Start It Up!

Advice on turning your big idea into a successful business as an expat

Starting a business anywhere is a demanding endeavor, but doing so in Japan presents its own particular set of hurdles and idiosyncrasies. For those who can navigate the process, however, there are many rewards to be had.

Although the dynamics can vary widely depending on the industry, the top challenges facing startups in Japan include simply breaking into the market, language and cultural differences, the time it takes to build a customer base, bureaucratic requirements, and difficulties raising money. It’s also hard to find staff suited to the brisk-paced, rough-and-tumble, uncertain world of startups. That is according to 10 entrepreneurs and venture capital (VC) investors interviewed for this story.

“This is definitely playing with the difficulty level turned up,” said Jim Weisser, co-founder and chief executive officer of e-signature service provider SignTime KK. Weisser has launched five companies in Japan, some of which have succeeded and one that he says was a “complete flop.”

Yet, Japan also offers many positives and rewards for entrepreneurs—from the loyalty of customers and employees to the high quality of infrastructure and a society that is much less litigious than the United States.

Michael Alfant, founder and CEO of software solutions provider Fusion Systems Group—one of about 25 companies he has started here as well as in mainland China, Hong Kong, Australia, and the United States—said that Japan is one of the most challenging markets to crack, but not that much harder than elsewhere. One big advantage is that Tokyo by itself is the most “target-rich environment” in the world, he told The ACCJ Journal.

“People sometimes lose sight of the density of economic activity in Tokyo, which is the highest anywhere. You’ve got the third-largest [gross domestic product] in the world, and 35 percent of that is accessible to us via the subway,” Alfant said. “In Tokyo, I can easily do four or five meetings a day with clients. If I wanted to do that in Los Angeles, I’d better have a helicopter.”

Sophie Meralli of Eight Roads, a VC fund backed by Fidelity Investment, pointed out that Japan shows strong potential for new businesses in part because it is still in the early stages of digital transformation. “Japan’s economy provides entrepreneurs with numerous opportunities to launch new businesses,” she said. “Due to their position in the adoption cycle of new technologies, entrepreneurs can continuously innovate by transforming the way services can be deployed in Japan.”

It’s a Marathon

Nearly all those interviewed—representing a collective 180 years living in this country—agreed that two key qualities needed for an entrepreneur to succeed in Japan are patience and perseverance. That’s true of any startup, but the more traditional nature of Japanese society and business, which deeply values relationships and trust built over time, requires extra stamina, they said.

“I can guarantee there will always be hard times,” said Terrie Lloyd, who has lived in Japan for 38 years and is the founder and CEO of full-service travel services provider Japan Travel K.K. “If you’re not prepared for those hard times, then maybe you’re not cut out to be an entrepreneur.”

Alfant noted that starting and running a business in Japan is like running a marathon, whereas in other markets where he’s done business—especially New York and Shanghai—it’s like being in a boxing match. “When the bell rings, you have to be on your toes, totally engaged from the first nanosecond, or somebody is going to knock your block off. It’s intense for a shorter period, and then you get a break.”

But in Japan, “you put your head down and you keep putting one foot in front of the other—and you don’t look up for the finish line,” because it’s still a long way off. When you get to the very end, “and you hear the crowd yelling, [then you say] ‘Okay, now I can see the finish line.’”

Start with a Hunch (and Test It)

So how do you start that marathon here? What are the first steps? What lessons can be learned from entrepreneurs who have succeeded and failed in Japan?

“Entrepreneurship is not one size fits all,” Alfant explained. “In fact, it’s the bespoke aspect of entrepreneurship that tends to create value for, and appeal to, a certain kind of person. So, it doesn’t surprise me that you get different answers from different people.”

Lloyd, who teaches classes for would-be entrepreneurs, said that often the kernel of a business idea is simply a hunch. Three of his companies began that way, and all three have done well; two he sold and the third is Japan Travel.

The quality of the hunch is, of course, what makes the difference, according to Lloyd. So, to test out your idea, he recommends finding a mentor, someone who already has entrepreneurial experience and can help you “sort of BS-check your idea.”

Steve Bleistein, founder and CEO of consultancy Relansa, Inc., recommends doing something similar—talking about your idea with a lot of people who might become customers to validate whether it is a credible concept. Some entrepreneurs develop a business idea without really checking to see if there’s an interest in it. That, Bleistein said, is a big mistake. It is through those conversations that you gain valuable information about what exactly your potential customers want.

