ElectronicsRestructuring is onthe rise and foreigncompanies arethrowing lifelinesPage 2

Inside »

ManufacturingFactory closuresforce workers toleave home insearch of jobsPage 2

Structural reformAttention switchesto strategy topromote nationaldynamismPage 3

PropertyReal estaterebound may signalend of two-decadeTokyo slidePage 3

HealthcareMedical groupsglimpse prospectsin demographics ofold agePage 3

FT SPECIAL REPORT

Investing in JapanThursday March 28 2013 www.ft.com/reports | twitter.com/ftreports

For the first time in manyyears, there is an air of confi-dence in Japan amid signsthat the country could be onthe edge of an economic ren-

aissance.The stock market has bounced

back, with the benchmark Nikkeiaverage rising 44 per cent sinceNovember. Exporters are reportinghigher profits as a result of a weakeryen and companies from Toyota toSeven-Eleven are paying their employ-ees bigger bonuses than they have insome time.

The positive mood is such that, onmeeting US President Barack Obamain Washington last month, ShinzoAbe, Japan’s prime minister, was ableto declare that “Japan is back”.

As if to presage the country’s come-back, last year it registered net for-eign direct investment for the firsttime in three years, according to pro-visional statistics compiled by Japan’sexternal trade organisation, Jetro.

While Japan saw more companiespull out in 2010 and 2011, and sufferednegative FDI of $1.4bn and $1.7bnrespectively, last year it received anet $2.1bn, reports Jetro.

One driver of renewed interest hasbeen increasing regional interdepend-ence. “Investment from Asia is grow-ing strongly,” says NobuyukiNagashima, director-general ofJestro’s invest Japan department.

Although investment by Asian busi-nesses still trails that by US and Euro-pean companies, investment fromAsia, excluding China, has risen from16 per cent of the FDI made with Jetroassistance in fiscal 2003, to 44.9 percent in the first three months of 2012.

Investment from China has also

risen slightly, from 6.5 per cent to 7.7per cent, although that is a drop from15 per cent in 2009, reflecting, per-haps, the impact of aterritorial dis-pute over islands in the East ChinaSea.

Nevertheless, China is Japan’s sec-ond largest investor, with 106 compa-nies investing in Japan with assist-ance from Jetro, between April 2003and the first three months of 2012,just behind the 315 companies fromthe US.

What is more, Korea tied with theUK for fourth place – 63 companieseach – while Singapore was eighthand Hong Kong, China’s specialadministrative region, ninth.

“This was unthinkable when westarted [promoting FDI] in 2003,” MrNagashima says.

More recent events, such as thenuclear meltdown in 2011 in Fuku-shima Daiichi and the resultingenthusiasm for alternative energy andenergy conservation, have spurrednew markets in which foreign compa-nies are showing keen interest.

RAE Systems, a US maker of gasand radiation detection systems, andPolimaster, a Belarus-based radiationinstrument maker, both set up officesin Japan last year.

Still, the government has its workcut out to sustain foreign interest.

“Only one in 10 companies that arecandidates to invest in Japan actuallydo so,” Mr Nagashima complains.

Japan has never been a particularlypowerful magnet for FDI. Inward FDIcomprised just 3.7 per cent of grossdomestic product at the end of 2011,compared with 49.8 per cent for theUK and 34.7 per cent for France,according to statistics from the United

Nations Conference on Trade andDevelopment.

“The reasons why foreign compa-nies don’t set up businesses in Japanare the high taxes, compared to therest of Asia, a lack of English lan-guage fluency, inflexible labour rulesand regulations,” Mr Nagashima says.

Japan’s corporate tax rate of about38 per cent compares unfavourablywith the 24.2 per cent in South Koreaand 17 per cent in Singapore.

Masahiro Sakane, chairman ofKomatsu, said this year one reasonoverseas interests would not want toacquire a Japanese one is because“Japanese people fear tremendouslybeing bought by a foreign company.”“But unless we create an environment

for foreign companies to come intoJapan, we won’t be able to overcomedeflation,” he said.

While changing public attitudes willtake time, the new administration isstirring hopes that it will adopt boldmeasures to deregulate industry andstimulate investment by domestic andforeign companies alike.

Mr Abe, who has made fightingdeflation a priority, has expressed astrong commitment to deregulation,which many agree is critical toattracting more FDI.

As soon as he took office, Mr Abe

reinstated the regulatory reform coun-cil, which had been disbanded by theprevious government.

Mr Abe has instructed the councilto focus on deregulation in the areasof employment as well as the energy,environment, health and medicinesectors.

The government is providing incen-tives to companies that bring highvalue-added activities, such as R&Dand regional headquarters business.

A pillar of the programme is a 7 percent effective corporate tax cut forfive years, which reduces the corpo-rate tax rate from 38 per cent to 31 percent.

If special local government taxbreaks are included, the rate falls fur-ther to the lower 20s.

This move, is “unprecedented”, saysTakashi Nakamizo, deputy director ofthe trade and investment facilitationdivision at the ministry of economy,trade and industry.

The government has acceleratedvisa-issuing procedures, set up specialregional zones, which offer further taxbreaks and is offering subsidies to glo-bal companies to cover some costs ofestablishing operations in the coun-try.

But the key to attracting FDI lies instimulating demand for the productsand services foreign companies haveto offer.

In that respect, Mr Abe’s success sofar in rallying the country behind hisgrand plan to escape from deflationand lift the public mood, suggests heis off to a good start.

Japan may no longer be able toattract large manufacturers, whichcreate numerous jobs, but it is still anattractive market for consumer prod-

uct and services companies, particu-larly those in the forefront of cuttingedge technologies.

For example, Biogen Idec, the oldestindependent biotech company in theworld, sees strong potential forgrowth.

“Japan is a market that recognisesand encourages major innovationslike those we’re developing at BiogenIdec,” says Doug Williams, executivevice president of research and devel-opment.

“The Japanese healthcare systemprovides low-cost, universal coveragefor patients with intractable diseasesincluding multiple sclerosis and hae-mophilia,” for which Biogen Idec isdeveloping effective treatments, saysLes Fosbrook, managing director inJapan.

The group plans to double invest-ment in the country as well as thenumber of local employees, from 70 to140, in a year’s time.

For many consumer product compa-nies, success in Japan, one of themost demanding markets in theworld, provides a gateway to globalsuccess.

As the Chinese home electronicsgroup Haier told the FT: “We believethat maintaining a presence in Japan,which has the highest level of con-sumer electronics technology in theworld and where consumers aredemanding and discerning . . . willcontribute to raising Haier’s presencein the world and help us become thenumber one company in the world.”

Convincing more foreign businessesto share that view will hinge on MrAbe’s ability to deliver on his prom-ises and show that Japan’s revival isreal.

A nationteeteringon the edgeof recovery

The government is stirring hopes that it willadopt boldmeasures to deregulate industry andstimulate investment, saysMichiyoNakamoto Brighter lights: for the first time in years, there is confidence that Japan is on the edge of a renaissance Dreamstime

One driver of renewedinterest has beenincreasing regionalinterdependence

In a little over two years,the attitude of the Japanesepublic towards the nation’senergy mix has changeddramatically.

