The Wall Street Journal reports today that Chinese search giant Baidu expects to enter the Japanese search market in 2007. The exact timing hasn’t been finalized, but Baidu has been hiring Japanese staff and is in the process of opening a Tokyo office.

Baidu has long dominated search in China, where competitors Google and Yahoo are still trying to make inroads. With 120 million internet users and growing fast, China has the world’s second largest internet population.

But revenue-wise, China is a dwarf still. Japan’s approximate $1 billion annual search revenues is about five times China’s worth. Baidu’s Chief exec Robin Li on the expansion plans:

Mr. Li said Baidu has spent about six months preparing for the move into Japan. The company is planning to operate there by itself but is “very open” to working with a Japanese company, he said. Baidu feels it will have an advantage because the Japanese written language is based on Chinese characters.

He wouldn’t say how much Baidu plans to invest, but he said the company has plenty of cash from its initial public offering last year, when it listed its shares on the Nasdaq Stock Market. Baidu reported about $138 million in cash and equivalents as of Sept. 30.

Still, Japan is sure to be a challenge. Baidu has long said that its Chinese roots give it an edge against foreign competitors in China. In Japan, Baidu is not only foreign but also far less well-known than its U.S. rivals. Moreover, some analysts say Baidu has benefited from being seen as cooperative by China’s Internet regulators, who put strict limits on Web content and who have sometimes blocked access in China to Google and other Baidu competitors.

Mr. Li said Baidu’s advantage in China comes not from any positive relationship with regulators but because it has been better at tailoring its services to local users’ needs. He said the company plans to replicate that in Japan. “We understand the local user better,” he said.

this will be interesting to follow, how a restricted company at home competes in a free market like the Japanese. Apart from cultural challenges, (I think it’s a little easy to think that comparable character sets will give it an edge) it poses interesting questions on Baidu Japan’s search results and hosting policies, and the obvious comparisons it will draw with their Chinese site.