“This is a way you can mitigate risk,” he continued. “If you’re talking to 12 people who you think are likely buyers of your product, you understand exactly what it is that’s valuable to them. You find out that some of your assumptions were wrong, but some were right. Then you start to discover opportunities that you hadn’t realized existed.”

Some entrepreneurs worry that sharing too much information—even with a mentor—might lead to their idea getting stolen. If that’s the case, then ask them to sign a non-disclosure agreement (NDA), said Lloyd. He has signed NDAs with numerous people who have showed him business plans.

Already having business experience in Japan—and a deep knowledge of the target market—obviously helps with getting a hunch right. Seth Sulkin, who operates hotels and shopping malls and has lived in Japan for 27 years, came up with the idea for Food-e, the upscale food delivery service he started last year, as he was exchanging information about business conditions with struggling restaurant owners early in the pandemic.

But the idea didn’t come out of nowhere. He noticed a trend at his favorite restaurants during the pandemic: none of them delivered. When he began to ask about this, he found that higher-quality restaurants couldn’t rely on mass delivery services because the food couldn’t be reliably transported on time or without being shaken up.

“After talking with 20 restaurant owners, I could see there was a clear opportunity. And it wasn’t something I needed to test,” Sulkin said.

Compelling Idea vs. Fierce Execution

Lloyd explained that once you’ve tested and refined your idea, and it’s becoming a more realistic business concept, you need to ask yourself some key questions:

• How powerful is this idea?
• Does it engross you?
• Do you dream about it?
• Do you wake up thinking about it?

If not, maybe it’s not strong enough, he cautions.

“In years two and three, when things are getting tough, people give up. In fact, most new companies fail within the first three years,” Lloyd said. “But if you have something that’s akin to religion—and you can hold onto that dream—the idea will sustain you through the hard times.”

Alfant has a slightly different approach to this initial “hook,” as he calls it—an information advantage in the market segment he’s targeting. “That doesn’t mean inside information. It means I have access to knowledge and information that gives me an advantage over other entrants into the space.”

And while businesses do need a compelling concept, “ideas are a dime a dozen. Execution is what matters,” he added. “If the idea is so shallow that someone else can go and replicate it or beat me to the punch, God bless them. I view execution as the differentiating factor.”

This is a familiar debate in the world of startups, Weisser said. Some believe that the right idea can rule the world. Others hold the view that an idea doesn’t win without excellent execution, but execution can often lead to success even if the idea is not so good. “I’m firmly in the second camp,” he said, noting that this has been borne out in the US tech industry where “not-as-good” ideas executed fiercely and quickly usually beat out better ideas that take more time to take shape.

Timing Matters (But So Does Planning)

Sometimes, the biggest factor determining a business’s success is timing—particularly in something as fast evolving as technology, Weisser noted. In his case with SignTime, he had discussed the idea of creating a digital signature business for Japan a few years ago, believing that, at some point, Japan would give up its reliance on hanko (personal seals) and faxes. But he wasn’t convinced the timing was right. “A lot of companies have great ideas, but if it’s too early, they go bankrupt.”

When Covid-19 struck, and people were forced to work from home, he knew the moment had arrived. “We’d already laid the groundwork for the company, so getting it up and going, and doing some of our first pitches, was doable,” Weisser said.

The best time to start a business is at the bottom of the market, said Lloyd, who launched Japan Travel shortly after the Great East Japan Earthquake and Tsunami of March 11, 2011, and subsequent nuclear disaster, when foreigners left the country by the tens of thousands. “Thinking about how tourism was devastated after the disasters, I thought, well it’s a great industry to get into.”

Timing may be important, but not at the expense of careful planning, said Andrew Dunbar, who founded his wine importing business Iconic Wine Japan, Inc. about 10 years ago. He cautions against launching too quickly and without investing time in a well-thought-out, five-year business plan. He said having that gave him confidence when things got tough and helped him see the big picture.

“A lot of times, people jump into things quickly, thinking it’s going to work out. But it’s so much better if you have a full written plan and projections for how you’re going to build the business for the first five years,” he explained. “Make a good plan and be able to finance that plan in a credible way.”

