Japan Overview

Japan is located in the East Asian region with Tokyo being its capital. Most of Japan’s area is surrounded by the Pacific Ocean and the country has 6852 islands. The economy of Japan is the third largest in the world after the United States and the People's Republic of China. Furthermore, more than 99% of the population speaks Japanese. It has 127 million people and is the 10th largest country in the world by population.

The country is sparsely diverse with Japanese people comprising 98.5% of the population and Koreans, Chinese and others constitute 0.5%, 0.4%, and 0.6%. Further, Japanese corporations are renowned worldwide and the Japanese companies in the top 100 of the Fortune ranking include Toyota Motors, Hitachi, Honda Motors, Nissan Motors, Panasonic, Sony, Toshiba, and so on. Moreover, the top performing companies in Japan by market capitalization are shown in the illustration below.

Most valuable Japanese companies by market cap

The PESTLE Analysis is an effective tool for analyzing the external environment with respect to the industry. It reveals the political, economic, social, technological, environmental, and legal aspects prevalent in the countries. This article would contain an in-depth analysis of prevailing political, economic, social, technological, environmental, and legal environments for the telecom companies in Japan and the study of which can assist the companies in knowing the business environment there based on which they can make effective business decisions concerning the investment and turn out to be successful and sustainable in the market.

A detailed and informative PESTLE Analysis of Japan

Political factors affecting different industries in Japan

Japan has witnessed a turnaround in the federal administration quite a number of times recently. The country has been ruled by three different prime ministers in the last three years. The continuous change in the leadership cannot be a good sign for the companies looking to invest in the country as the rules would also keep on changing which can lead to uncertainties. The government has recently undertaken many steps for different industries like in the automobile sector, the government is pushing for more environment-friendly options like EVs and vehicles running on hydrogen, etc. and according to a recent announcement all the cars sold by 2035 in the country would be environment friendly (International Trade Administration, 2021).

The government is lessening the financial burden on the automobile companies and the government has implemented a system wherein the taxes on newly purchased vehicles after October 2019 for engines below 2000cc would be reduced by 10% every year to an upper limit of 4500 Yen. This relief by the government can lead to a reduction in the prices of the cars, thereby leading to an increase in the sales of the auto industry (Ministry of Economy, Trade, and Industry, 2019).

Further, Japan is famous worldwide for its gaming industry and the country is known for several popular games like Mario, Pokémon, Minecraft, etc. As the gaming industry is one of the most important industries, the business in the country would suffer a temporary setback as consoles used for gaming require semiconductor chips which are short of supply throughout the world because of COVID and further because of the decrease in production in the raw material of chips in Ukraine as a result of the ongoing war. This would indirectly impact the manufacturing capacity of video gaming companies.

In addition, the production facilities of most video game companies are located in China and the Japanese government is discouraging companies to shift their investments out of China (McFerran, 2020). Though the government is providing subsidies for making a shift, the companies would have to spend a great number of resources on searching for land, establishing bases and making networks, etc. (Dooley and Inoue, 2020). Though the world is opening up and governments all over the world are providing several types of relief to the business but on the other hand, Japan has still imposed bans on companies from bringing workers from overseas.

This could force many companies to shift their businesses out of the country or temporarily shut down the facilities as the local Japanese population comprises mostly elders and the companies are dependent on migrants for performing the complex labor tasks. Currently, 29% of companies are in dire need of overseas specialists, and 23% of companies have reported serious losses because of the immigration ban (Brunnersum, 2022). However, there are some positive aspects as well for the businesses looking to venture into Japan.

The Fukuoka city government has launched a startup scheme for foreign investors in the sectors including fintech, semi-conductor, software development, contents production, robotics, Health, Medical, Welfare Industries, Environment & Energy, and Logistics and the companies would be offered full assistance related to establishing infrastructure (Fukuoka City, 2022). Hence, this can be positive news for foreign companies to increase their market share and profitability. Further, the companies that are looking to invest in the startups can expect tax relief as the government has extended its innovation tax relief program wherein the larger companies that invest more than 100 million yen or more and smaller companies with an investment of 10 million yen or more are allowed to deduct the 25% value of their investments from their taxable income (The Japan Times, 2021).

This would reduce the tax liability of the companies and they would be encouraged to diversify their investments more, thus leading to an increase in corporate wealth.

In addition, Japan currently has signed Free Trade Agreements with various nations including Singapore, Mexico, Malaysia, Chile, Thailand, Indonesia, Brunei, ASEAN, Philippines, Switzerland, Viet Nam, India, Peru, Australia, Mongolia, EU, US, and the UK while it is also part of larger trade blocs like Trans-Pacific Partnership and Regional Comprehensive Economic Partnership.

