An Entrepreneurial Spirit Begins to Emerge in Japan

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Japan was Late to Adapt its Business Model to the Needs of a Maturing Economy

In many ways, the technology and U.S.-driven dot.com boom of the late 1990s accentuated rigidities and deficiencies in the Japanese economy. Many had attributed Japan’s problems to cyclical factors. The forces of innovation, capital formation, resource mobilization and corporate flexibility – perhaps best epitomized by the achievements of Silicon Valley -- finally helped many Japanese opinion leaders to come to the overdue realization that change was overdue. It’s traditional business model, which served the nation so well during the post-World War II era, now impinged on its ability to compete in a rapidly changing world economy.

Small to medium sized businesses were hit especially hard. During this strenuous period a consensus for change began to pick up momentum. Time, however, was needed to both initiate the full range of measures necessary to carry out this transformation and to wait it out until the desired results became evident.

Today, however, we are beginning to see a new model emerge. It combines many of the entrepreneurial tools, practices and mechanisms that have helped to drive new business formation and innovation in the U.S. with the hard work, dedication and attention to quality and detail that have made Japanese firms such a formidable presence in markets around the world.

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Reform Measures Initiated in the Mid-1990s Helping to Achieve this Transformation

To help establish the foundation and direction upon which to base the changes that needed to be made, the Japanese government adopted a detailed “Action Plan for Economic and Structural Reform” (Action Plan) in late 1996. Substantial progress has since been achieved through deregulation and reform measures directed toward corporations and consumers as well as the financial and public sector. One can debate the effectiveness of these measures, the speed of implementation and whether the recovery now occurring in Japan has been motivated more by government policy, corporate actions or cyclical factors. What cannot be disputed, however, is that Japan’s economic fortunes have begun to change and even the most pessimistic analysts are beginning to pay a begrudging respect to the progress that has been made.

As a result, investors are now raising their exposure to Japan. Acording to Barron’s, Japan-oriented funds enjoyed the strongest performance in Asia during the second quarter. Another indicator of the enthusiasm now emerging was reported in early July by EmergingPortfolio.com, which noted the Japan Equity Funds it tracks drew in inflows totaling $8.27 billion this year. Combined with the appreciation of the underlying securities – total assets in these funds doubled to $29 billion from $16 billion at the beginning of 2004.”

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Macro Reforms Accompanied by Promotion of Business Formation and Development

In October 1999, the U.S. “dot.com miracle” was proceeding along full steam. Japan in comparison appeared despondent -- unattractive to foreign and domestic investors -- and many in Japan remained fearful for their economic future. Recognizing important changes needed to be made, the Japanese Diet convened an extraordinary session to strengthen small and medium-size enterprises (SME's) and the availability of venture capital.

The Diet session introduced legislation that promised to: 1) provide self-support of business management, 2) enhance competition and 3) provide a safety net for emergency situations through the introduction of legislation similar to Chapter 11 bankrupcy law in the US. In addition to improved bankrupcy procedures, specific measures were enacted to reform the Japanese over-the-counter market, to create new sources of venture capital and to promote more flexible financial and corporate structures. Other measures allowed the use of stock options, established Technology Licensing Organizations, provided financing and training to entrepreneurs, facilitated restructuring and enhanced corporate governance and the development of new growth sectors.

At this time, the Japanese Government categorized Japanese SME's into different categories, each with different goals and objectives. These included:

• Venture businesses that can take advantage of initial public offerings (IPO's) in the over-the-counter market.
  
  Goal: to have an equal number of IPOs as the United States. For example, in 1998, the U.S. NASDAQ market had 287 IPOs, while Japan had only 62.
  
  Update: Even though Japan was also affected by the bursting IT bubble, about 500 companies have listed on Japan's three stock markets for emerging companies since June 2000. Only about 150 firms listed on the NASDAQ market in the three years through 2003.
  
  
• Competitive SME's with distinctive goods or services.
  
  Goal: within 3-5 years to have an increase of 1,000 new venture companies based upon the results of University research.
  
  Update: As of the end of March 2004, 799 venture companies had been established based on research conducted in Japanese Universities.

Furthermore, nearly 15,000 new companies have been established following a simplification of business registration procedures in February 2003.