Before March 11 2011,nuclear power was unques-tioningly in the ascendancyand broadly accepted as thebest solution for an industr-ialised nation withextremely limited naturalresources.

Today, while the govern-ment has expressed itsdetermination to restartmost of the reactors thathave sat idle since theearthquake and tsunamicrippled the FukushimaDaiichi nuclear plant, thereis also growing support foralternatives.

The focus on nuclearenergy before the disaster,however, means that thecountry has a great deal ofcatching up to do.

A system of feed-in tariffsfor solar energy was intro-duced in July 2012 – at arate of Y42 per kWh, amongthe highest in the world –

and there have since beenplenty of applications to theministry of economy, tradeand industry from compa-nies keen to bring theirenergy solutions to market,although few have beenlinked to the grid.

Analysts suggest that, inthe past two years, an extra3 GW of capacity has beencreated. “Before the March11 disaster, governmentcommitment to renewableenergy was tepid, at best,”says Tom O’Sullivan, anindependent energy consult-ant and founder of Tokyo-based Mathyos Japan.

“There were very fewincentives and no feed-in-tariff structures,” he says.“In the US, there are renew-able energy capacity targetsthat utilities have to meet,but they don’t have that inJapan. For a resource-poorcountry, they should havethought of this a lotsooner,” says Mr O’Sulli-van.

Even utilities are “cominground” to the idea ofincreased use of renewa-bles, he says, encouragedby a public that has seenGermany make a successfultransition way fromnuclear.

With limited new oppor-tunities for hydro energy,attention is turning tosolar, wind, geothermal,

biomass and tidal power.“We have good amounts ofwind in northern parts ofJapan, such as Hokkaidoand the Tohoku region,while geothermal potentialis spread out all acrossJapan,” says Hisashi Hoshi,director of the new andrenewable energy depart-ment at the institute ofenergy economics.

“When it comes to photo-voltaic power, the southernpart of the Japanese archi-pelago tends to have more

sunny days, although thereare other parts of the coun-try that are reasonablysunny.”

Mr Hoshi believes Japancould one day require nei-ther costly imports of fossilfuels nor nuclear energy.

Steve Crane, founder ofBusiness Link Japan, sayshis organisation has seen a“sharp increase” in foreigncompanies inquiring aboutand gaining access to the

renewable energy sector inthe past two years.

Thanks to the generousfeed-in tariff and the factthat the technology isalready in widespread use,solar companies have beenquick to seek a foothold. “Itseems the market is start-ing to gather momentum asmore and more of the largeengineering and construc-tion companies in Japanstart to enter the market,”says Ben Christie, head ofbusiness development forAmsterdam-based PhotonEnergy NV.

Canadian Solar has had apresence in the countrysince June 2009 and hasinstalled more than 20,000residential systems, whileGeneva-based Etrionarrived in late 2012 andclaims to have made “excel-lent progress”, although thecompany admits it has notall been plain sailing.

“As we have just enteredJapan, the risks and hur-dles are still not totallyunderstood,” says RobertEriksson, head of investorrelations. “We do know,however, that securing landis difficult and labour andsupplies are generallyexpensive.”

That has not dissuadedthe company from setting atwo-year target for it to

become one of the leadingindependent solar energygroups in Japan.

One area in which moreresearch needs to be con-ducted is marine energy.Given similarities betweenthe two nations in this areaof activity, Japan is lookingto Scotland for some point-ers on how to move ahead.

Kawasaki Heavy Indus-tries is to test a tidal powergeneration system at theEuropean Marine EnergyCentre in Orkney (Emec)while the centre has alsosigned a partnership withJapan’s ocean energy asso-ciation.

A delegation of Scottishcompanies is to visit Japannext month to developcloser ties and identify newareas for cooperation.

John Swinney, the Scot-tish cabinet secretary forfinance and sustainablegrowth, is due in Tokyothe following month to fur-

Sharp change in attitudedrives green energy interestRenewables

Nuclear accident hasconcentrated mindson alternatives,says Julian Ryall

“Abenomics” has been goodfor taxi drivers picking upmore late-night fares inTokyo’s party districts. Ithas been good for landlords,thinking of rent increasesfor the first time in years. Ithas been good for inboundtourists, whose currencynow goes a lot further.

It has also been very goodfor overseas fund managers,many of whom have spentthe past few years watchingJapanese indices throughparted fingers.

Now, thanks to that 40per cent rally triggered bythe new prime minister’scommitment to aggressivemonetary and fiscal stimu-lus, Japan specialists arepacing around investmenthouses with a bit of a swag-ger, says Adrian Hickey,who runs about $700macross two funds at PictetAsset Management in Lon-don. “The chests are puffedout, the heads are held

high,” he laughs. “It’s niceto be relevant for achange.”

Opinions vary on howlong the good times willlast. Some see a threat inJuly, after Mr Abe’s LiberalDemocrat party has wonthe elections for the upperhouse of parliament. It isthen that factions and inter-est groups within the LDPcould start to stir trouble,they say, jeopardising plansto boost competitiveness.

“The LDP’s ability toimplement its plans, as wellas the actual impact of pol-icy change on the economy,remains uncertain,” saysPaul Chesson, head of Japa-nese equities at InvescoPerpetual of the UK.

Others wonder how farstock prices can keep risingwithout the prompting of aweaker yen, noting thatfalls against the US dollarhave stalled in recentweeks. Taizo Ishida, whohas run a Japan fund atMatthews, the San Francis-co-based mutual fund man-ager, for the past sevenyears, says he worriesabout a deterioration inTokyo’s relations with Bei-jing – especially in the con-text of Mr Abe’s obvious

Continued on Page 2

Rally puts aspring in stepof specialistsAbenomics

Opinions vary onhow long good timesmight last, writesBen McLannahan

ther cement the relation-ship. These visits are timelygiven that Tokyo is due tocall for proposals for a Japa-nese version of the Emec,with Nagasaki and Iwateprefectures – in the tsuna-mi-hit northeast – vying tohost the new facility.

The 2013 budget ear-marked $15bn for renewableenergy initiatives, in addi-tion to the feed-in tariffschemes, while financialinstitutions are setting uprenewable energy financingteams.

Mr O’Sullivan believesJapan should follow thelead set by Britain and aimto have 20 per cent of itsenergy coming from renew-ables in 2020.

“Globally, we are movingaway from an fossil fuel-based society and Japanshould be in the forefront ofthat movement,” he says.“In reality, I don’t thinkJapan has a choice.”

‘Before theMarch 11 disaster,commitment torenewable energywas tepid, at best’

Winds of change: still much catching up to do Getty

Budget airlinesPrices dive asfledgling traveloperators take tothe skiesPage 4

Asian brandsNewcomers startto make inroadsafter years spentgaining recognitionPage 4

2 ★ FINANCIAL TIMES THURSDAY MARCH 28 2013

fondness for Washington.But most agree that,

absent any great externalshocks, the good timescould roll for a little longer.Valuations have come up alot, note analysts, but theNikkei 225 average is stilltrading below its 10-yearaverage level, on a price/book value basis.