Red Tape, No Tape

Once you’re ready to launch the business, the formality of incorporating the company with authorities is relatively easy. The task can be outsourced to a lawyer who can file the necessary papers for you, the entrepreneurs said. Getting approval takes anywhere from several days to three weeks, depending on the circumstances.

The two main options are registering as a kabushiki kaisha (KK), a stockholding company, or godo kaisha (GK), a limited liability company. Essentially, if you’re planning to bring in outside investors, you need to be a KK. If you don’t need a lot of money, you may want to be a GK. Most entrepreneurs in this story registered as the former.

For some businesses, such as consultancies, that’s all you need. But many other kinds of companies require various licenses and approvals specific to the products or services they aim to provide. Acquiring those can take a lot more time.

Anything to do with food and beverages, for example, tends to be heavily regulated in Japan. Having run hotels and shopping malls, Sulkin was familiar with the regulations, but he was still surprised by the amount of red tape he encountered in setting up Food-e.

Since he was using cars and motorcycles, not bicycles, he discovered that if his company wanted to hire drivers directly he needed a difficult-to-obtain license that required him to have his own garage and maintenance staff. So instead, he outsourced the actual delivery part to another company, which required a different license.

Then he was told that alcohol served as part of a delivery service was taxed at a different rate than when served in a restaurant. Initially, authorities said this meant restaurants needed to purchase and store the alcohol for delivery separately. Untangling all this involved several trips to the tax office with lawyers.

“There were just insane layers of regulation,” he said. Before starting a business, “I would highly recommend getting help from lawyers to investigate whether there’s any aspect that is regulated.”

In Dunbar’s case, he had to get a liquor license to import wine, which took about three months, though now it can take up to six months, he said. And he found that waiting times for such licenses can vary by location. Getting permission in Kanagawa Prefecture, where he was initially based, took less time than in Tokyo, which has a reputation for being stricter.

Once Dunbar had the license, the regulatory side of his business was pretty straightforward. It was easier than in the United States, where alcohol regulations are more complex, differing by state and requiring some wineries to hire entire regulatory teams to handle the paperwork, he said. Dunbar has no such headaches here and hired a customs broker to handle his incoming shipment paperwork.

Other businesses—many providing services—are much less regulated. Consulting, for example, has little regulation and is easier to get into because it requires little upfront investment—not even an office. “You need a phone, a laptop … and that’s about it,” said Bleistein.

Given that ease of entry, first-time entrepreneurs should try independent consulting for starters, advised Jeff Crawford, founder and CEO of Zo Digital Japan, which provides digital marketing services-related advice to foreign companies entering the market. “Put together a nice website that basically advertises your services and demonstrates that you’re an expert in some field,” he said. “That’s what I did.”

The finances at a consultancy are also simpler. Once you provide the services, the client pays you. You don’t have to worry about suppliers, delivery costs, or other middlemen as you do in a product business, which tends to be much more capital-intensive and requires owners to handle inventory, production, safety, and delivery. “If you’re looking to start a business in Japan, look really hard at services,” Bleistein added.

On the flip side, that also means there are few barriers preventing competitors from jumping into the same market, Lloyd pointed out. “There is no safety in having a low hurdle to entry. Yes, products are harder and riskier, but if you get it right you have a much longer run before the competition shows up.”

Breaking In

Perhaps the most difficult step in starting a business is finding customers, most of the experts agreed. Clearing this wall is do-or-die for a startup, and it can be particularly hard in Japan, where business is driven so much by long-term relationships. So how do you break in?

Here is where a mentor or consultant with an established network can be a big help by introducing you to potential clients. When Dunbar started his wine importing business, he hired a Japanese consultant who knew the alcohol industry and introduced him to people in the business. “That was a very important step for me, because I was new to the industry.”

That was a start, but Dunbar still needed to make hundreds of cold calls and visit a slew of wholesalers and other related companies to drum up business. While at times the rejections got discouraging, he knew that, to survive, he had to get out there and make connections. And he enjoyed sales, so that wasn’t a problem. He later discovered that he had started his business during a seasonal year-end ebb.

“The sales portion was not something that was scary to me. I’d much rather go and visit customers than almost anything else,” he said. “And in this particular business, it’s all about meeting people. We have to go out and visit our customers—they don’t come to us.”

