Japan: Japan is back

Economic growth, changing consumer habits and new media are giving agencies plenty to think about.

Japan is back, the country's finance minister, Sadakazu Tanigaki, announced in New York in January. After more than a decade of deflationary decline, growth now looks sustainable for the world's second-largest economy.

A revival in consumer spending, allied with robust exports, led to 5.5 per cent GDP growth in the fourth quarter of 2005. The economy looks set to beat official estimates for 2.7 per cent growth for the year ending 31 March 2006 - better than the European Union or US expect to achieve.

Economists say this is further evidence that Japan's recovery has entered a virtuous cycle. People are spending more because wages are higher and jobs more plentiful.

Consumers, while increasingly optimistic about the future, are still cautious. McCann Erickson Japan's director of strategic planning, David McCaughan, has been tracking consumer sentiments in Japan for several years. He concludes: "People seem to be preparing themselves to take advantage of the next five years, when the economy will be a little better and Japan will be more competitive again.

"Of course, they are not thinking it will be easy but there does seem to be a belief that Japan can make the changes to succeed. Even though many Japanese hold strong feelings of 'anxiety' about their country, they are far less depressed than they were in, say, 2003."

There are good reasons for anxiety. The population is declining and its profile is ageing. "Perhaps the biggest worry on the horizon is the plan to increase the 5 per cent consumption tax around 2009. When this was increased from 3 per cent to 5 per cent in 1997, the economy went into reverse. And now they are talking of an increase to 10 per cent, possibly more," Chris Beaumont, the president and chief executive of Grey Global Group Japan, says.

"Even so, the world is looking at China, the Olympics and the World Cup. External catalysts, such as these, will encourage Japanese corporations to invest in their brands," he adds.

Advertising has joined the recovery. According to Dentsu - Japan's largest agency, with a roster of major clients spanning every sector of the economy - total spending in 2005 rose for a second year to 5,962.5 billion yen (about £29 billion), an increase of 1.8 per cent on 2004. With inflation at around 0.1 per cent, this equates directly to real growth, but not necessarily to improved agency fortunes.

Dentsu is uniquely placed to feel the effect of macro-economic changes.

Yet, for the nine months ending December 2006, while revenues edged upwards by 1.6 per cent, operating profit fell 8.1 per cent to 38.89 billion yen for the same period the previous year, pressured by heavier sales, management and personnel costs. The picture at Hakuhodo DY Holdings (HDY), Japan's number-two agency group, was similar. Strict labour laws and a commitment to "lifetime employment" practices make it difficult for larger Japanese agencies to align revenues with staff numbers.

Dentsu's business, like that of HDY and other large Japanese agencies, depends heavily on media commissions from "old media" (newspapers, TV, radio and magazines), a sector in decline. The figures reveal that growth is now coming from the internet and mobile phones. No single agency has yet proved able to dominate this vibrant sector in the same way that a handful of agencies dominate old media.

These changes will increasingly affect the fortunes of the major Japanese agencies. However, for their Western counterparts, the problems and opportunities are different. Winning Japanese clients is the key to growth for Western agencies, once they have buttoned down their aligned multinationals. Domestic companies account for around 95 per cent of all ad-related spend in Japan.

As well as giants such as Toyota, Nissan and Sony, there are hundreds of smaller companies, unknown outside Japan, but important players at home.

Traditionally, it has been tough for Western agencies to win Japanese business beyond one-off assignments. But the climate has been changing in recent years as more advertisers seek to explore branding concepts and planning disciplines.

McCann Erickson has been the most successful at this, thanks to starting early - in 1960. But Ogilvy & Mather's strategy to broaden its client base beyond aligned multinationals illustrates what can be achieved.

Just over a year ago, Ogilvy hired Akira Odagiri, formerly Dentsu's creative yokozuna, as its executive creative director. His mission was to improve creative work and help win Japanese business. Odagiri's reputation helped to attract talent, while his experience helped to fashion advertising in a Japanese idiom, using Western disciplines of planning and branding.