And there are still bar-gains to be had. Manysmall-caps, for example, arestill trading at temptingmultiples. Mr Hickey sin-gles out Nittoku Engineer-ing of Saitama, a fast-grow-ing, debt-free manufacturerof machines to wind coils. Ithas returns on equityalmost twice as high as thebroad Topix index, and yettrades at a discount inprice/book terms.

The small-cap space couldbe happy hunting ground,agrees Takashi Fukuzaki,equity product specialist atBlackRock in Japan. Whilethe value of the Topix indexhas halved in the past 10years, he notes, more than500 small- to mid-cap com-panies have doubled inprice.

Some larger-caps could dowell too. Banks may haveroom to move up, say ana-lysts, as they continue toexploit the relative weak-ness of capital-constrainedEuropean and US lenders.The big exporters, too,could have further to run,even if the dollar/yen ratestalls. Further falls againstthe Korean won, for exam-ple, could feed through tobetter profits at carmakersand electronics companies.

One indication that exu-berance is not yet irrationalcould be the performance ofa closed-ended small-capfund known as JOF, incor-porated in the US and listedin New York.

In mid-March, JOF wastrading at a 7 per cent dis-count to net asset value –little changed on its five-year average discount of 8

Continued from Page 1per cent. Only in rare peri-ods of high interest in Japa-nese stocks – such asmonths leading up to theLehman crisis in 2008 andduring a spike after theearthquake of March 2011 –has it ever moved to a pre-mium to net asset value.

At the very least, flowsfrom overseas into Japa-nese stocks should keepprices firm as investorsreallocate funds from mar-kets with less compellingmacro growth stories.“Japan is the only nationwhere monetary, fiscal andcurrency policy are in syncto boost domestic demand,consensus [gross domesticproduct] growth forecastsare on the rise and 2013[earnings-per-share] growthexpectations are a robust 43per cent [versus just 7.4 percent in the US],” wrote ana-

lysts at Bank of AmericaMerrill Lynch in earlyMarch.

Investors expect a few set-backs along the way, ofcourse. But, for now, fewexpect them to throw offmomentum. “If we’re rightabout Japan having a goodstory to tell this year, theconsolidation might beshortlived,” says MichaelWood-Martin, who runsabout $100m as director ofJapanese equities at Hend-erson Global Investors inLondon.

“We’ve had numerousfalse dawns before, but thistime there is more cohesionbetween politicians, thefinance ministry and theBank of Japan. Everybodywants to get a move on, toget Japan going again.”

Investing in Japan

The tide could be turning forJapan’s distressed electronicsindustry after two decades ofentrenched deflation, falter-ing innovation and a strong

yen eroding exports.Restructuring is on the rise, partly

spurred by the growth-friendly initia-tives of Shinzo Abe, the new primeminister. Foreign competitors arebeginning to throw lifelines, some-times by injecting cash in exchangefor supply deals, sometimes by buyingup unprofitable but technology-richproduct divisions to get a toehold inthe Japanese market.

The result is that the industry offersnot only lessons in failure but oppor-tunity as well, say analysts. “It’s beena kind of perfect storm for the tech-nology sector over the past 20 years,”says David Motozo Rubenstein, aTokyo-based analyst.

While Japanese companies domi-nated chipmaking in the 1980s, theyhave long since lost their crown.South Korean companies dominatedynamic random access memorychips for mobile phones, with a mar-ket share of 79 per cent in the fourthquarter last year, according toDramExchange, a Taipei-based spotmarket.

Innovation has been a big stum-bling block. Japan’s low growththrough much of the 1990s and 2000sprevented many companies fromkeeping up with the aggressive spend-ing on research and development pur-sued by such companies as Apple.

“[Former Apple chief executive]Steve Jobs helped destabilise the Jap-anese electronics industry in astonish-ing ways,” says Peter Fuchs, a Tokyo-based analyst and consultant. “Appletorpedoed the game console makersNintendo and Sony, and to a lesserextent the Japanese digital cameraindustry.”

Relatively high corporate tax andrigid labour laws have hampered theindustry, while the strong yen hasbeen another drag. “Japanese manu-facturers’ cost structures tend to behigher than their rivals in Korea, Tai-wan, and the US largely due to thestrong yen,” says Mr Rubenstein. Henoted that Korean manufacturers, inparticular, benefited from the steepdrop in the won against the yen afterthe Lehman Brothers crisis.

Miscalculating domestic televisiondemand was the final blow. Electron-ics makers such as Sharp and Sonyhad been aiming to capitalise on agovernment scheme to promote ener-gy-efficient appliances in 2009-2010and the mandatory switchover to dig-ital terrestrial broadcasting in July2011.

But after all that, sales kept slip-ping. “The combination of the two ateup a lot of future demand for flatscreen TVs, setting the industry upfor a crash in what had been a profita-ble domestic market,” says Scott Fos-ter, an independent analyst.

From 2009 Sharp found itself stuck

with a modern TV factory near Osaka.“Sharp spent about Y430bn on thelargest LCD (liquid crystal display)factory in the world,” says Mr Foster.

But it was an investment too far, hesays, “perfectly suited to making 60,70, and 80-inch TVs for outrageousprices that nobody wanted to buy.Koreans were making up to 50-inchTVs and undercutting the Japanese 50per cent in the US market, the world’sbiggest”.

For Sharp, a 3 per cent capital tie-upwith Samsung Electronics in Marchhas improved its outlook. Sharp willbe receiving Y10.3bn in cash, keepingcreditors a little happier, while the

South Korean electronics giant willsecure a steady supply of Sharp’s LCDpanels.

Sharp’s talks on a similar deal withTaiwanese business partner Hon HaiPrecision Industry (also known asFoxconn) faltered after Sharp’s stockprice plummeted last year, and HonHai asked for a seat on its board ofdirectors.

“Sharp may become a smaller com-pany but I think it will survive ascompanies globally want diversifica-tion of their parts suppliers,” saysFrank Packard, Japan representativeat Triple A Partners, a boutiqueinvestment firm.

The surge in stock prices since MrAbe took power in December hashelped propel Japanese electronicscompanies to reshuffle their portfoliosand divest noncore businesses.

Panasonic is planning to trim itsbusiness units by a third after grap-pling with losses reaching more thanY1.3tn over the past two years.

The company says products such asTVs and mobile phones will be cut.Executives will concentrate insteadon higher-margin operations such aswelding machinery and beauty appli-ances.

Streamlining has become a mantraat NEC. The computer company soldits 2.7 per cent stake in Lenovo inSeptember last year for Y18bn tofocus on more profitable businessesthat include internet data servicesand corporate computer networks.Hitachi, too, is busily restructuringunder new president Hiroaki Nakani-shi, who is looking to sell or spin offunprofitable businesses to focus oninfrastructure, energy and IT solu-tions.

