No discussion of the Japanese ad market can ignore the economy. Since Japan's economic bubble burst at the end of the 80s, its fiscal fortunes have lurched from bad to worse; Japan is still the world's second-largest economy, with the highest per capita GDP, but the scars of 15 years of decline are etched into its psyche.
Consumer spending hasn't stopped sliding; because clients generally base their ad expenditure on last year's sales figures, adspend has gone with it; and because Japanese advertising is exceptionally media-driven, with most agencies still remunerated on a commission basis, the ad industry has been hit more directly than it would be elsewhere.
So recent, cautiously optimistic economic figures sound like good news for Japan's ad industry. GDP grew by 3 per cent last year, and is forecast to grow by a further 2.3 per cent this year. With the number of bankruptcies falling and unemployment edging down slightly, there's talk of economic recovery.
Billings for the top eight agencies rose by 1.3 per cent between January and November 2003, and while the year's adspend was down anywhere between 0.1 per cent (Initiative) and 0.3 per cent (Dentsu, which puts total 2003 spending at 5.68 trillion yen, or about £28.1 billion), that still represents a bottoming out after bigger falls the previous two years. Dentsu forecasts 2.3 per cent growth in 2004, taking adspend back to 1997 levels, while Initiative reckons it will increase by 2 per cent.
Talk to some of Japan's senior agency executives, however, and the picture they paint isn't so bright. "I'm not necessarily feeling any more optimistic in 2004 than in 2003," Michelle Kristula-Green, the former president of Beacon and now the regional managing director of Leo Burnett Asia-Pacific, says.
"Advertising spending has been down every year for the past three years, and there's also been a softness in agency revenue, because Japan is still very much on a commission system. Everyone's talking it up, but we're not seeing an increase in consumer spending."
For Chris Beaumont, the president and chief executive of Grey Global Group Japan, the problems run far deeper than the ad industry. "You're hearing things about Japan improving at a macro level, but the fundamentals haven't changed," he says. "The country is still in denial - it's just coasting on the back of a cyclical recovery. Major structural changes are needed to obviate Japan's continued decline, and they haven't been acted on at a macro level."
Among the changes might be an overhaul of Japan's banking system, lumbering along under the strain of zero interest rates and saddled with bad debt, much of it dating back to before the economy went sour. Salaries remain flat and the country's pension system is struggling to cope with an ageing population. And crucially for the ad industry, the economy's recent modest recovery has mainly been built on the back of a yen kept weak to drive exports, particularly to the US. In other words, Kristula-Green is right when she says that domestic consumer spending has not recovered.
That doesn't mean that everyone sees only gloom. In particular, the big domestic agencies have seen their billings boosted by clients deciding to consolidate their buying to save on costs - and with 40 per cent of the market between Dentsu and Hakuhodo alone, the domestic monoliths have unmatched buying power.
Dentsu highlights "a number of positive factors", including "the upward trend in the Japanese economy, increased demand in digital-related sectors and the Athens 2004 Olympic Games. These are expected to stimulate aggressive advertising demand in many categories," a Dentsu spokesperson says.
"As a result of the efforts made by companies during the prolonged recession, earnings structures have improved and we are seeing indications that companies are beginning to make investments in anticipation of a new stage of growth."
Of course, you might expect a commission-based mega-agency to say that.
"The big agencies have got an interest in talking up the market - they did the same thing in 2000 before the dotcom bubble burst," MindShare Japan's chief executive, Andrew Meaden, says. But Dentsu and its ilk are not alone.
"I believe that Japan's ad market is finally in the mood for recovery," Kimihito Okubo, the chief executive of Euro RSCG Japan, says. "Until recently, the overall sentiment was pessimistic, mainly due to the bureaucratic system, which resulted in a lack of long-term vision and strategy, and unnecessary consensus management that lags critical decisions.
"It worked well during the bubble era, but has acted as a substantial hurdle to reforming the business environment. The past years were the preparatory period in making such changes."
Many big media owners are also confident. "We will see recovery in the Japanese advertising market in 2004," Masaaki Ii, the general manager, international advertising and division for the strategy of emergence at Asahi Shimbun, the world's largest-circulation newspaper, says. "At Asahi Shimbun, we are looking forward to an increase of more than 2 per cent in ad revenue in 2004. Corporate results will improve with accelerated write-offs of non-performing loans and intensifying corporate restructuring and it will revitalise consumers' purchasing power."
If the issue is confidence, then getting talked up may be exactly what the Japanese economy needs. But there's a limit to how far positive thinking alone can drag the economy and its ad industry out of such a deep rut, as not all of the issues holding the ad industry back are related to the wider economy. Lack of transparency is one issue - clients generally have no idea how much of the money they pay to their agencies goes on buying media - but it's one of those things that isn't going to change just because it's done differently overseas. "It's a non-transparent market," Initiative Japan's managing director, James Gover, says. "Deal with it."
Neither is the media-driven, commission-based nature of the market, with strategy and creative generally given away for free, going to change any time soon. "Training Japanese clients to understand the concept of the fee is very difficult," Arto Hampartsoumian, the managing director of Wieden & Kennedy Tokyo, says. "We have a struggle every time, explaining to clients what they get. 'What do you mean, we pay every month for thinking?' It's a little bit of a long haul for us, but worth it, because every single client that's walked through our door has wanted something different."
At least, according to Kristula-Green, the issue is now out in the open: "There's more discussion in the industry and the Japanese advertising press of fees and how commissions are holding us back. When we talk to Japanese clients they're interested - they like the idea of knowing what they're paying for, but they find the idea of paying for creative difficult. They feel like they're paying a premium."