Similarly, after he set up his consultancy website, Crawford started “pressing the flesh”—going to meetups where he thought he might connect with potential clients. He also attended other relevant events, such as those presented by the American Chamber of Commerce in Japan (ACCJ). “I’m a big fan of going to meetups, introducing myself, and handing out a ton of business cards,” he said.

Crawford, who worked at Microsoft Japan Co., Ltd. and Adobe KK in Japan after having worked in Silicon Valley, also started hanging out at online sites where digital marketers and search engine optimization experts would gather. He would field any questions about Japan to establish his expertise in his niche, and started blogging and creating podcasts. He tried to snag public speaking opportunities and was thrilled to be invited to do so at the ACCJ. Writing and blogging also helped him become more widely known within that business circle and paved the way for better initial conversations with people, he explained.

“If people see you on stage talking about a topic, they view you as an expert,” he said. “It’s great when people come up to you afterwards and say, ‘Hey, we read your content. You sound like you know what you’re doing.’ They already assume you’re competent. They don’t ask questions like, ‘Tell me about your clients.’ They just jump right into their issues. It’s like a level of trust is already there.”

In Bleistein’s radically stripped-down view of starting a business, there really is only one step: finding a customer. Everything else is secondary. Many entrepreneurs mistakenly think they need to have all sorts of systems in place before they launch, he said, but that’s not true.

“At the start, you’re going to be serving one customer—that’s how you get started, that’s how you learn. Everything else will fall into place,” explained Bleistein, who is author of the book Rapid Organizational Change. “There is no capability more important than client acquisition. I don’t care what people say about delivery, expertise, or product ratings. You have to have the ability to acquire customers.”

Branding Yourself

Fariza Abidova said that a key step to gaining clients at her first company, SOPHYS Corporation, a human resources and training business, was to attend events that catered almost entirely to Japanese. This, of course, required language ability. “I was just showing up and talking to people and sharing what I do and my passion.”

Abidova also paid close attention to how she branded herself, stressing and repeating key words and phrases that she wanted people to remember and spread among their networks. For SOPHYS, that was “cross-cultural communication.” For her second company, Trusted Corporation, which was founded in 2016 and helps clients with technological innovation, she stressed the key words “global open innovation.”

One way to divide Japan’s business world is to split it into a business-to-customer (B2C) market and a business-to-business (B2B) market, said Lloyd. The first functions pretty much as it does elsewhere, so is easier to enter, although you need to understand the Japanese consumer psyche, he said. The B2B market is much more political and based on long-term relationships and brand loyalty, making it much harder to break into.

“If you’re a new entrepreneur, my recommendation is to go B2C,” Lloyd said. “But if your expertise is in B2B, then secure your first project before you launch, because it’s going to be a long, hard haul.”

Still, these days, one good way to get business if you’re a tech entrepreneur is to contact Japan’s big, established companies. They are struggling to digitally transform their business, have money to spend, and are looking for people to help them make that transition, according to Annie Chang, founder and president of IT recruiting company AC Global Solutions Ltd.

“The hottest market is now IT, so there are lots of opportunities there,” she noted. “And I think foreign entrepreneurs have an advantage because they generally have more skills and can move more quickly in the market.”

When starting a business, it’s also important not to be too narrowly fixated on your niche or specific business solution, because there simply may not be enough interest in that, Chang said. When she started her company 32 years ago, she needed to be more of a nandemo-monoya, or a shop that sells anything, and be willing to accept a wider range of projects just to get cash flow, she explained.

“Later, when you’re in a better position financially, you can focus more narrowly.”

Language can also be a barrier for doing business in Japan. For Dunbar, being able to speak Japanese was absolutely critical to selling wine. “You need to get in front of your target audience and get them interested in your product. If you have difficulty communicating, that’s going to be a major hurdle to success.”

But in other businesses, particularly IT, language is less of a problem. Early on, Abidova used Japanese to engage potential clients, but these days she communicates in English with most of her customers at Trusted.

Raising Money

In addition to acquiring customers, the other big hurdle is funding your business. If a startup can break even after two years, it’s doing very well—unless you’re a tiny consultancy with very few expenses. During that time, you need to keep spending money.

Nearly all startups are initially self-financed by the entrepreneur’s savings, with additional help from family and friends as the case may be, experts interviewed for this story said. Some service businesses may be able to survive on that plus income generated from the new business—especially if the founder has received a large severance package from their previous job and wants to stay small.