Others are eyeing new businessareas such as water and air purifica-tion devices and products for an age-ing society. Rising stock prices can bea great boost to confidence, whateverthe industry.

“The mood has changed since [MrAbe returned to the] leadership,” saysTaisuke Sasanuma, a Tokyo-basedrepresentative for Advantage Part-ners, the private equity firm that hasagreed a deal with Panasonic to buyits Sanyo digital camera business,” hesays. “The Japanese economy is grow-ing so it’s very good timing for foreigninvestors to put more money in.”

In the northwestern provin-cial city of Komatsu, a vastfactory that once producedmetal stamping presses hasbeen transformed into alush park, complete withcherry trees, 300 varieties ofplants, a children’s pavilionand a technology trainingcentre.

Komatsu-no-Mori, as thesite has been renamed, wasbuilt by Komatsu, themaker of construction andindustrial machinery, in itshome town, to mark its 90thanniversary in May, 2011.

The park and trainingcentre are Komatsu’sanswer to a problem thathas afflicted Japan over thepast 20 years – the closureof manufacturing sites andthe disappearance of jobsthey once offered local com-munities.

All over the country, pro-duction sites that churnedout everything from flatscreen televisions to lip-stick have been closingtheir doors, forcing workersto leave their hometowns insearch of work and exacer-bating the steady decline ofregional economies.

The number of peopleworking in manufacturingin December fell below 10mfor the first time since 1961.Although that figure rose to10.2m in January, it is stilldown 35 per cent fromabout 15.7m in 1992, accord-ing to government statis-tics.

This year, Shiseido, thecosmetics group, said itwould close its factory inKamakura after more than50 years and shift some pro-duction to Vietnam, wherefacilities will be expanded.

At the end of this month,Sony will close itsMinokamo manufacturingsite, in Gifu prefecture incentral Japan, where itonce employed as many as2,400 workers manufactur-ing interchangeable lensesfor digital cameras.

Regional governments

have been at pains toattract employers and cre-ate much-needed jobs butthey are up against a relent-less shift of manufacturingto growth markets, particu-larly elsewhere in Asia.

The downturn of the elec-tronics industry has hitIzumi city, on the south-western island of Kyushu,hard.

In 1969, Panasonic, NECand Fujitsu all came toKyushu, which attractedinvestment as “SiliconIsland”, recalls an official atthe Izumi city municipaloffice. “Those were the gooddays, but now emergingeconomies are becoming theplace for manufacturers togo,” he says.

Izumi city suffered a twohits in 2009, when Pioneerand NEC closed their plantswith the loss of 1,000 jobs.“It was a huge jolt to lose1,000 jobs in a city of52,000,” says the official,who declined to be named

because of the sensitivity ofthe issue.

Izumi is offering to waivetaxes for 10 years to manu-facturers, IT companies,call-centre operators andfood processing factoriesalike, and three of its offi-cials have been scouringthe country in search ofpotential investors.

But “there aren’t any can-didates. Even attracting avegetable processing plantthat employs five people isa big challenge”, the officialsays.

“Factories throughoutJapan are closing andKagoshima is now focusingon keeping the factoriesthat remain. Companies saythe strength of the yen isthe main obstacle to build-ing a plant in Izumi. Theysay that rather than set upin a corner of Japan wherethe transport links are notthat great, they would

rather build a plant in anemerging economy.”

Some regional cities havebeen more successful inreplacing lost jobs by look-ing to businesses other thanmanufacturing.

Kainan is a small city of55,000 in the southwesternprefecture of Wakayamathat makes 60 per cent ofthe kitchen brushes sold inJapan.

The city spent Y3.2bn 15years ago, buying a factorysite that covered 33,000square metres. It sold partof the property and setaside 20,000 sq m as retailspace, after taking a surveyof local residents that indi-cated they wanted moreshops in the neighbour-hood.

“Ever since a supermar-ket in the city centreclosed, people found it verydifficult to meet their dailyshopping needs,” saysYohei Yamabe, project gen-eral manager, at Kainancity’s office.

A local supermarket oper-ator, Okuwa, won the pub-lic bid to lease the space,with a plan to invest Y2.1bnand employ about 200 peo-ple, which is more than the140 or so that the formerfactory employed.

Komatsu city expects thenew park and technologytraining centre, built andowned by the maker of dig-gers and dump trucks, togenerate revenues for thelocal community of Y1.2bn.

But such positive exam-ples are far outnumberedby the countless failedattempts to find newsources of jobs that havebeen lost as a result of thehollowing out of manufac-turing.

The consensus is that thegovernment needs to domore to encourage moreforeign direct investment, ashift in Japan’s industrialstructure and the emer-gence of new ventures.

“There are said to beabout 50 vegetable process-ing companies in Japan andI think there is a possibilitythat there will be more infuture,” says KazuyukiSudo, president ofYasaikobo.

“But I don’t think thatnumber will increase to1,000,” he says.

Rally puts spring instep of specialists

Lifelines thrown to alleviate distressElectronics Industry offers object lessons in failure and opportunity, writes Lucy Birmingham

The surge instock priceshas helpedencouragecompaniesto reshuffleportfolios

Investment too far: the Sharp factory near Osaka that made LCD televisions few wanted Bloomberg

Countless efforts fail toproduce employmentManufacturing

Factories have beenclosing doors all overthe country, saysMichiyo Nakamoto

‘Emergingeconomies arebecoming the placefor manufacturersto go’

Marc Benioff’s winning beton Japan helped elevatesalesforce.com, the globalsoftware company, to thetop of the cloud after ajourney across the Pacificfrom its San Franciscoheadquarters

Trust, moderntechnology, timing and alocal merger andacquisition specialist – orrainmaker – helped sowthe seeds of success. Japanaccounts for 8-10 per centof the company’s $27bnmarket capitalisation andis its second biggestterritory after the US.

“I have always had greatconfidence in Japanbecause it is sotechnologically advanced,”says Mr Benioff, founder,chairman and chiefexecutive.

“It has one of the mostreliable communicationsinfrastructures in theworld. [But] like any globalmarket, [it] requirespatience. We have been inJapan for more than 10years. The key is to hirethe best people and focuson the customer.”

The environment wasright, says Eiji Uda, chiefexecutive and president forJapan. The country had amature broadbandinfrastructure, a strategyfor small and mediumbusinesses andinternational competency.

It also has intellectualproperty (IP) and privacylegislation. “Intellectualproperty issues are key forus. Without established IPlaw, foreign IT companiescannot invest in Japan’smarket,” he says.

From the start,salesforce.com avoided

exclusive resellerrelationships with localcompanies, an approachtaken by others.

Chikara Sano, formerJapan chief executive atOracle, warned Mr Benioffthat such a move couldlimit future growth. MrSano instead suggested ajoint venture partnershipwith local expert AllenMiner, chief executive ofSunBridge Corp, whichprovides venture capitaland globalisation support.

“Normally it takes a longtime to penetrate theJapan market,” says MrUda. “Microsoft and Oraclehave been in Japan formore than 20 years and areheavily dependent onpartners for a majority oftheir business,” he says.

