Thu, 25 Jul 2013 | By Adrian Kearsey, equity analyst at Hardman & Co

It is almost impossible to get through company results meeting without at least some passing mention of the BRIC opportunity (Brazil, Russia, India and China). With these countries’ strong economic expansion, the allure is hardly surprising. By contrast, the quoted recruitment companies spend a lot less time talking about Japan. However, with an annual income of $5.9trn (£3.86trn) and 62m people in work, it’s the world’s third largest economy. Moreover, Japan represents 19% of the global agency market (source: Ciett). So why are the western agencies ignoring such an important market? Well, most are not. They are just finding difficult to do well in the territory.

For example, Adecco derives 6% of its revenues from the territory – clearly underweight relative to the size of the market. Recent trading shows considerable backward momentum, with revenues down 15% in the first quarter of 2013, a trend that started in 2012. Many of the other international networks are similarly under-represented and similarly struggling. 

There are many reasons for the struggle. Part of the problem is cultural. Doing business is Japan requires an intimate understanding of the subtle social traditions of the country. The solution is simple: use local management to spearhead the growth. Empresaria shows how it is possible to successfully work in the region. The company focuses on IT and retail assignments, and in 2012 grew revenues by 40%, helped by a hiring of a perm placement retail team. 

Another reason for the struggle is structural. In Japan there are more than 20,000 private employment agencies, with more than 82,000 branches. This compares with 14,000 agencies (and 32,000 branches) in the US. The Japanese market is clearly fragmented. But surely that provides the opportunity for consolidation? 

The final problem with doing business in Japan has been economic. The bursting of the property bubble in the early 1990s led to an economic malaise, which has lasted for more than two decades. Trying to penetrate a market that has been moving sideways for a generation is a tough ask. However, the position is improving. Outdated corporate structures created immense inflexibility. But competition from other parts of Asia is now forcing Japanese corporations to rethink the way they do business. 

Moreover, the government is beginning to address the problems. Shinzo Abe’s victory in the upper house election last week provides a clear mandate to pursue his reforms. He is looking to make it easier to fire full-time workers, allowing corporations to reposition their businesses. In time, this measure should create a more vibrant labour environment. Secondly, he is looking to cut the budget deficit by half, but at the same time stimulate the economy with capital investment projects – a $116bn injection. Finally, he is looking to use inflation to kickstart demand, pursuing an aggressive version of quantitative easing.

There are already some positive signs. For example, GDP grew 0.9% sequentially during 1Q13. Crucially, if these policies are successful, the sleeping economy will jump back into life and the international recruitment agencies are likely to be keen to pursue the potential gold mine – and Japan will once again be on the results meeting agenda.