While China is hot, Microsoft makes a lot more money in Japan. Over half of Microsoft's Asian revenues come from Japan. Maybe that's why the company is putting a renewed focus on the country, plowing money into developing markets for its Windows Media, Xbox and enterprise products. Microsoft now has 2,000 employees in Japan and is adding new staff at a rate of 20 percent a year.

Microsoft is the best known brand in Japan, says Darren Huston, CEO of Microsoft Co. Ltd. Japan, but doing business requires the time-consuming task of building personal relationships. At one meeting, a Japanese executive told Huston that his company renewed his enterprise agreement with Microsoft because he liked his Microsoft representative and wanted to make sure he reached his target and got his annual bonus.  "The relationship is everything," says Huston, who was the inaugural speaker for the Japan-America Society's distinguished speaker series.

For the same reason, says Huston, Microsoft has suffered from the company's past failure to be sensitive to customer needs. If you do something wrong and fail to apologize, says Huston, "it's never forgotten."

Microsoft has been belatedly mending fences. One way has been to show Microsoft isn't  just out to make a profit, but is also making a social contribution. "Microsoft needs to start acting like a mature company with a social role," says Huston. One result has been "Plan J," Microsoft's name for its plan to help nonprofits and other organizations improve their operations by using technology.

Microsoft has lots to gain by making itself a part of the Japanese social fabric. Japan's innovativeness, its tendency to embrace technology, has opened up opportunities for the company not available elsewhere. While Microsoft barely has a presence in the digital music market in the rest of the world, Windows Mobile was named one of the three most "trendy" products in Japan. Why? NTT Docomo, Japan's largest mobile carrier, offers Windows Mobile on its cell phones. Now, a growing number of Japanese are using those cell phones to download music instead of iPods.

Japanese companies are also driving innovation by coming out with cell phones that double as PCs. Some come with tiny keyboards. Notebook computers, now hugely popular in Japan, will soon show up in U.S. markets, Huston predicts. Toshiba has introduced a notebook PC that uses flash memory instead of a hard drive to reduce the weight of the machine to just over two pounds.

The tablet computer, which has done so poorly in the U.S., is finding success in Japan where schools are using it to help students learn to write kanji characters. And because Japanese like to buy PCs preloaded with important software, about  70 percent of PCs in Japan are sold pre-loaded with Office, making that product a hugely profitable business for Microsoft Japan.

Although the Xbox still has a relatively small share of the Japanese market for video game consoles, it represents a huge opportunity. Huston expects that share to rise as it becomes clear that Sony PlayStation3 will not gain traction. Previous generations of the PlayStation were popular in Japan, in part because households also used the machines as DVD players. The latest PlayStation, however, uses Sony's proprietary Blu-ray technology that is expensive and not yet established as a standard.

For all its inventiveness in the consumer space, Huston says Japan remains several years behind when it comes to productivity in the office. Some of that is the result of aging proprietary systems that have been in use for decades. The Tokyo Stock Exchange, which uses decades-old software, has twice had to shut down because of software problems. One company had to pay hundreds of millions of dollars when shares were placed in larger numbers and at a far lower price than the seller had intended. And the Japanese government pension system was unable to match up millions of pensioners with pension accounts because of a software failure.

Information technology in Japan is slow to change because the top four mainframe makers in Japan control 60 percent of the computer market, compared with just 8 percent in the U.S. Because many Japanese companies aren't sophisticated about the use of technology ? many companies are led by older people who are less comfortable with technology ? they depend on their computer suppliers, who have little incentive to migrate them toward more open systems.

Microsoft is trying to change that by encouraging Japanese companies to hire chief information officers who are savvy about the productivity advantages of new software.

There are also some cultural obstacles to the use of new technology in the workplace: Japanese find instant messaging rude because of the way it pops up on the screen without permission. Consequently, while Microsoft Exchange has an 80 percent share of the market in the U.S., its share in Japan is only 20 percent.

The need for Japan to increase its competitiveness, however, is finally driving its companies towards updating their software and Huston says there are huge opportunities for Microsoft there. The Japanese national railroad system now uses Microsoft software to help the bullet train run on time, for example.

Leslie Helm is the executive editor of Washington CEO Magazine.