Gaining references fromlarge “brand” clients hasbeen crucial. Success inJapan requires a top-downapproach, normally out ofreach to new foreigncompanies. “One of thefactors that makes theJapanese IT marketdifficult to navigate is that,unlike the US where manycompanies like to try newtechnologies, most of thecompanies in Japan preferto follow a successfulexample, typically from abig company,” wrote MrBenioff for Japan’sexternal trade organisation.

Gaining access to thosepotential clients was halfthe battle. Mr Beniofffound his M&A guru in MrUda. Before joiningsalesforce.com, Mr Uda hadhad 20 years at IBM andhad been president andchief executive of SoftBankCommerce. Relationshipshe had developed atcompanies such as Canon,Hitachi, Ricoh, NTT,Nippon Steel and MizuhoBank opened doors.

This led to the group’sbig catch, Japan Post, thatwas being privatised. Fromthere, a domino effect sawthe company gain accounts

with large financialinstitutions, includingbanks and insurancecompanies, as well assmall and medium-sizedbusinesses. Japan Post isnow the largest customerof salesforce.com.

The company startedwith customer relationshipmanagement (CRM) butcustomers began asking ifthey could build otherapplications on “thecloud”, so the companyopened up its platform,called force.com, enablingcustomers to build theirown applications.“Customers can use ourplatform to develop anykind of application theywant.”

The company’s manyaccolades have been greatfor sales. Forbes namedsalesforce.com the mostinnovative company in theworld for 2011 and 2012.Fortune ranked it 27 onthe “100 Best Companies toWork For” list.

Salesforce.com Japan isknown for its acquisitions.Last year it spent $835m.In early March, thecompany announced a$1bn, five-year cash budgetthat would raise cashlevels to $2.8bn, a signalthat it might be on thelookout for morepurchases.

“We will continue toinvest in Japan,” says MrUda.

“We may also do someSME equity participationand technological supportbecause many lackadvanced technology.

“That would be the bestway to help stimulate theeconomy,” he says. “We’veinvested in 11 companiesin Japan. We’re not aimingat capital gain. We want tosupport Japanese ITcompanies and help themtransform from legacy to anew innovative era – thecloud computing era.”

Lucy Birmingham

Big betpays offfor USIT group

Company profilesalesforce.com

Trust, technology,timing and a localrainmaker helpedsow seeds of success

Japan fan: Marc Benioff has confidence in technical prowess

‘We’ve had falsedawns before butthis time there ismore cohesionbetween politicians’

FINANCIAL TIMES THURSDAY MARCH 28 2013 ★ 3

Investing in Japan

When Shinzo Abe becameJapan’s prime ministerin December, he prom-ised to fire three“arrows” into the heart

of the country’s long economicmalaise.

Three months into his tenure, twoof the projectiles are speeding towardtheir targets: a Y10tn fiscal stimuluspackage that will boost spending onpublic works and a dramatic regimechange at the Bank of Japan, whoseprevious leadership, Mr Abe believes,had done too little to fight deflation.

Now, attention is shifting to thethird arrow in the quiver: a nationalgrowth strategy, including deregula-tion and other structural reforms thatexperts say are needed to improve thecountry’s underlying economic dyna-mism. A panel of ministers and spe-cialists is examining options and aplan is expected in June.

So far, the first volleys of “Abenom-ics” have been enough to excite inves-tors. A campaign promise by Mr Abe’sLiberal Democratic party to aidexport-dependent manufacturers bybringing down the value of the yenhas become self-fulfilling.

Traders, expecting an assault on thecurrency, have knocked 15 per centoff its exchange rate against the dol-lar since November.

That, in turn, has ignited the stockmarket, which has soared by morethan 40 per cent to its highest levelsince 2008. Last month, Mr Abe addedfuel to the rally by picking Haruhiko

Kuroda, a former finance ministryofficial who advocates aggressivemonetary easing, to be the next gover-nor of the Bank of Japan.

Mr Kuroda and his even moredovish deputy Kikuo Iwata, an aca-demic economist, say they can reversea nearly 20-year trend of mild con-sumer price declines and generate 2per cent inflation within two years.

As ambitious as that target may be,many believe regulatory reform repre-sents an even tougher task.

To accomplish it, Mr Abe will haveto take on vested interests that havestalled many proposals for years –some of them, such as doctors andfarmers, traditional pillars of supportfor his party.

Yoshihiko Miyauchi, the chief exec-utive of Orix, a financial servicesgroup, has for years been one of themost outspoken proponents of deregu-lation. With opinion polls showingbroad support for Mr Abe and his eco-nomic agenda, he says the potentialfor progress is greater than in thepast.

“If you look at all the reports in themedia, they seem to be supportingreform. It’s the first time in the last 10years,” he says.

Japanese are “bored” by slowgrowth and deflation, he continues –but they also understand that highgovernment debt, now equal to morethan two years’ gross domestic prod-uct, means there is limited room formore stimulus.

“Finally, people have found out

that reform is a necessary thing.”Mr Abe has already made one

important move on the structuralfront by committing Japan to joinnegotiations over the trans-PacificPartnership, a proposed Pacific Rimfree-trade zone.

The decision was supported by busi-ness groups but opposed by the farmlobby that fears Japan will have tosacrifice its high import duties onagricultural products, particularlyrice.

Matthew Goodman and MichaelGreen, of the Center for Strategic& International Studies in the US,call TPP the “most consequentialelement” of Mr Abe’s economic

programme, pointing to studies thatsuggest it could add 0.5 per cent toGDP a year.

Motoshige Itoh, an economist at theUniversity of Tokyo, believes joiningthe pact could raise growth by 2.2 percent by 2025, adding Y10tn to annualoutput by improving prospects forexporters and forcing protecteddomestic sectors, from agriculture toservices, to become more efficient andproductive.

Other decisions will be just as con-troversial. Mr Abe’s Council on Indus-trial Competitiveness is re-examiningJapan’s strict labour laws, which offergenerous protection to full-time, per-manent workers.

They have helped keep unemploy-ment low, but created a growing classof vulnerable contract employees andpart-timers and frustrated restructur-ing efforts in declining sectors suchtelevision-making.

Mr Abe also wants to promoteexports of infrastructure-relatedequipment, something the previousgovernment also pursued.

But that includes nuclear reactors,an area that has become much morecontroversial since the Fukushimadisaster in 2011. He must also decidewhether to restart some of the dozensof reactors that have been closedsince the accident.

He has also spoken of improvingprofessional opportunities for womenwho quit the workforce after child-birth in greater numbers than theirpeers in other developed countries.But tackling hurdles for workingwomen – by easing regulations tomake it easier to set up nurseries, forinstance, or reducing the tax code’sbias against double-income house-holds – would mean fighting withbureaucrats and going against theviews of many of his own conserva-tive party.

“Mr Abe has made a great start, butreform will take a long time,” MrMiyauchi says.