But most product businesses or companies that plan to grow even modestly will need financing help from investors or banks once they get up and running. “If your company is growing at a fairly high pace, you’re going to need more capital,” said Dunbar. “That was especially true for me in a physical goods business.”

Most of the experts said they didn’t borrow from the bank, partly because they found that banks in Japan generally won’t lend to startups, particularly in IT or services. “The bank is the worst place to start unless you have a lot of assets and you want to do a collateralized loan,” said Bleistein. “Banks do not make money on business plans. That’s not their model.”

But there can be benefits to pursuing that route. Dunbar said he obtained bank loans and worked to cultivate relationships with banks as much as possible, and that the Japan Finance Corporation (JFC) is a good place to begin if you are looking for debt financing. Once you establish some payment history with the JFC, it is easier to work with commercial or trust banks.

“I found that even if you don’t need money, if the bank offers it, you should take it,” he said. “This allows you to develop a payment history with them. When it comes time for you to ask for bigger loans, it’s a much easier conversation than if you don’t have a relationship.”

More entrepreneurs said they relied on VC funding, but even that was often hard to obtain. “I think the biggest challenge in growing a business is raising money,” said Sulkin, who first raised money from outside investors 10 months after founding Food-e.

In his experience, Sulkin found that venture capitalists in Japan—despite their name—are very risk averse. “If you’re an unknown entrepreneur, even with the greatest idea ever, you’re still going to have a lot of trouble raising money. And that’s a problem for Japan.”

Fledgling Market

Japan’s VC industry is still small and young compared with that in the United States, but it has grown rapidly over the past 10 years. While it cooled off last year amid the pandemic, funding has bounced back so far this year.

The total number of startups that received funding in Japan peaked at 2,619 in 2018 before falling to 2,055 last year, according to Initial Inc., which tracks new deals. Total deal value slipped from $5.06 billion in 2019 to $4.89 billion last year, but it’s on track to reach a record $6 billion this year. That’s up sharply from the $660 million raised by 1,161 startups in 2012.

Since mergers and acquisitions are not common in Japan, 67 percent of startups exit through an initial public offering (IPO), Eight Roads’ Meralli said. But in recent years, there have been only 50–70 IPOs in Japan. In the United States, there were 407 last year alone.

There are very few second-time Japanese entrepreneurs who have successfully led their first startup to an IPO, Meralli noted. “The industry is quite young, and there is a need to take a bit more risk. When we get more of these, the ecosystem will become much stronger.”

Meralli sees recent growth particularly among the early-stage funds, especially seed and Series A rounds. But she sees a gap in the subsequent “growth stage” funds—Series B, C, D, and so on.

She explained that, while the Japanese government has tried to support the startup market through its growth fund, JIC Venture Growth Investments Co., Ltd., at an early stage, Japan also needs more accelerators—organizations that help startups define and build their products by offering mentoring, connections to investors, and sometimes capital.

Eight Roads Ventures is a global growth stage fund with more than $6 billion in assets under management that invests in technology and healthcare companies. Meralli, who is also an advisor to Tokyo’s Shibuya Ward in its efforts to bring in more startups, said that among foreign entrepreneurs in Japan, she looks for individuals or teams who have experience in their field, demonstrate cultural flexibility, are coachable, and are self-aware.

She said there are always questions such as:

• Why you?
• Why now?
• How big is the market?
• How defensible is your business?

“A lot of foreign businesses see things from their own country’s perspective,” Meralli added. “But do they have a really strong understanding of the Japanese players and market, and why their solution will be better?”

She and her colleagues look very closely at the founding management team when considering investment. One suggestion she offered is to bring on board one or two experienced people who have a local track record and can help refine the startup’s business.

Sulkin agrees. “If you really want to speed up your fundraising process, probably the best thing you could do is get someone who has worked for a famous startup company and borrow their credibility,” he said. “Get them on your board and call them a co-founder. That will jump-start your fundraising.”

Agile Mind

Another big challenge for startups is hiring good staff. This can be particularly hard in Japan, where the pool of talented candidates is smaller because many people work for one company their entire lives. Switching jobs is somewhat unusual, although it is becoming more common.

It’s also difficult to find people who may have experience in your niche, and startups generally aren’t able to use headhunters, because they cost so much.

