly valued.
Online Presence: A localized online presence, including a Japanese-language website and activity on platforms like LINE (a popular messaging app), is essential for both B2C and B2B engagement.

Market Challenges and Opportunities

Japan offers significant opportunities, but its market also presents unique challenges for foreign businesses.

Products/Services that May Struggle: Products that do not meet Japan’s high standards for quality, safety, and precision may struggle. Overly casual or non-traditional approaches to branding may also face resistance.
Test Market Potential: Japan is an excellent test market for high-quality, innovative products due to its discerning consumers. However, success requires careful localization, including adapting products, packaging, and messaging to align with Japanese tastes and cultural norms.
Regulatory Environment: Japan’s regulations can be complex, particularly in sectors like food, pharmaceuticals, and electronics. Companies must comply with standards for safety, labeling, and consumer protection, often requiring collaboration with local partners or consultants.

Comparing performance in existing markets

If the company the we are assessing already has sales in different countries, you can determine distributor performance or sales staff performance.

One do this by correcting the actual turnover with data about:

the buying power in the market;
the geographical reach of the distributor or sales team;
the competition intensity;
the number of years active in the market.

Combining the data of the various countries over time leads to a growth curve where overperformers and underperformers can be easily identified.

You can then do selective interviews what causes any underperformance, and you can take corrective measures.

A curve like this also helps to estimate the potential in a new market.

Before you focus only on Japan

Please note that there are many countries in the world and the biggest ones or the ones nearby are not automatically the best choice. It all depends of the market growth, the competition and the barriers for entry.

Therefore we would advise you to make a short-list of at least three, but preferably five potential new markets and compare them against the same criteria.