First volleysfired in effortto promotedynamism

Structural reformPrimeminister will haveto take on vested interests that have enjoyeddecisive inf luence, writes Jonathan Soble

High government debt,equal to two years’ GDP,means there is limitedroom for more stimulus

Japan stocks

Source: Thomson Reuters Datastream

Nikkei 225 stock average

Dec2012

Mar20139000

10000

11000

12000

13000

Japan inward foreign directinvestment flow$bn

-10

0

10

20

1990 95 2000 05 10 12

YenAgainst the $ (¥ per $)

Jan 2011 2012 Mar2013

100

90

80

70

New wave: Shinzo Abe, right, at thismonth’s LDP convention. Potentialfor progress is greater than in the past

Getty

At the intersection of theKen-O expressway andhighway 254, about 30kmnorthwest of Tokyo, a hugelogistics facility is about totake shape.

This month, the devel-oper, Prologis of San Fran-cisco, broke ground on this451,000 sq ft project near thetown of Kawajima inSaitama prefecture – at anexus between the emerg-ing ring-road around thecapital and routes to north-ern and western Japan –

with the aim of boosting theefficiency of supply chainswithin the world’s thirdlargest economy.

In Japan, facilities oper-ated by third-party logisticsproviders such as Prologisamount to about 2 per centof total industrial space –compared with the mid-30sin the US and the mid-teensin Europe.

“We feel really goodabout our business in Japanfor a lot of reasons thathave nothing to do with‘Abenomics’,” says HamidMoghadam, chief executive,alluding to the new govern-ment’s mix of monetary andfiscal stimulus that haslifted asset prices since theend of last year. “There arestill so many opportunitiesfor companies here to takecosts out.”

But there is no questionthat the policies unleashedunder the second coming ofShinzo Abe, prime minister,have been good news forthe entire real estate sector.

It was thanks to Abenom-ics, for example, that a realestate investment trust(Reit) part-owned by Prolo-gis was able to raise Y100bnin February, pricing thedeal at the top of its range,in the fifth biggest initialpublic offering in the worldthis year.

Money has also pouredinto the commercial, retailand residential sub-sectorssince Mr Abe took power inDecember.

So far in 2013, as the cen-tral bank has loosened mon-etary policy further, Japanhas accounted for about 17per cent of all the money

raised by Reits around theworld – outgunning the restof Asia (12 per cent) and thewhole of Europe (9 percent). The first-quarter haulof about Y208bn will be arecord for any three-monthperiod since the birth of theJ-Reit market in 2000,according to Thomson Reu-ters data.

“J-Reits are out raisingvery strong domestic capi-tal, and the weakening ofthe yen has also encouragedoverseas investors to takeanother look,” says AndyHurfurt, Tokyo-based exec-utive director at CBRE, thecommercial real estate serv-ices company.

This tide of money shouldkeep market prices firm.SMBC Nikko Securitiesreckons that about Y800bnworth of property will be

bought by Reits in the firstfive months of the year. Atthat rate, total propertypurchases in 2013 will sur-pass the previous record ofabout Y1tn set in 2008.

That, in turn, could pushup rents. Prices for officespace in Tokyo’s most fash-ionable commercial dis-tricts bottomed in the thirdquarter last year, accordingto CBRE, and now rentrises are beginning tospread across more classesof property.

Real estate broker JonesLang LaSalle expects land-lords to achieve an averageannual increase of about 5per cent in rents this yearand next.

Such a rebound wouldsignal the end of a 21-yearslide that cut by 63 per centrents for all categories of

offices in the capital’s fivecentral wards, according toMiki Shoji, a Tokyo-basedbroker.

Land prices, too, arebeginning to tick up in

parts of Tokyo. Such activ-ity is normally a good indi-cation of “inflation andrisk-taking creeping backinto the economy,” saysNicholas Smith, a strategistat CLSA. High-grade office

space in Osaka, too, is bub-bling up, as is the multi-family residential sector inthe southern city of Fuku-oka. Further, the Bank ofJapan is unlikely to dowhat it did in 2008, when it“smacked on the head” arising property market bytightening policy, says MrSmith.

Meanwhile, investors ofall descriptions seem likelyto keep piling in in searchof income.

Tatsuo Ichii, secretary-general of the Associationof Real Estate Securitisa-tion (Ares), notes that theaverage yield of the J-Reitsector is about 4 per cent –roughly six times that ofthe 10-year governmentbond. Revivals have fizzledin the past, he notes. Buthe describes himself as

“cautiously optimistic” onthe outlook for the market,for the first time since theLehman crisis.

Momentum has to stall atsome point, of course.

Curtis Freeze, chief exec-utive officer of ProspectAsset Management, likensthe moment at which Reitand equity investorsbecome sated to “Wile ECoyote running off a cliff –the legs are still moving,but the ground’s no longerthere”.

But that seems a longway off. “It is still earlydays in this cycle of assetreflation,” he says.

For now, the market hasthe precious quality of“confidence”, agrees MrMoghadam of Prologis. “Itreally is the cheapest formof stimulus.”

Tide of money pours in to keep real estate prices firmProperty

Rebound may signalthe end of a 21-yearslide in Tokyo, saysBen McLannahan

MRI scans are painless buthardly pleasant. So whenexecutives at GE Health-care in Japan noticed eld-erly patients struggling justto get on to the scanningtable, then fidgeting to staycomfortable during the pro-cedure, they realised thattheir machines needed afew improvements.

Now, many of the latestmodels produced by the UK-headquartered company arewider and easier to climbon to, while the cushionsare designed to alleviatespecific pressure points.

The way Jun Kawakamisees it, this is an example ofwhat the Japanese market

can do best: using theinsights afforded by itsuniquely challenging demo-graphics to drive the devel-opment of new medicalequipment and technolo-gies.

“Japan needs to redefineits role in our global portfo-lio,” says the chief execu-tive of GE HealthcareJapan, which has beendesigning and manufactur-ing from a sprawling site inthe city of Hino, about anhour west of Tokyo, for 33years.

“Our 6 or 7 per cent top-line growth here can’t com-pete with China, which isgrowing at 25 per cent, withthe bottom line even better.But where Japan can lead isin delivering solutions forthe ageing of society.”

Most foreign healthcarecompanies pursue a differ-ent model, importing every-thing they sell. But theyshare the view of the coun-try as a vital test bed.

Japan’s super-ageing soci-ety – with the 23 per cent ofJapanese who are currentlyover the age of 65 set to riseto about 40 per cent by 2050– is a glimpse of the futurein many developed anddeveloping nations. Whatworks here could work, intime, in China and in SouthKorea, and in many coun-tries in Europe.

Recognising the sector’spotential, the state goes outof its way to lure foreigncapital. Healthcare is one ofhalf a dozen areas of theeconomy designated as“attractive” by Jetro, thestate-backed Japan ExternalTrade Organisation, alongwith energy, car parts,retail, technology and bio-tech.