Sulkin, who has eight employees at Food-e, said he relied on a variety of online recruiting services, some of which worked better than others. Rather than searching only for people with experience in food delivery, he looked for those with consumer-related online experience.

Key qualities he wants in individuals are flexibility and fast thinking—an agile mind. “Someone who can quickly adapt from whatever they were doing before to whatever I’m doing now,” Sulkin said.

Weisser said that, in a startup, you’re typically hiring “for potential more than for the past,” and are looking for someone “who can deal with change every quarter. That’s hard.”

Lloyd said it’s important to appeal to something bigger than simply the chance to make money in an exciting new venture. At Japan Travel, he stressed how the business would help Japan recover after the devastation of March 11.

“I was appealing up Maslow’s hierarchy of needs to self-esteem. That is way above the base level of physiological needs, which I equate with money. The weakest form of loyalty in an employee is how much you’re paying them,” he said.

“For fresh startups, you need an idea that’s so powerful that when people come to work for you, or when people do business with you, they’re thinking about the idea not the underlying economics,” Lloyd added. “They’re there because they believe in that vision.”

Lessons Learned

Entrepreneurship necessarily involves some failures and mishaps—and lessons to learn from them. For Fusion Systems’ Alfant, the biggest mistakes have related to choosing business partners who didn’t share his values. This created friction.

“That doesn’t mean they were bad people, but there was not a consistency of values, ethics, and approach to business and life,” explained Alfant. He added that, as a result of those experiences, at this point in his career, he won’t go into business with people he doesn’t already know and trust, and with whom he shares common values.

Another trap that entrepreneurs can fall into is getting distracted by “shiny new objects,” he continued. Entrepreneurs tend to see opportunities everywhere, so you must train yourself to stay focused. He likened the temptation to a crow building a nest and seeing a sparkling object on the road. When he flies down to pick it up, he gets hit by a car. “In the end, that sparkling thing wasn’t going to help with the nest, but it looked really appealing.”

Alfant has also seen business founders attack minor problems with their most valuable resources. “Intelligent people like to solve problems. But if you’re the captain of the ship sailing through dangerous waters and a small hole appears in the hull, the last thing you need is for your chief engineer and your guy who is the lookout to run down there and try to fix it.”

Crawford said one reason for the failure of a previous consulting business he started—that was designed to provide web advice to US dance and music schools—is his personal lack of interest in what they did. “I had no musical or dance talent. I was sort of in love with the solution and not really in love with the customer,” he explained.

At Zo Digital, he’s more interested “not just in the customer but in the kind of problems they face”—breaking into the Japanese market.

Lloyd likens running a company to flying a plane. You need to pay attention to multiple dimensions. Focusing too much on one will result in a crash. Just as a compass has four points, business founders need to attend to four key stakeholders: customers, suppliers, investors, and staff.

“Most people, when they start their company, worry about the money. So, they go after the shareholders. But after that’s done, they forget about them,” he said. That’s a big mistake, because those shareholders can make introductions, give endorsements, and provide more financing.

Similarly, many people get a deal from a supplier and then leave it at that, Lloyd said. “They don’t keep pushing the supplier to innovate, reduce prices, and provide alternatives.”

Listen … and Exercise!

Listening to your customers—and thinking about their customers—is vital to success, several experts said. Many entrepreneurs are eager to talk and sell their ideas to people, but that often means they can’t hear what potential clients want or see how they can adjust their businesses to meet those needs.

“Instead of spending 80 percent of the time talking and explaining my idea, I try to spend 80 percent of the time listening to what my clients or potential clients want,” said Alfant. “That’s extraordinarily valuable.”

It’s active listening that matters, he said. “I’m not thinking about what I’m going to say next. I’m trying to open up my mind and allow everything my counterparty is saying to come in before I formulate my next statement.” As a president emeritus of the ACCJ, Alfant stressed the many valuable and tireless contributions that entrepreneurs had made over the years. “They are the engines for a lot of the chamber’s activities.”

A final tip from Alfant is about health: the need for exercise. Being an entrepreneur requires physical and mental stamina. Keeping physically fit is an important part of that.

“We tend to lose sight of the fact that it’s not easy to work 60- and 70-hour weeks for years on end,” he said. “You’re setting the tone in your organization. You are the leader. You need to have stamina, be in good physical condition, and have good mental acuity and balance to do that. It’s important for young entrepreneurs to understand this, and allocate time so they can have a balanced lifestyle.”

