From the September 2006 issue of Entrepreneur

When Yeogirl Yun went to Asia to scout for business opportunities earlier this year, he settled on an emerging market: Japan.

Yun's Mountain View, California, search-engine company, Become.com, which has more than 40 employees, entered a joint venture with Japanese firm Transcosmos Corp. in May 2005 and launched Become Japan in April 2006. It's Become's first entry into a foreign market, and there's potential: Thirty percent of all Japanese direct marketing sales happen online, according to the Japan Direct Marketing Association. "It was natural for us to move into the Japanese market," says Yun, 36. "Japan is a very lucrative market."

It's certainly more lucrative than it's been in a long time. Japan's unemployment rate is falling as wages rise, and the Japanese are spending more on foreign brands. The yen is climbing--a sign that Japan, the world's second-largest economy, is under-going an economic expansion that could be the biggest since America's during World War II. "The environment has really changed a lot over 10 years," says Jim Fatheree, president of the U.S.-Japan Business Council, a Washington, DC, organization working to ease regulations on U.S. companies doing business in Japan. "It's a much better and easier place to do business."

Still, Japan can be a tough customer. It lags behind other G7 nations in how much direct foreign investment it allows, and Japan's inscrutable regulatory system frustrates U.S. firms. Foreigners encounter more middlemen along Japan's distribution chain, and deals take months, sometimes years, to negotiate. The Japanese, however, realize they must change. "We've always heard of 'Japan Inc.,' but that's actually kind of breaking down a bit," says Damian C. Smith, a shareholder with Parr Waddoups Brown Gee & Loveless in Salt Lake City, who negotiates contracts around the world on behalf of Japanese companies. "The markets are gradually opening, and the barriers are coming down."

U.S. entrepreneurs face their own barriers. Yun is having trouble finding qualified Japanese employees; to date, only one Japanese engineer has passed Become's programming test. Japanese applicants also tend to shun startups and rely on recruiters. In response, Yun hired a Japanese recruiter.

Become also pays more for its 1,300-square-foot Tokyo office than for its 6,400-square-foot Silicon Valley headquarters. In Japan, "everything is extremely expensive," Yun says. But the pros outweigh the cons, and Become plans to take its joint venture public. To do business effectively, "you really need to find partners and employees in Japan who are Japanese and understand the culture," Yun says. The Japan External Trade Organization offers a good starting point.

Financial services and health care will be hot markets as Japan's population ages. Understand Japan's subtleties before making your move, though. "It would be hard for an American company to just go set up in Japan," Smith says. "Japan is a very different market."