In the Y10.3tn fiscal stim-ulus package announced inJanuary, just weeks afterShinzo Abe’s new govern-ment took office, Y3.1tn wasset aside for spending onhealthcare, education and

local government subsidies.All of which is good news

for intermediaries. “Health-care is one of our fastergrowing and most stablebusiness areas,” says GoroYoshimura of Robert Wal-ters, a UK-based recruit-ment company. The com-

pany’s healthcare team,which he leads, has quadru-pled in headcount since itwas set up in 2009. Over atPhilips Electronics, chiefexecutive for Japan DannyRisberg tells a similar storyto Mr Kawakami. One thingthe Japanese unit of the

Dutch “health and wellbe-ing” company can teach therest of the world, he says, ishow to respond to the grow-ing prevalence of chronicdisorders such as Alzhe-imer’s disease, cirrhosis ofthe liver and rheumatoidarthritis, to offer patientsefficient, standardised care.“People are living a lotlonger, but they’re not get-ting any better,” he says.

An elderly patient with along-term lung problem, forexample, may require treat-ment in the intensive careunit, a pulmonary ward orat home. If Philips can sup-ply clinics and hospitalswith ventilators suitable forall three locations, withinterchangeable accesso-ries, it can bring down thecost of care.

In a country where socialsecurity spending isexpected to eat up morethan two-thirds of tax reve-nues in the fiscal yearbeginning in April, finding

ways to cut costs is abso-lutely critical, he says.

“We know that 20 to 25per cent of patients canaccount for 80 or 90 per centof costs,” says Mr Risberg.“What we need to do is tofocus on the areas wherehospitals are spending mostmoney.”

For all the attractive fea-tures of Japan’s healthcaresystem – universal cover-age, high life expectancy,low infant mortality – it isriddled with inefficiencies,he says.

Take the average lengthof stay in hospitals. At 18.6days, it is more than threetimes the equivalent in theNetherlands (5.6 days) andalmost four times that ofthe US (4.9 days).

This is a function of toomany small hospitals, saysMr Risberg, all trying tooffer the same services.While that model could besustained in the past, morespecialisation is essential

now, agrees Mr Kawakami.And if rural and suburbanhospitals start to disappear,doctors need to reachpatients and potentialpatients somehow.

Last June, GE began apilot programme with thegovernment of Aomori pre-fecture supplying “healthpromotion cars” stockedwith ultrasound equipmentand other devices to tourremote areas. ShingoMimura, Aomori governor,had seen a similar fleet thatGE offered to prefecturesaffected by the March 2011tsunami as part of the reliefeffort – and wondered if the4x4s could be used to pushbetter diets and lifestyles inone of Japan’s fastest-ageing regions.

“It’s the kind of non-tradi-tional thing we need to domore of,” says MrKawakami. Japan’s health-care system “needs a mas-sive redeployment ofresources”.

Medical groups glimpse future in extreme demographicsHealthcare

Ben McLannahanconsiders prospectsfor companies usingJapan as a test bed

Japan hasaccounted forabout 17% of fundsraised by Reitsaround the world

The 23% ofJapanese over theage of 65 is set torise to about 40%by 2050

Michiyo NakamotoDeputy Tokyo Bureau Chief

Jonathan SobleTokyo Bureau Chief

Ben McLannahanTokyo Correspondent

Julian Ryall,Lucy BirminghamFT Contributors

Stephanie GrayCommissioning Editor

Steven BirdDesigner

Andy MearsPicture Editor

For advertising details,contact: Michiko Hayashi on+81 3 3581 2097;michiko.hayashi@ft.com

All FT Reports are availableon FT.com at ft.com/reportsFollow us on Twitter attwitter.com/ft.reports

Contributors »

4 ★ FINANCIAL TIMES THURSDAY MARCH 28 2013

Investing in Japan

Until recently, Asian con-sumer brands were all butinvisible in Japan, despitethe rising popularity ofKorean electronics and carsin markets around theworld.

Even Samsung, theworld’s leading mobilephone and LCD televisionmaker, initially struggled tomake its mark in Japanwhere it faced fierce compe-tition from national icons,such as Sony, Sharp andPanasonic.

While there are no regula-tory obstacles, stiff competi-tion from local manufactur-ers coupled with the loyaltyof consumers to nationalbrands have made itextremely difficult for new-comers to succeed in whatmany describe as the mostdemanding market in theworld.

“The difficult thing aboutthe Japanese market is thatconsumers are verydemanding, there is somuch competition, thetechnological level of manu-facturers is really high,and retailers demand veryhigh quality products,”says Kiwook Lee, vice-president of sales and mar-keting at LG Electronics inTokyo.

In order to compete, for-eign manufacturers need tohave something “much,much better than what Jap-anese companies have”, hesays.

What is more, since Japa-nese manufacturers developmany electronics productsspecifically for the homemarket, the costs of tryingto do the same can be pro-

hibitively high for foreigncompanies.

Another hurdle is win-ning the approval of con-sumers who expect veryhigh graphics quality and,even though they are recep-tive to outside brands, “it’sa consumer electronicskingdom so their loyalty toJapanese brands is veryhigh”, Mr Lee says.

Haier, the Chinese elec-tronics and home appli-ances maker, spent a dec-ade building brand recogni-tion in the market.

In 2002, it was alreadywell-known in other mar-kets but brand recognitionin Japan among retailersand consumers alike waslow, the company says.

“Consumers trusted theJapanese electronics mak-ers’ products and brands,which they were highlyfamiliar with, and evenmajor, global consumerelectronics makers in thewest were not able to gainsignificant market shares inwhite goods, such as refrig-erators and washingmachines,” Haier says.

Nevertheless, for theworld’s consumer electron-ics companies, cracking theJapanese market is a holygrail that they believe isnecessary to achieve worldclass status.

“Even though we arefamous globally, unless weare recognised in Japan,can we really say that weare a top level company?”asks Mr Lee.

LG entered the market in1981 as an original equip-ment manufacturer, mak-ing products for other com-panies’ brands, “because itwas difficult to sell underthe LG brand”, Mr Leesays.

It was not until2006, a full 25 yearslater, that thegroup felt it

had sufficient recognitionto start selling its mobilephones in Japan.

Even Samsung struggledwhen it launched its firstmobile phone through NTTDoCoMo, using the Win-dows Mobile operating sys-tem, in early 2010.

However, when Samsunglaunched the Galaxy S justeight months later, itbecame a massive hit andstores quickly ran out ofstock.

The success of the GalaxyS had much to do with thehigh quality of the product,but Samsung also benefitedfrom good timing, saysYoshiki Fujima, director ofDoCoMo’s product depart-ment.

Sony had launched itssmartphone, Xperia, andconsumers were becoming

aware of smartphones whenSamsung launched the Gal-axy S, which was alreadywell regarded overseas,says Mr Fujima. LG is alsomaking an effort to differ-entiate its products fromthose of its Japanese com-petitors.

By using what it calls a“magic remote control”, LGhas made the user interfaceof its smart televisionsmuch easier than that ofmost other smart TVs, MrLee says.

Chinese electronics mak-ers are also making inroads.

Huawei has launchedniche products for the Japa-nese market and its hand-sets targeted at childrenhave gained a stable follow-ing in the past three years,says DoCoMo’s Mr Fujima.