RCEP would boost the Japanese economy and it is expected that it would result in additional employment for around 570,000 people and value added to the country’s GDP to an extent of 2.7% and the exports are expected to increase by 5.5%.

Moreover, the trade pact can help smoothen trade ties with China as it is also a member of the bloc and this can be beneficial for the businesses as they would get easy access to the largest consumer market in the world and the biggest benefit to the Japanese customers would be in the form of streamlining of the business operations as the companies would have to comply with the single set of the norms for exporting to multiple countries.

The companies operating in Japan can avail multiple tax benefits. The enterprise tax, taxes on property or transactions, etc. are deductible for the purposes of corporate tax calculation. Further, salaries, wages, and bonuses paid to employees of a corporation are also deductible expenses.

The more positive news for the small and medium enterprises is that the expenditure done by them on entertainment for the employees is also deductible to the tune of 50% while calculating the tax and the upper limit for it is 8 million yen. The government has launched a program related to the minimization of food waste named NO-FOODLOSS. Herein, several campaigns are run such as Order only as much as you can eat and many others. This can cause a threat to the players in the food industry that promote their outlets with attractive offers like these.

Economic factors affecting different industries in Japan

As mentioned above, Japan is among the top economies of the world. The businesses looking to invest in Japan must consider the business relations of Japan with other nations. The countries where the majority of goods and services are exported include China and the United States of America, and other countries in Asia, such as South Korea, Taiwan, Hong Kong, Singapore, and Thailand. The companies must invest in automotive, electric devices, and machinery if they are looking to establish an exporting unit in the country as these are the major exported commodities from Japan.

The finances of the country are in a great state with current accounts recording an increase of $1.7 billion in Jan 2022, meaning that the companies would not need to worry about availing finance and any financial instability.

The FDI numbers reveal that a large sum of money flows out of the country and in 2021, there was an outflow of $222.5 billion while the FDI into the country is really low, it was just $14.5 billion in 2021. As per OECD, the growth rate in Japan was 1.8% by the end of FY2021 and is expected to increase to 3.4% in 2022 and then further decrease to 1.1% in 2023.

Further, the unemployment rate in Japan is consistent over the last 1 year at less than 2% and is expected to be 2.5% by the end of Q1 2022. The huge fluctuation in growth rate can mean difficulties for the businesses while expanding the businesses but however the low unemployment rate indicates more people in the country with fixed income which would increase the demand and consumption among the people and this can lead to an increase in the sales for the companies. Inflation is another important economic factor that affects businesses as the fluctuation in the prices can impact the affordability of the customers and the current rate of inflation in the country is just 2.67%.

Such a low level of inflation can also be a loss for the businesses as they would not get the correct value for their products. The housing market in Japan is witnessing huge losses as there are abundant residential properties lying vacant because of changes in demographics and the shrinking of people’s age and as a result, the government is forced to sell homes at prices as low as $500. Hence, it can be said that there is not much scope in the country for the housing industry to generate a substantial return on investment.

Social factors affecting different industries in Japan

The social trends in Japan are more inclined toward playing video games and watching anime. The fact that supports this statement is that people in Japan spend 16.9 hours on average per week playing video games and the individuals incurred $300 per person in the year 2021. Further, Japan has one of the highest percentages of old age population, 36.4 million people are currently above the age of 65 (The Japan Times, 2021). As a result of such mass old age, the industries would face difficulties in sourcing high-performing employees that require a tough physique. To overcome this issue, the companies can source employees from overseas which may prove to be costly.

The other solution is implementing technology like robots to perform the tasks. Another trend that is quite popular in the corporate environment of Japan is hiring employees for a lifetime i.e. the employees that are hired by the companies stay with them till their retirement. This must be taken care of by the new companies trying to venture into Japan as if they change employees on frequent occasions then that can be considered against the culture and the companies might not be able to sustain and grow in the country.

The new young population in Japan is much materialistic as highlighted by McKinsey and the tendency of consumers is more inclined towards spending time to save money” rather than “spending money to save time which signifies that the companies offering affordable products have high chances of growth in the country. Further, people prefer spending more time at home and the internet penetration in the country is one of the highest in the world. These combined factors present a significant opportunity for the companies to shift their operations to online mode and the companies that are already experts in e-commerce can exploit the opportunity to be the king in their own respective industries.