Also, in July 2003, METI helped to establish a new Internet-based service named Dream Gate, which has been helping young Japanese people to “chase the dream” of entrepreneurship. Using a popular celebrity wrestler in Japan, Bob Sapp, a native of Colorado, as a spokesperson, this site has been receiving a lot of traffic and almost a quarter of a million people have registered to use this service.

One of the programs offered by Dream Gate is an internship initiative, which allows promising university students to gain experience working at venture companies. In little more than a year since this program was implemented, several of these interns have gone on to found their own enterprises.

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Japanese Become More Appreciative of Entrepreneurial Career Path

Japan was late to embrace the dot.com and venture capital boom that pervaded the U.S. in the late 1990s. At the time this seemed a real deficiency, but Japan’s reluctance to break with the past now seems to have allowed it to avoid some of the excesses that occurred during that period. While Japan too enjoyed a mini boom and bust during those years, a more stable foundation is now being put into place.

Today one can find entrepreneurs seeking funding, training and support through angel and networking organizations including the Nippon Angels Forum founded in 1999 by Yukio Iura. This group is seeking to facilitate matchmaking between entrepreneurs and angel investors throughout Japan. Other organizations include the Venture Alliance Association and Osaka-based Venture Community.

Major foreign VC and private equity firms are also active. The McKinsey Quarterly in Private Equity heads for Japan, Reuters in Venture capitalists place bets in risk-averse Japan and Chief Executive Magazine in The Private Equity Invasion of Japan are just a few of many articles covering major investors such as Ripplewood, Cerebus, Lone Star, the Carlyle Group, Investor AB, and Goldman Sachs. Other firms active in Japan include Whitney & Co. LLC, JAFCO, Walden International, APAX Partners, and Warburg Pincus.

In addition to venture capital firms, numerous business incubators are now forming, and local firms including Globis, Neoteny, J-Seed, Sunbridge, Tsunami Network Partners. AntFactory, and Ignite Japan as well as other specialized entities are now moving to make investments and provide support to emerging companies in Japan.

One of the many byproducts resulting from this move toward a greater acceptance of entrepreneurship is increased labor flexibility. Younger people are coming to view entrepreneurship as a legitimate career option. Additionally, business failure in Japan has traditionally meant losing ones reputation and assets. Today, however, a growing number of entrepreneurs, especially in the technology sector, are starting to get second chances. In fact, Ministry of Economy Trade and Industry data released in 2003 revealed that nearly 14% of entrepreneurs who had filed for bankruptcy had gone on start new enterprises.

The Nikkei Weekly recently cited several examples including the case of Tetsuya Sanada, who in 1998 helped to start up Cybird Co., a firm that offers cellular telephone services after a previous business went bankrupt. Two years later Cybird went public. Sanada notes in this article that in the late 1990s “The environment in Japan for starting up IT businesses became closer to that of the U.S….(and that) .. the number of investors that take a positive view of past failures has grown”.

Another notable example is the case of Takashi Sakamoto, a 63-year old former piano salesman, who has built Bookoff, Japan’s largest used book chain, from a single outlet into 700+ stores in little over a decade. Bookoff has even gone on to expand internationally and presently has branches in New York and Los Angeles. Ever the entrepreneur, Sakamoto has gone on to adapt his business model to other sectors, including sporting goods (B-sports), clothing (Mode-Off) and even technology (Hard-Off). In an article last year in Time magazine, Sakamoto has even suggested that he may try to start up a nationwide ramen (noodle) chain.

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Entrepreneurs and Investors are Driving a Robust IPO Market in Japan

The move to embrace and reward entrepreneurship is evident in the robust performance of the Japanese initial public offering (IPO) market in recent years. The Economist recently commented on this development comparing the almost 50% rise of the Nikkei 225 index since April 2003 – one of the more impressive performances among developed markets – with the 160%+ advance of the JASDAQ over a similar time frame.

JASDAQ Performance from March 2003 – July 2004

Entrepreneurial companies in Japan generally list on the JASDAQ, the "MOTHERS" market of the Tokyo Stock Exchange, or the "Hercules" market of the Osaka Stock Exchange. The average IPO last year raised only ¥5.38 billion ($46m). This is approximately a quarter the size of a typical IPO in the U.S. Given their small size, Japanese retail investors have been the largest participants, though institutional investors are now starting to take notice. Retail investors are reported to account for 70% of all JASDAQ transactions, with an even bigger share of IPO trading. 121 Japanese firms went public last year -- 50% more than in the U.S. Additionally, as of late May, another 54 firms went public in 2004.