For sustained growth, Okubo says, Japan's ad industry needs to address its weaknesses by adopting what he calls the three Ss. "The first is for 'sense': foresight in reading both the macro and micro economy to identify what needs to be done now and in the future. The second means 'strategy': in the past, Japanese industries were more focused on tactics and executions, but missing the vision and strategy, which only resulted in haphazard measures. The third means 'system': there have to be the systematic practices and processes to turn strategies into executions."
Strategic buying, in particular, is a hot topic in Japan right now. Phil Rubel, the managing director of Fallon Tokyo, comments: "Clients are starting to invest strategically. They're not raising budgets across the board, but they are being wiser and considering new ways about how they spend it. I think they are past the stage of cutting back and only doing coupons."
Asatsu-DK, the third-largest domestic agency, takes the same view. "It is obvious that many advertisers have come to attach more importance on 'efficiency'," its spokesperson, Kaori Nakajima, says. "Since most of the advertisers decide their budget based on the previous year's sales figures, we can't expect a big increase in 2004. We have to say that the ad market is still in a difficult situation, although it has started to recover."
Gover, though, speaks for many when he doubts how far that partial recovery can go. "Internationally, people are talking up Japan, but not much has changed," he says. "There's an acceptance here that it's in decline. People don't want a revolution. I don't think adspend will ever really recover."
KEY SECTORS ON THE ROAD TO RECOVERY
If the Japanese ad economy does recover, certain key sectors will have a vital role to play. In particular, sales of high-end consumer electronics such as digital cameras, plasma-screen TVs and DVD players, already strong, are expected to grow further.
Last year's elections to the House of Representatives, the lower house of the Diet, also stimulated spending, as will corresponding elections to the upper House of Councillors this year. This year's Olympic Games are expected to provide a further fillip. And corporate governance and social responsibility are also starting to enter the radar ("We believe that campaigns related to sustainability and social issues will increase," Masaaki Ii of the Asahi Shimbun Company says), with companies such as Toyota, NTT DoCoMo, DaimlerChrysler, Canon, Sony, Fujitsu, Xerox and Fuju Film already running ads promoting their good corporate citizenship.
Right now, the consensus is that the most successful products are at either ends of the economy. In addition to high-end consumer electronics, luxury brands such as Dior, Bulgari and Louis Vuitton are performing well.
At the other end, price competition among suppliers of commodities is fierce. Plus, Japan is seeing, for the first time, a rash of bargain-basement retailers, including pawn shops, secondhand shops (often known as "recycling stores" to play down an item's pre-owned status) and 100-yen shops (that's about 50p, which doesn't generally buy a lot in Tokyo).
Those in the middle ground, not offering either a mega-premium positioning or a price advantage, are struggling.
THREE WESTERN AGENCIES TALK ON LIFE IN JAPAN
Year launched in Japan: 2003, following a two-year alliance with a local agency, Gram Advertising, with whom Fallon merged.
Key clients: Callaway Golf, Citibank, DIY Insurance, Dyson, Mitsubishi, NEC, industrial conglomerate Sekisui, Sony, United Airlines, Volkswagen.
Predictions for the Japanese ad market in 2004: "In the research that we see, there is a growing polarisation of brands and consumer spending habits between expensive, high-end products that people will pay a premium for and low-end products, aimed at the basic needs of people who are looking for the lowest price," Fallon Tokyo's managing director, Phil Rubel, says. "The brands in the middle are getting squeezed. I think that's also going to happen in the advertising industry. The super-sized, media-driven agencies and the smaller, nimbler, more creative agencies will do well. Those who are in the middle, trying to be Dentsu or trying to be a creative shop, will suffer."
Survival tips for agencies in Japan: "Have true domestic insight - you can't just apply international thinking here and be taken seriously. Don't do what everyone else does - be unique, take your own path, find new ways to add value to brands and reach consumers. This will help raise the bar for the entire industry," Rubel says.
BARTLE BOGLE HEGARTY
Year launched in Japan: Established a satellite office to serve Levi's in 1998, reporting in to Singapore. Became a full office in 2002.
Key clients: Levi's, Virgin Atlantic, Starbucks, Tanqueray.
Predictions for the Japanese ad market in 2004: BBH Japan's managing director, Hoon Kim, says: "Adspend for this year should increase by a bit compared with last year. The Olympics should help, especially in categories such as home electronics. But I think it's going to be pretty much the same as before. The ad market won't be revitalised until clients start to see advertising as an investment; now, they see it as a cost."
Survival tips for agencies in Japan: "Produce good work that people notice. It's an obvious answer, but it's not the easiest thing to do," Kim says. "Find the right balance between Japanese and western ideas; you need to adapt strategically and creatively."
WIEDEN & KENNEDY
Year launched in Japan: 1998.
Key clients: Nike, Sapporo beer, education provider Kumon, developer Mori Building Company, Aiwa, fast-food chain Lotteria.
Predictions for the Japanese ad market in 2004: "The yen will strengthen and there will be a retraction of export-driven growth," Wieden & Kennedy Tokyo's managing director, Arto Hampartsoumian, says. "There's a good feeling in Japan, something in the air, a feeling that we're on the brink of something. The cultural influence of Japan is growing, in areas such as fashion, art and music - the Japanese have started to find their Japanese-ness again."
Survival tips for agencies in Japan: "Tell people who you are and what you stand for, don't just try to be like everyone else. There's a huge sense of failure among western agencies that try to be either too Japanese or too western," Hampartsoumian says.