With the strong yen creating an increasingly competitive environment and the Clinton administration achieving a conspicuous lack of success in trade negotiations, many executives in the United States and Europe have abandoned their search for new opportunities in the Japanese market. Frustration has set in as attempts to become "insiders" have proved futile. Some companies have shifted their attention to emerging markets like China and India. But by ignoring Japan, they are making a big mistake.

Over the past four years, the Japanese market has changed dramatically. The demise of the fast-growing bubble economy and the subsequent strengthening of the yen have established a new climate for domestic and foreign competitors alike as parallel imports, private brands, and generic products claim a growing share of many markets. The rapid rise of the yen against the dollar—¥124 at the end of 1992, ¥100 at the end of 1994, and as low as ¥80 in 1995—suggests that businesses can expect to face intensifying competition.

Long known for their preference for branded products, Japanese consumers are now turning to the expanding array of cheaper goods. A low-cost segment is emerging across consumer and industrial markets. Daiei, Japan’s largest retailer, has cut the...