Haier has targeted retailchannels that Japanesewhite goods makers did notfocus on, such as generalmerchandise stores andhome centres.

It has also been helped byits strategy to concentratemarketing on one major dis-count retailer and is aimingto increase sales in Japanfrom Y48.3bn last year toY56bn in 2013 and Y80bn by2015.

Cars made by SouthKorean manufacturers,such as Hyundai, have

not fared as well.However, Hyundai

has been a formidablecompetitor to Toyotain the US market andit may be a matter oftime before it makesits mark as well.

“As long as theproducts are good,Japanese consumerswill buy them. They

are more concernedabout the products being

good than about thenationality of the brand,”says Mr Lee.

Outsiders try to get a grip onhigh demands and local loyaltyAsian brands

Newcomers start tomake inroads afteryears spent gainingrecognition, writesMichiyo Nakamoto

Sellout: Samsung’s Galaxy S became amassive hit and stores quickly ran outof stocks Dreamstime

Cracking theJapanese market isa holy grail neededto achieve worldclass status

It may have taken far longer forthe concept to catch on in quality-conscious Japan, but low-cost car-riers (LCCs) are finally getting offthe ground. Three budget airlines

began operations in 2012 – JetstarJapan, AirAsia Japan and the cutelynamed Peach Aviation. They arebeing credited with dramaticallyboosting domestic demand in a mar-ket worth an estimated Y3tn annually– and with four of the busiest domes-tic air routes in the world, linkingTokyo’s Haneda airport with Osaka,Fukuoka, Sapporo and Naha.

In a study last December, travelagency JTB forecast that the numberof Japanese travelling overseas in2013 will climb to a record 18.7m, upabout 1.5 per cent on 2012, many ofthem with the new operators. Simi-larly, budget airlines are expected toeat into the passenger numbers ofshinkansen bullet train companies, aswell as ferry operators and long-dis-tance coach companies.

Geoffrey Tudor, an analyst withJapan Aviation ManagementResearch, says Japanese travellersattracted by fares as much as75 per cent lower than on established

airlines have broadly welcomed theoption of no-frills flights. “Some trav-ellers still prefer to fly with JapanAirlines and All Nippon Airways asthey want to receive the full serviceand the high frequency,” he says.“But travellers with time to spare –students, retirees and so on – are tak-ing to these new LCCs with glee.”

The figures bear that out, both ontheir domestic and internationalroutes. During the Obon holiday sea-son in August, Peach was flying at 94per cent capacity, AirAsia had 91 percent and 89 per cent of all seats inJetstar Japan were occupied.

“Because of our low prices, travel-ling by air has become more familiarand convenient for the public,” saysKensuke Asami, a spokesman for theOsaka-based airline.

“Peach’s core business concepts aresafety, low fares and fun,” says MrAsami. “That last one – ‘fun’ – is prob-ably the biggest difference between usand LCCs in Europe or North Amer-ica,” he says. “Peach is the first air-line company in the Kansai area,which is famous for its culture ofhumour. Peach believes it is impor-tant to promote our sense of humour

as a Kansai airline and to differentiateourselves from other airlines.”

In its first year of operations, Peachflew 1.5m passengers and has plans toopen a hub in Okinawa and start serv-ices to Vietnam, Bangkok and otherdestinations in southeast Asia.

However, the new arrivals are stillreliant on the established airlines.ANA owns slightly more than 38 percent of Peach, while 33.3 per cent isheld by the Hong Kong investmentgroup First Eastern and 28 per cent byquasi-public investor Innovation Net-work of Japan. ANA also has a 67 percent share in AirAsia Japan, with theremainder held by the Malaysian LCCAirAsia.

The third new arrival, JetstarJapan, is a tie-up between the Austral-ian budget airline and JAL. Each hasa 33.3 per cent share in the company,with Mitsubishi and Tokyo CenturyLease holding the remainder.

Costs at the outset have been high,but Peach has set itself a target ofreporting a profit after two full yearsof operation and Jetstar Japan aims toachieve the same within three years.In addition, no fewer than 12 foreignLCCs are now flying into airports the

length and breadth of the country,with China’s Spring Air also planningto set up a company with local part-ners before the end of the year.

The first LCC in the world wasSouthwest, which can trace its rootsin the US back to 1967 – 45 yearsbefore budget airlines were able togain traction in Japan. In Europe, theboom in cheap flights began in theearly 1990s. “The main hurdle here isthe very high cost of running an air-line in Japan,” says Mr Tudor. “Wecall it the ‘Japan Cost’ and it includesa unique and very high fuel tax, thehigh landing fees at airports, high air-port charges, high navigation fees andhigh labour costs.”

Other handicaps include tight regu-lation over flight operations, limitedcapacity at airports and, in some

cases, airport curfews, such as at Nar-ita International Airport, the maingateway to Tokyo.

The arrival of genuine budget carri-ers in the Japanese market was pre-ceded by air fare deregulation in 1998that helped six regional airlines getairborne, led by Skymark Airlines inSeptember 1998. Of the six, five weretied to either ANA or JAL.

“Established airlines tried to protecttheir positions in the lucrative domes-tic market with political influence andprice-matching with the new airlinesthat were trying to create a marketwith lower prices,” says an industryinsider.

“But the trend towards open skieswas so strong around the world andthe influence of LCCs was becomingtoo big to ignore,” he says. “Thatforced both ANA and JAL to changetheir tactic to invest in and takeadvantage of LCCs rather than tryingto compete with them head on.”

The full service airlines may never-theless have cause for concern – ANAhas cancelled its service betweenNarita and Incheon from March 31 asseat occupancy slid to 60 per cent –but was wise to hedge its bets by

investing in the fledgling airlines.“We recognise that cannibalisation

may arise among a certain segment ofour customers,” says Megumi Tezuka,a spokeswoman for ANA. “However,because the customer segment thatANA targets is different from that ofthe LCCs, we think that actually wewill see a greater effect in terms ofnew demand generation.

“Until Peach was established, Japanwas a white spot for LCCs and webelieve it holds enormous potential,”she adds. “The demand is enormous,not only for travellers from Japan butalso among visitors from overseas.

“We believe, by participating in theLCC business, we will play a role inbringing a great many more people toJapan and reviving the economy.”

But the industry accepts that theinterlopers are here to stay. LCCs willcontrol about 30 per cent of the mar-ket on main trunk routes withinJapan by 2017, says Mr Tudor, andthey are busy launching new routes.The latest additions to Peach’s net-work will be flights between Osakaand Busan from September – with theone-way fare starting at a mereY4,780.

Fledgling travel operators take to the skiesBudget airlines Established groups have tried to protect positions but the inf luence of low-cost companies is too big to ignore, says JulianRyall

‘Peach believes it isimportant to promoteour sense of humouras a Kansai airline’

No frills: Peach, Jetstar Japan and AirAsia Japan started operations in 2012. They are all challenging the traditional carriers, along with bullet train companies, ferry operators and long-distance coach groups Getty