Hiroko Tabuchi, contributor to the New York Times, has below written about the competitive advantage Japan should have regarding  the smartphone market. Indeed, Japanese makers thought they had positioned themselves to dominate the age of digital data.

In the 1990s, they set a standard for the second-generation network that was rejected everywhere else. Carriers created fenced-in Web services, like i-Mode. Those mobile Web universes fostered huge e-commerce and content markets within Japan, but they have also increased the country’s isolation from the global market.

Then Japan quickly adopted a third-generation standard in 2001. The rest of the world dallied, essentially making Japanese phones too advanced for most markets. At the same time, the rapid growth of Japan’s cellphone market in the late 1990s and early 2000s gave Japanese companies little incentive to market overseas. But now the market is shrinking significantly, hit by a recession and a graying economy; makers shipped 19 percent fewer handsets in 2008 and expect to ship even fewer in 2009. The industry remains fragmented, with eight cellphone makers vying for part of a market that will be less than 30 million units this year.

The role the Japanese telecommunications industry can play in years to come can set a new standard in innovation and even help bring Japan up to speed geopolitically if capitalized on appropriately, including a stronger push away from domestic dissemination and in to overseas markets.

Continued, as excerpted from the New York Times:

Several Japanese companies are now considering a push into overseas markets, including NEC, which pulled the plug on its money-losing international cellphone efforts in 2006. Panasonic, Sharp, Toshiba and Fujitsu are said to be planning similar moves.

“Japanese cellphone makers need to either look overseas, or exit the business,” said Kenshi Tazaki, a managing vice president at the consulting firm Gartner Japan.

At a recent meeting of Mr. Natsuno’s group, 20 men and one woman crowded around a big conference table in a skyscraper in central Tokyo, examining market data, delivering diatribes and frequently shaking their heads.

The discussion then turned to the cellphones themselves. Despite their advanced hardware, handsets here often have primitive, clunky interfaces, some participants said. Most handsets have no way to easily synchronize data with PCs as the iPhone and other smartphones do.

Because each handset model is designed with a customized user interface, development is time-consuming and expensive, said Tetsuzo Matsumoto, senior executive vice president at Softbank Mobile, a leading carrier. “Japan’s phones are all ‘handmade’ from scratch,” he said. “That’s reaching the limit.”

Then there are the peculiarities of the Japanese market, like the almost universal clamshell design, which is not as popular overseas. Recent hardware innovations, like solar-powered batteries or waterproofing, have been incremental rather than groundbreaking.

The emphasis on hardware makes even the newest phones here surprisingly bulky. Some analysts say cellphone carriers stifle innovation by demanding so many peripheral hardware functions for phones.

The Sharp 912SH for Softbank, for example, comes with an LCD screen that swivels 90 degrees, GPS tracking, a bar-code reader, digital TV, credit card functions, video conferencing and a camera and is unlocked by face recognition.

Meanwhile, Japanese developers are jealous of the runaway global popularity of the AppleiPhone and App Store, which have pushed the American and European cellphone industry away from its obsession with hardware specifications to software. “This is the kind of phone I wanted to make,” Mr. Natsuno said, playing with his own iPhone 3G.

The conflict between Japan’s advanced hardware and its primitive software has contributed to some confusion over whether the Japanese find the iPhone cutting edge or boring. One analyst said they just aren’t used to handsets that connect to a computer.

The forum Mr. Natsuno convened to address Galápagos syndrome has come up with a series of recommendations: Japan’s handset makers must focus more on software and must be more aggressive in hiring foreign talent, and the country’s cellphone carriers must also set their sights overseas.

“It’s not too late for Japan’s cellphone industry to look overseas,” said Tetsuro Tsusaka, a telecom analyst at Barclays Capital Japan. “Besides, most phones outside the Galápagos are just so basic.”