The companies should be aware of the fact that millennials in Japan are mostly dependent on social media for searching for products, so the companies should be active on various social media channels and try their best to engage the customers. There has been a rise in single households or in other terms the sole persons living in homes and even dining and recreational activities are also being done solo by people (Lufkin, 2020). This is important, especially for FMCG companies, they should not manufacture family packs of the products as there wouldn’t be much demand for those products.

Moreover, people in Japan are much shorter in height than Europeans and Americans, hence the famous retailers from those regions must be aware of this fact and should establish stores in such a way that people won’t have to climb up to reach for the products, if the shelves are not stocked appropriately then that can result in failure of the company in the country.

Besides, the trend of fitness and sustainable consumption is increasing in Japan. Out of all the wellness products and services, McKinsey states that 57.5% of the expenditure is just incurred on health and nutrition, signifying the growth opportunities for various companies that are into gyms, health supplements, and diet-conscious meals. This can pose a threat to many industries like the poultry industry, dairy, and QSR and they would see a huge decline in their businesses.

However, the QSR industry can exploit the opportunity of entering into new markets and increasing its financial stability. Further, 10%-15% of customers buy products based on the recommendations of social media influencers. Though the number is small, the companies cannot afford to lose even a single customer, so they should look for collaborating with them as well.

Furthermore, the trend of sustainability is also on the rise and people have changed their working styles in order to conserve the environment. The employees are preferring more work-from-home options to reduce the consumption of energy in offices. Moreover, the consumption of more organic products has increased over the years and this could be a potential opportunity for the companies dealing in organic produce to target more customers while the agricultural groups and companies that use more chemicals and fertilizers to produce the products would see a decline in their business in the coming future if they do not mend the ways.

More industries like cosmetics and QSR can see a decline in the business if they do not execute sustainable practices while conducting business operations. In addition, OECD ranks Japan as a high literacy country and the literacy rate in Japan is significantly higher as compared to the literacy in other countries and the majority of people possess good proficiency in reading as well as solving numerically. This is a positive sign for tech-enabled companies like those offering IT solutions, companies dealing in smart wearables, etc. as more literacy rate means the people would be more equipped with the knowledge to operate digital products.

However, the trend of working from home in Japan is not as common as it is in other parts of the world because of COVID and this trend could be negative for the companies offering digital products and services as the trend could have contributed to increasing in the demand for various gadgets and software. Also, the companies dealing in luxury goods stand a good chance of being profitable as the net worth of rich individuals is rising in the country and compared to 2020, there has been an increase of 48% in the wealth of the top 50 richest people of Japan (Forbes, 2021).

Technological factors affecting different industries in Japan

The Japanese government spends hugely on Research & Development, and in 2020 it spent more than 19.50 billion yen. Japan has shown the way of a new technological era by being the first nation in the world to introduce the fastest trains also known as the bullet trains. Japan was also the major inventor of the audio device Walkman and the blue LED light that is fitted with the latest, cutting-edge consumer technologies.

Further, Lenovo, a Japanese tech company launched a virtual reality-enabled Star Wars game that allowed users to engage in virtual reality lightsaber battles. Other Japanese inventions include a calorie scanner wherein the diners can accurately evaluate the calories present in their meals through an infrared scanner that measures the nutrients in the meal.

Moreover, the supermarkets in Japan are fully tech-enabled and the country has innovated with Usockets which is a series of electronic supermarket price tags which feed into a centralized system that uses real-time data to manage a store. To further enhance the customer experience many supermarkets are fitted with a technology called LinkRay that allows the shoppers to scan the price tags with their smartphones in order to activate videos that can assist them in providing more information about the product (Marsh, 2018).

Besides, Japanese businesses can also benefit from other emerging technologies like Big Data Analytics, Blockchain, Augmented Reality, Virtual Reality, 3D printing, artificial intelligence, etc. Big Data analytics works on the basis of analyzing the past and present data and is used to forecast the demand for the future so that the companies can produce and stock up appropriately. Further, this technology also helps the companies in knowing what product is currently in demand.

This can help the companies accurately forecast the demand and reduce wastage. 3D printing is used to manufacture the products through the use of technology rather than manually. The products can be manufactured more quickly and the resultant product is more accurate. This technology is being heavily used by the automobile industry to manufacture spare parts and the housing industry uses it to design the whole house.

Virtual Reality can be a great means to let people experience the realities without physically doing the tasks. For example, many businesses use it for the training purpose wherein the employees are trained off the site and made aware of the real situations that the employees would be working in. Even the entertainment industry uses virtual reality to present the scenes more closely.

