How Is Japan’s Video Game Industry Faring?

These days we often hear talk of the poor health of Japan’s video game industry. The consensus that the industry is ailing is presumably related in part to the string of three annual consolidated losses at Nintendo. In the past Nintendo and other Japanese companies dominated the world’s video game market. But in recent years firms based in other countries, particularly the United States, have been increasing their market share, and they have also taken the lead in technology. So it is true that the former leading Japanese firms have seen their positions slip in some respects, as I will explain below.

Viewed from a different angle, however, the Japanese game industry, far from being in decline, is actually on a roll, showing signs of shining as the global center of this sector. Today “soft power” is in the limelight. In this context, we need to reexamine the strength of Japan’s video game industry without being misled by the gloomy consensus. In this article I will consider the big picture, offering an overview of the industry’s current state and discussing its Japanese identity.

In Retrospect: The Rise of Nintendo and Sony

The video game industry was born in the United States. In 1972 Atari, a California-based company, put Pong on the market. This was the world’s first commercial video game. Building on its popularity, Atari came out with a home gaming console, which was also a hit, and for the rest of the 1970s America dominated the video game world.

In the 1980s, however, the picture changed. Atari’s market collapsed in the wake of sales of inferior software, and this “Atari shock” (also called the video game crash of 1983) caused the price of shares in Warner Brothers, its parent company, to plunge. Japan’s Nintendo emerged as the new industry leader. In 1983 Nintendo launched the Family Computer (Famicom) home gaming console, and five years later it put it on sale in North America as the Nintendo Entertainment System. NES became the world’s top gaming console, and the name Nintendo became synonymous with video games in countries around the world. The 1980s became the decade of Japan for this industry, and the Japanese lead continued through the 1990s, with Sony Entertainment coming out with its PlayStation and enjoying success rivaling that of Nintendo.

Long-Term Decline in Demand for Gaming Consoles

After the turn of the century, the US game industry came zooming back. The 2000s brought rapid advances in the performance of gaming hardware. Sony Computer Entertainment produced PlayStation 2 and 3, and Microsoft entered the fray with the Xbox and Xbox 360. The improvements in hardware worked to the advantage of US companies, which had strengths in the basic technology for computer graphics. In addition, the first decade of the new century saw a dramatic increase in the number of people involved in game development. A single game could cost tens of millions of yen and require a team of hundreds or even more than a thousand people to produce. Engineers in the United States, with their experience in implementing large-scale information-technology projects, were well suited to such undertakings. So the 2000s became the decade of a US comeback in the game industry.

Following the 1983 debut of Nintendo’s Family Computer, the Japanese market for video games grew steadily through 1997, when annual sales (hardware plus software) topped ¥750 billion. But after this the industry entered a period of decline, and as of 2013 sales had fallen to a bit over ¥400 billion. On the global scene, meanwhile, Japanese firms’ share of the market is now only about 13%. So, to sum up, the market for gaming consoles is experiencing a long-term decline, which has pushed Nintendo, formerly a star performer, into the red. In this respect, the Japanese video game industry can indeed be said to be doing poorly.

On Top in the Global Market for Mobile Games

In another respect, however, the Japanese video game industry is not declining but rather thriving in a Japanese way. Gaming devices come in two main types: home consoles that are attached to television sets and handheld game consoles. The handheld variety accounts for only about 20% of the market in other countries, but in Japan it has a share of over 50%. The popularity of handheld units has been supported by mega-hit games like Pokémon and Yo-Kai Watch. It is also often suggested that these portable units sell well in this country because the Japanese have a predilection for compact, lightweight electronic devices like the Sony Walkman, and because many people are in the habit of playing video games while commuting.

And Japan, where this sort of portable culture has taken root, now leads the world in the market for mobile games (games played on smartphones or other mobile phones). According to International Data Group, a major US research company, the global market for mobile games came to $14.7 billion in 2013. At ¥120 to the dollar, this amounts to ¥1,764 billion. So the domestic Japanese market of about ¥550 billion accounts for roughly one-third of the global total.

The iPhone was put on the market in Japan in 2008. The following year Mixi, a major Japanese social networking site, launched a social gaming service, and the mobile social gaming market, which at that point was worth only about ¥23 billion, subsequently ballooned. The vigor of the Japanese video game industry has shifted over the past few years from home gaming to mobile gaming.