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Square picks an auspicious moment to enter Japan’s changing market

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Square, which allows anyone with a smartphone to take credit-card payments, is now doing business in Japan. It is the third country, after the United States and Canada, where the company has made its industry-disrupting payments service available, and the popularity of the iPhone there could create fertile grounds for expansion.

It’s no surprise that the company would want to get into one of the world’s biggest, most sophisticated markets. It recently hired the top US trade negotiator, who helped bring Japan into a new round of regional free-trade talks, as its international government-relations guy, and a Google executive with significant global experience as its business lead. But the question for Square is whether businesses in Japan will adopt its little plastic card-swiper with the enthusiasm they have in the US, where the firm is on track to process $15 billion in payments this year.

There is already plenty of competition for mobile payments in Japan. PayPal is getting into the market, alongside a robust domestic sector dominated by mobile providers like NTT Docomo. But the bigger problem, or perhaps opportunity, might be in Japan’s way of doing business.

While Japan has many small enterprises— theoretically Square’s target customers—the country does not have a lot of people starting new businesses. In fact, among all OECD countries, it ranks dead last. Visitors and Japanese alike point to cultural factors that favor stability and institutions as a barrier to starting new businesses, although a lack of capital and other resources is also part of the problem.

But that may be changing today. As part of his bold economic agenda, prime minister Shinzo Abe has made plans to encourage entrepreneurs; he promoted Silicon Valley-style disruption at a Japanese tech conference where the attendees included Jack Dorsey, Square’s founder. And a new generation  is trying to break through the country’s staid corporate culture to produce the kind of anyone-can-have-a-business attitude that could drive Square’s revenues.

Japanese businesses will pay a 3.25% commission on the payments, a half a percentage point higher than their US counterparts. They can use the service thanks to the backing of the Sumitomo Mitsui Card Corporation, the financial institution that also brought Visa to the land of the rising sun.

Correction (5/23/13): An earlier version of this article incorrectly said Japanese Square users would pay a 3.75% commission; it is 3.25%.

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