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Smoother Paths

Dealing with red tape and finding your way to success in Japan

Red tape and entrenched ways of operating are facts of business life in any country. Yet, Japan seems to have more head-scratching rules and regulations to confound the unwary than do most countries. Entrepreneurs who have navigated the minefields that make up Japanese business law each have a tale to tell of the experience—but all those with whom I spoke for this story expressed the firm belief that the country’s bureaucratic red tape is slowly being unwound.

“Setting up a company is like a lot of things in Japan—difficult and time-consuming,” said Timothy Langley, founder and chief executive officer of government affairs consultancy Langley Esquire. “You’re bound to make mistakes, particularly if you are doing it for the first time. You can attempt to do it by yourself, with a partner or friends who can help fulfill the requirements in Japanese, or you can pay someone to do it.

“Once you’ve set up a few companies and learn the ropes, you know what hoops you need to jump through. But the first couple of times, you’re going to ‘learn by mistaking,’ even if you pay someone to do it for you,” he told The ACCJ Journal.

Layers of Difficulty

The requirements for anyone setting up a company are clearly going to vary depending on the business sector. Anything in the healthcare industry is likely to face significant scrutiny before being permitted to operate, while companies in the legal, financial, real estate, or cryptocurrency spaces, for example, will all need the relevant licenses, said Langley, who serves as vice-chair of the American Chamber of Commerce in Japan (ACCJ) Secure Digital Infrastructure Committee.

“But if it’s plain vanilla and you have an innovative technology, product, or service you are trying to sell—and you simply want to set up an entity that has formal recognition and grants access to things like opening a bank account—there are several layers of difficulty that you hit at different stages of the company’s development,” he added.

The first layer is simply getting established, holding an incorporators’ meeting, the first shareholders’ meeting, and setting up a bank account. And while opening a bank account should be straightforward, the majority of people interviewed for this story expressed exasperation over the great pains to which new businesses are expected to go.

Banking can be a “game-stopper,” Langley admitted. “Sometimes you simply can’t.”

Thomas R. Shockley, CEO of travel business DocuMonde Inc. and co-chair of the ACCJ Independent Business Committee, is one of the founders who is of the opinion that innovations such as the ¥1 capital requirement (instead of the traditional ¥10 million) have made it easier to set up a company in Japan. But banking, he agrees, remains a source of frustration.

“Regulations are not the issue. The most challenging thing today is the same as it was 20 years ago: establishing a corporate bank account,” he said. “Banks choose their clients restrictively … and from the bank’s point of view, there is no business advantage—and it is quite possibly a disadvantage—in having a ¥1 company as one of its corporate accounts.”

Taxing Choices

Robert Roche, executive chairman and president of Oak Lawn Marketing, Inc., concurs that abolishing the ¥10 million capital requirement was a positive development, but also believes that elements of Japan’s tax system are unnecessarily draining entrepreneurial capacity.

“Although at the entrepreneurial level, I think that Japan is on a par with America and better than China, where everything has to be a wholly foreign-owned enterprise,” he said. “So, in general, Japan is ahead of the game in making many things easy.”

But that does not extend to one key element of tax laws here.

“If you live in Japan for more than five years, the Japanese tax your worldwide income,” he said. “My original success was in Nagoya. From there, not only did I establish several more companies, I also invested in even more startups in Japan. Naturally, I also invested in my home country and other countries. For many foreign entrepreneurs, over time, their non-Japanese investments become material.”

Roche said that his businesses are in several countries, each with separate teams; however, income generated from them would be taxed in Japan. Consequently, he did less entrepreneurial business in Japan simply because he was not proximate, not because he didn’t want to.

“I’m aware of quite a few people who no longer reside in Japan because of this tax,” he continued. “If they did live in Japan, they would be building and investing in more and more Japanese businesses. But the true loss is the mentoring of new entrepreneurs that doesn’t happen as a result of their absence.”

Piles of Paper

Catherine O’Connell, founder of Catherine O’Connell Law and co-chair of the ACCJ Legal Services and IP Committee, discovered that setting up a legal practice in Japan “does take a lot of time and paperwork,” although she emphasized that it is “absolutely correct” for the Ministry of Justice to regulate who can practice law in Japan so that consumers are protected and to ensure that lawyers behave ethically.