Many might be tempted to view the heady performance of these IPO’s as reminiscent of the speculative behavior seen in U.S. markets only a few years ago. Time will tell whether these securities can sustain their value, yet it is important to note that unlike the U.S. -- where many of the securities listed during the dot.com years were VC-driven vehicles with little or no operating history -- a good number of the listings now being seen in Japan are based on the performance of established firms. Many have decades of operating history -- and appear to be using the IPO vehicle to adjust their financial structure away from the traditional “cross-shareholding” and “main bank” commercial lending orientation they have relied upon in the past. Instead, they are moving toward the equity-driven model common in the U.S. and many European countries.

Furthermore, unlike many firms that listed in the U.S. several years ago, many of the Japanese firms listing today are profitable. According to data compiled by the Nihon Keizai Shimbun, total pretax profits for non-financial firms listed on the three markets for emerging firms cited above – rose 15.4% to ¥515.5 billion ($4.5 billion) for the year ending March 31st. This is the second annual increase in the three years since these three markets were established.

Among the numerous firms scheduled to go public or who have listed in recent years include:

• TV Tokyo: The last of Japan's five nationwide commercial broadcasters to go public, TV Tokyo plans to list approximately 18.3% of its shares on the first section of the Tokyo Stock Exchange. TV Tokyo was incorporated in 1968 and as of late May had 674 employees. TV Tokyo broadcasts to approximately 32 million households, roughly 68% of Japan’s total population, with 16 million households in Tokyo alone.
  
  
• Zakkaya Bulldog: A Shizuoka-based fashion retailer, Zakkaya Bulldog is scheduled to list on the JASDAQ. It was founded in 1982 and as of late May had 365 employees.
  
  
• ADTEC Plasma Technology Co. Ltd. A Hiroshima-based firm which specializes in the design, manufacture and sale of industrial electronics for use in semiconductor process equipment as well as hardware and software for microcomputer applications. Founded in 1985, ADTEC is scheduled to list on the MOTHERS exchange this month. It maintains an extensive international network and as of late May had 60 employees.
  
  
• Netprice: An online retailer, Netprice listed its shares on the MOTHERS exchange earlier last month. It was established in 1999 and as of late April had 58 employees.
  
  
• TAZMO, Co., Ltd. Listing last month on the JASDAQ exchange, TAZMO develops and manufactures LCD panels used in notebook PC and other equipment. Its spin coater, used in the color filter manufacturing process, holds the leading share of the worldwide market for this product. It was founded in 1972 and as of late April had 356 employees.
  
  
• Frameworx: Shizuoka-based Frameworx listed in June on the MOTHERS exchange. The firm was founded in 1991 and specializes in logistics- and warehouse-management software packages. Its “LogistisStation" series for WMS packages have been used at more than 150 sites at major companies in Japan and overseas.
  
  
• Jorudan Co., Ltd.: Shinjuku-based Jorudan, listed its shares on the HERCULES exchange in April of last year. The company’s activities include the development and marketing of “Keiro Annai”, a software used to identify the shortest public transportation route between stations and is also used in home video game software. It was founded in 1979 and as of late March of last year had 44 employees.
  
  
• Pickles Corporation: Saitama-based Pickles Corporation listed on the JASDAQ in December 2001 to settle loans and allow facilities investments. Its main business is the provision of pickles, and preparation of vegetables and sale of grocery and agricultural products. Founded in 1977, as of late September 2001 it had 175 employees.

While the normal need for caution and intensive due diligence clearly must prevail, international corporate and portfolio investors – who have only just begun to address the severely underweight position they have maintained in Japan for many years – are advised to pay closer attention to these and other recent developments. This is necessary to determine how they can benefit from, and plan their optimal exposure to, the many attractive opportunities that are now emerging in Japan.

Data, statistics and the reference materials presented within this newsletter have been compiled by JETRO from publicly-released media and research accounts. Although these statements are believed to be reliable, JETRO does not guarantee their accuracy, and any such information should be checked independently by the reader before they are used to make any business or investment decision.

Focus: Consumer Demand
Focus: Asia
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Focus: New Policy Challenges
Focus: Investment Japan IV
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Focus: Entrepeneurship
Focus: Economic Revitalization 
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Focus: Economic Rebirth
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