The newest generation of home video game consoles, the eighth generation, is about to unfold with the release of Nintendo’s Wii U console on November 18, 2012, in the U.S. Historically, Japanese game developers have had an advantage over Western developers, creating iconic franchises such as Super Mario, The Legend of Zelda, Final Fantasy, Metal Gear, Street Fighter, Resident Evil, Gran Turismo, and Pokemon. However, over the past few years, Western developers have come to the forefront of the industry with franchises such as Halo, Gears of War, Uncharted, God of War, Assassin’s Creed, Portal, Bioshock, and Grand Theft Auto. The Japanese video game industry has shrunk from nearly 50% of the global market in 2002 to 10% by 2010 and Japanese developers are now scrambling to catch up with Western developers to attract Western players who now make up the majority of the video game industry. With a new generation of consoles on the horizon, Japanese developers are being provided with an opportunity to reinvent themselves for the more dominant Western market by taking advantage of a strong Yen and low interest rates to expand their operations in the West.

The current global economic turmoil may make companies think twice before spending on growth, but Japanese developers are actually being provided with a powerful market opportunity. The appreciation of the Yen to the U.S. dollar in recent years, its current exchange rate being 79 Yen per USD and a forecast for it to further appreciate to 77 Yen per USD by April 2013, provides a favorable climate for establishing or growing a Western presence. Profits generated by sales in the West can be used to pay down Western operating costs first, avoiding an unfavorable dollar to Yen conversion. Couple this with low international interest rates at or below 1% for Japanese firms to borrow for this endeavor and it becomes quite clear what direction Japanese developers should move toward.

Many developers are looking to expand their operations in the coming years and they should use these market conditions to invest and develop a stronger Western presence. For example, Capcom is planning to hire another 1,000 developers over the next 10 years. In the past, Capcom has outsourced its development capabilities to Western studios such as Ninja Theory with the upcoming reboot of Devil May Cry, DmC, Slant Six Games with Resident Evil: Operation Raccoon City, and Spark Unlimited with Lost Planet 3 to develop games more suited to Western players. However, these games have received mixed results from audiences across the globe causing Capcom to rein in outsourcing and refocus on internal development. In my opinion, Capcom should focus on diversifying themselves by moving some of their projects to their Western studio subsidiaries, Capcom U.S.A., Capcom Europe, and Capcom Vancouver. By investing more time and money into these studios, Capcom will be more likely to create future games that are more appealing to Westerners. Sony is an excellent example of success. Many of its top franchises such as God of War, Uncharted, and Ratchet and Clank are all developed by studios in California, while others such as Little Big Planet and Killzone are developed by studios in Europe. These critically acclaimed franchises are Sony exclusive and, without a doubt, saved Sony’s PlayStation 3 from running in Microsoft’s Xbox 360’s shadow.

Hiring more developers in the West will help Japanese companies develop games that will appeal more to the Western market. It will take Japanese developers some trial and error to find the right mix of Japanese influence and Western influence for global appeal, but there is no doubt that the growing Western market is the future of the industry and it would be wise for Japanese developers to begin diversifying now while market conditions, a strong Yen and low international interest rates, are favorable. This eighth generation of consoles has the most uncertainty with the console gaming industry in decline and the expansion of mobile gaming. Many are hoping for this next generation of consoles to reinvigorate a slumping industry that has been waiting for the innovation a new generation brings with it. Nintendo has shown its hand with its Wii U console and Sony and Microsoft are waiting in the wings. Only the future knows how this story will end up unfolding, but Japanese video game developers can take advantage of today’s market to better arm themselves for whatever the future brings.