Furthermore, artificial intelligence in the form of chatbots to interact with the customers 24*7 and robots for doing various human tasks is gaining importance (Forbes, 2020). Moreover, the automotive industry is experimenting with various technologies like solar-powered vehicles and faster batteries for EVs that could charge the vehicle in under 15 minutes.

Also, it is essential to note that in times of emerging technologies, companies also need to maintain caution against technology exploitation.

The companies operating in Japan can expect a positive environment for innovating with various technologies and their effort would be secured through the grant of patents. The time period for which the patents can be availed in most of the world is 20 years but Japan offers the option to register the patents for 25 years. Hence, the companies can earn profits for extra 5 years without having to worry about competition. Further, as the businesses are flourishing in the country, the government has ensured equal chances of growth for every enterprise in the country by formulating the Fair Trade Maintenance Act.

Herein, the businesses are restricted to engage in unfair practices that include monopolization, price discrimination, predatory pricing, forming cartels, and interference with a competitor’s transactions (Baker McKenzie, n.d.). These restrictions can impact the video gaming companies as they cannot create a monopoly or exploit the market by forming a cartel.

The famous gaming industry can expect to face a bit of heat with the Kagawa government’s decision to limit the time for which the children, their major target market can play games. The law restricts the time limit to 60 minutes on weekdays and 90 days on weekends. This can reduce the number of transactions in the gaming industry. Many industries are dependent on the personal information of customers to gain insights into the customer’s tastes and preferences and improve their level of service.

The government has formulated the Personal Information Protection Act to protect the interest of the customers and the companies are expected to undertake precautionary measures like encryption systems that are recommended in the government’s Ciphers list while collecting the sensitive personal information of the customers or the information that can result in loss such as credit card information, IDs and passwords.

the UK and the countries falling in the European Economic Area while the companies would need to avail the consent of the individuals from whom the data is collected or would need to establish the data transfer agreement with the organization receiving the data.

The companies must disclose information such as the country where the transferee is located, the country where the transferee is located, a summary of the privacy laws of the country where the transferee is located, and whether there are any issues with the data handling measures taken by the transferees and, if so, a summary of such issues and measures that the transferor would take to solve such issues (Morrison Forrestor, 2022). In addition, Japan has an accounting system known as blue tax return wherein businesses can self-assess their accounts and can themselves calculate their income and tax liability, and pay the tax themselves.

The companies indulging in this system are offered several benefits like a ten-year carry forward of net loss for future deduction and allowance of reserves, special depreciation, and tax credits. However, not all companies can engage in this practice and require special permission from the authorities (Maekawa, Tsuchiya, Sekiguchi & Kurozumi, 2020).

Environmental factors affecting different industries in Japan

As video gaming is one of the top industries in Japan, there is a large amount of e-waste generated by the electronic industry in Japan, totaling about 650,000 tons along with a great number of fluorocarbons. To deal with this issue, the Japanese government has established targets of 70% for the recycling of fluorocarbons by the end of 2030 (Kanagawa and Nakayama, 2021).

The high targets of recycling can put a financial burden on the companies as they would have to establish adequate infrastructure and research different ways of recycling the waste. Further, the energy sector is also the main contributor to the greenhouse gas emissions as most of the energy needs in the country are now being met through fossil fuels that were earlier achieved through nuclear energy but after the nuclear disaster in 2011, the sudden shift was made towards fossil fuels. In addition, the agriculture and petrochemical industry is also the main source of pollution in the country.

Japan is a member of the Climate and Clean Air Coalition and as a result, the government sets high environmental standards for the industries. Moreover, the government of Japan has set up a target of reducing greenhouse gas emissions by 26% by 2030 and this could severely impact the agriculture industry as the rice paddy fields make use of rice straw which produces a large amount of methane gas. The industry would have to shift the business practices to a more sustainable manner, one of which can be by increasing the use of compost instead of rice straw. Sooner or later, the companies will have to comply with stricter environmental laws that will require effective change management at all levels.

To encapsulate, it can be concluded from the above analysis that the political environment in Japan is highly favorable for the industries and the automobile companies can expect an increase in liquidity in the future as the government has announced tax cuts. Digital literacy in Japan is comparatively higher than in many other developed nations and the companies engaged in technology-related products and services would witness an increase in business because of this. Moreover, the companies engaged in research and development can generate exponential profits as the government is supportive of the R&D activities and grants patents for a period of 25 years. However, the popular gaming industry could face disruptions because of the shortage of supply of semiconductor chips. The industries must make their operations tech oriented because of the fact that much of the population in the country is old age and they might have difficulty in sourcing labor for difficult physical tasks.

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