“That said, the procedure for being approved as a Registered Foreign Lawyer is an example of where the process could be a whole lot shorter and much more transparent,” she suggested. While the approval process is a “check-the-box” confirmation of paperwork that is submitted by the applicant, it can take eight months for approval to be granted.

“They need to remove the smokescreen and make this process transparent. I believe that crossing t’s and dotting i’s should really only take a month, maximum,” said O’Connell, who will be speaking on policy measures and regulatory practices for setting up a law firm in Japan at the APEC Study Center Japan event Promoting Trade in Services by SMEs and Women Entrepreneurs on October 1.

“I have an unsubstantiated personal belief that imposing lengthy processes is a way to test our dedication for doing business in Japan,” she added. “Anyone who is in Japan or has commercial relationships with businesses here knows that you are in this for the long game, building relationships over years.

“So, the process to set up is perhaps the very first trial of your tenacity and tolerance for what will be a long and successive line of tests of your gaman, your patience, in the journey that is doing business in Japan.”

Resistance to Change

Other arcane requirements of the Japanese bureaucracy—such as the need for hanko (personal seals) on all official documents and the domestic business world’s ongoing need for fax machines—were frequent bones of contention among business leaders.

O’Connell said she was glad she opted to use a signature when opening her law firm bank account instead of a hanko but is shocked at how many Japanese companies protested against government plans to abolish fax machines and introduce electronic alternatives to the hanko.

“Japan still has a long way to go on what other countries consider to be a given in business,” she said. “Japan is a modern country and a member of the G7, but they can’t move beyond the fax machine?

“The pandemic has shifted things a bit, thankfully, but these archaic remnants are anchoring Japan in the past and are a major deterrent for anyone considering doing business here.”

Smoother Paths

For all the hurdles in some sectors, however, others insist the process does not have to be too traumatic.

Over more than two decades as a partner at Deloitte Touche Tohmatsu LLC, Steve Iwamura set up a number of companies and says changes to the rules on representative directors, the attestation of the articles of incorporation, and the minimum paid-in capital have made the procedure much more straightforward.

“Although the incorporation process itself has been simplified, certain practical difficulties start to surface after the company is registered,” he said. “Even after the company is legally registered, most Japanese banks will not open corporate accounts when the directors of the company are not resident in Japan. Also, a personal address in Japan is required for many things, such as housing rental, personal bank accounts, auto purchases, domestic credit cards, and a cell phone.”

Obtaining residency status can be much more time-consuming than expected, resulting in frustrating delays in getting your business life started.

For Iwamura, it is “very important to hire a trusted bilingual judicial scrivener who will advise you about the total picture, rather than just providing the seemingly simplified incorporation services.”

Frank Packard, an advisor at Synnovate Capital Partners and chair of the ACCJ Alternative Investment Committee, said setting up a company is relatively simple but agrees that obtaining the necessary services, such as banking facilities, can be more of a challenge.

“The biggest problems lie within us,” he said. “Approaching regulations with a negative attitude and seeing it as necessary to ‘overcome’ regulations will almost surely lose every engagement. However, if you look to ‘meet’ or ‘satisfy’ regulations, then you will have a much better chance of success.”

Parker J. Allen, president and CEO of government relations and PR consulting firm Parthenon Japan Company Ltd., said that setting up a company is easier in the United States and other countries purely because much of the paperwork can be completed online. “However, having done the procedures on behalf of over a dozen companies in Japan, I don’t find them overwhelmingly difficult.

“For any issue that one may encounter in Japanese corporate affairs, the solution is always out there somewhere,” he added. “Having a strong network of specialists and legal professionals really makes a massive difference here. I am fortunate in that, no matter the situation, if I can’t solve it myself, I usually know who to ask.”

Room for Improvement

Yet Langley insists the hurdles to doing business in Japan—actual or perceived, large or surprisingly small—are still damaging to innovation and entrepreneurship here.

“This applies to entrepreneurs who are Japanese, foreigners who want to start a business in Japan, and those from overseas who want to innovate new processes or technologies and introduce them to the Japanese market,” he said.

“While there is promise of Tokyo’s growing attractiveness as a global financial hub, much work still needs to be done in this regard.”

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