Forty new clients joined the agency last year, including some well-known Japanese advertisers such as Suntory and Nihon Seimei. Ogilvy also ranked fifth for the total number of creative awards won by agencies in Japan during 2005. In 2004 and earlier years, the agency ranked outside the top 30. An Ogilvy ad for Nihon Seimei, Japan's largest life assurance company, won a gold award at last year's ACC contest, one of only nine golds awarded to the show's 3,000-plus entries. "Creativity can help us dent the 'psychological duopoly' exercised by Dentsu and Hakuhodo," Mark Blair, Ogilvy Japan's chief executive, says.

Beacon Communications is another agency pulling in Japanese talent. Kazuhiro Obata, one of Beacon's two executive creative directors, held a similar post at Dentsu, while Tetsuya Takizawa, the group creative director, was one of Hakuhodo's stars and a former Japan Advertising Agencies Association "Creator of the Year".

Last year, Beacon came first in the "Commercial Message Index", a ranking of ads by CM Databank based on consumer opinions. The ranking is based on 17,503 commercials for 9,298 brands, and more than 1,970 advertisers broadcast by the main TV networks last year. Beacon's winning ad was for Aiful, one of Japan's leading consumer credit companies.

One reason there are more opportunities for Western agencies is that consumer behaviour is changing.

"In the past, Japanese consumers used to buy products after they saw ads on TV but now they will check out prices and other details on the internet, maybe visit a store to look and feel, and then buy direct," Koichiro Naganuma, the president of Asatsu-DK, Japan's third-largest agency and a WPP partner, says.

"The old rules, the old assumptions no longer apply. We must make the best use of consumer and product touch-points if we are to help our clients sell their products."

Naganuma is forming a new online agency to exploit the new dimensions the internet adds to marketing. The agency is also developing expertise in experiential marketing and exploring new ways to work with retailers.

Similarly, both international and domestic agencies in Japan are redefining their own services to meet the challenges.

After two years of more than 50 per cent growth, the internet is big.

Ogilvy estimates 40 per cent of the total comes from search engine marketing-related business. The top three online media agencies are believed to have grown by more than 50 per cent in 2005.

"Agencies are competing fiercely over who will lead internet and digital-related media and investing accordingly," a Dentsu spokesman says. Dentsu is investing in e-commerce, mobile and broadband telecasting, plus a joint venture with 24/7 Real Media and Cyber Communications, its digital media agency.

Neo@Ogilvy will complement Ogilvy's existing OgilvyOne offering. Neo's brief covers digital advertising and direct marketing, digital and direct TV, direct-response print and mail, e-mail marketing, search marketing and new forms of digital media such as blogs and vlogs. Ogilvy is also moving John Goodman, currently the chief executive of Ogilvy & Mather India/South Asia, to Japan, where he will become the president and chief executive of the Ogilvy Group in Japan. It was Goodman who built the OgilvyOne network into a leading player in Asia before he moved to Mumbai three years ago.

Nobody expects the old media relationships between the major Japanese agencies and their clients to be seriously disturbed by new media. But new relationships will be formed in the digital space. Consequently, a rare window of opportunity exists for international agencies to build new business based on new models.

"In the past, it was often enough for an agency to create a sparkling TV ad," Kimihito Okubo, the chief executive of Euro RSCG Japan, says.

"But now clients are increasingly demanding creative business ideas and many of these do not involve traditional media advertising. Only by developing the services that deliver solutions in Japan's new environment can agencies hope to prosper."

JAPAN'S ADVERTISING INDUSTRY BY MEDIUM MEDIUM Adspend Year-on-year Share of (dollars bn) growth (%) spend (%) Television 17.6 -0.1 34.2 Newspapers 8.9 -1.7 17.4 Magazines 3.4 -0.6 6.6 Direct mail 3.0 3.1 5.8 Internet 2.4 54.8 4.7 Outdoor 2.3 -0.8 4.4 Transit 2.1 2.0 4.1 Radio 1.5 -0.9 3.0 Point-of-purchase 1.5 2.1 3.0 Source: Dentsu, February 2006.

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