Once upon a time, Japanese commuters left home in the morning clutching a newspaper and a boxed bento lunch. Today, the list is more elaborate: MP3 player, 3.2 megapixel camera, navigation system, digital TV tuner and web browser with download speeds faster than most British home broadband connections – all squeezed into a palm-sized device that costs about the price of a good sushi meal.

Millions of Japanese also use mobile phones to read novels, magazines and office files, make credit card payments, watch hours of recorded television and even check their body fat.

Over the last decade, consumers in this gizmo-loving nation have enjoyed a string of technological firsts. Japan pioneered the use of handsets to connect to the internet in 1999, download music (2002) and watch digital TV (2006). It was the first country to launch third-generation (3G) wireless networks (2001), and is one of a few to allow – since 2004 – mobile phones to be used as credit cards and train and bus passes.

Mobile networks here are so advanced that Japanese providers are struggling with problems – such as surging demand for high-bandwidth porn – that the rest of the world has hardly considered. Local operators are building so-called next generation networks, giving the country's 92 million daily surfers even more bang for their recession-hit yen. "People always tell me how jealous they are of Japanese mobile technology when I go abroad," says Tadayuki Yamada, a Tokyo office worker. "We're pretty spoiled."

Such innovations have not, however, prevented the market from slowing. Subscriptions are falling and, since peaking three years ago at 50 million, total handset sales by the 10 or so domestic manufacturers shrunk to 36m last year, according to Tokyo-based IT research company MM. So after years of being incubated like exotic plants inside a hothouse – a phenomenon dubbed the Galapagos Syndrome by Japanese analysts – the big operators are again preparing to roll out their toys abroad.

"Until now we have had our hands full with the Japanese market, but it is clearly saturated," explains Heihachiro Ochiai, spokesman for Sharp Corp. "We think this is an opportunity to introduce consumers abroad to our products, which we're confident they will like."

As Japan's top handset maker with about a quarter of local sales, Sharp leads the armada with a smartphone set for launch in Europe next year. Sales trials in China have been "very impressive", claims Ochiai. Toshiba launched its TG-01 this year, lighter than the iPhone and with a whopping 4.1in touchscreen, super fast 1GHZ chip and Windows-powered operating system.

The consumer electronics powerhouse Panasonic is planning a foreign smartphone campaign but will only divulge that the launch date is "under consideration", says spokesperson Kyoko Ishii. Fujitsu, NEC and Casio are also lining up behind the only Japanese maker with a presence outside Japan – Sony Ericsson.

Can products that have developed mostly in isolation from outside competition – Nokia, the global leader, has less than 1 per cent market share in Japan – make a dent abroad? Yes, says Osamu Hirose, senior analyst at Tokai Research Center in Tokyo: "Japanese phones are among the most advanced in the world, so I think they have a good chance of making a splash in foreign markets."

No, counters Tokyo-based tech-watcher Mark Hiratsuka, the publisher of digitalworldtokyo.com, who believes Japan's "ugly, cluttered handsets" will bomb in the West. Japanese mobiles have access to some wonderful and genuinely useful services, emphasises Hiratsuka, "but are hampered by generally awful hardware and a market that seems to dictate more features are crammed in than anyone needs". The result, he says, is messy software and clunky phones. "Hence, something slick like the iPhone kicks them all into touch."

Either way, the Japanese majors have little choice but to venture out of the hothouse. Besides plummeting sales, the iPhone is chipping away at market share since debuting here last year. The success of Apple's iconic gadget is helping its local partner Softbank Mobile outperform much bigger local competitors NTT DoCoMo and KDDI. Softbank is enjoying subscriber growth of 11 per cent per quarter, over double that of competitors, says the London-based researcher Wireless Intelligence. Meanwhile Japan's great Korean rival Samsung is marching ahead in Europe, where it has reportedly sold two million Jet smartphones.

We have been here before. In the 1990s the tech world was agog at delights rolling off Japan's mobile phone production line and Japanese makers were potentially major players abroad. But most were not geared for competition with foreign rivals, recalls Philip Sugai, director of research at the International University of Japan's Mobile Consumer Lab. "The handsets were incredibly expensive and were out of the capabilities of many networks," with features that were too advanced, costly and specific to local consumers, he points out. The 3G network created by NTT DoCoMo helped it corner over half of the Japanese market post-2001, for example, but also ensured its handsets were unusable abroad. Meanwhile, the Japanese market was big enough and subsidised enough and the makers didn't have to worry," adds Sugai, who says it is time for a second try.

"You have incredibly talented manufacturers that have done amazing things here, but couldn't replicate that elsewhere. Now they have 10-plus years of creating handsets for a highly sophisticated market, so I view this as a positive step."

What can European consumers expect? A hallmark of Japanese phones is they are crammed with novelties. Too crammed, say some who accuse Japanese makers of "feature creep" – one estimate is that on average less than 10 per cent of the features are actually used. Newer models, for example, have 5.1-megapixel cameras, navigation systems, 3in TVs, LED flashlights and games loaded with motion sensors to allow them to be played on the train. Oh, and they can make calls too.

Add antennas, sliding touchpads and large rotating screens and the result begins to resemble something found in the hands of a mad Klingon warrior. Few observers believe that will play well with European consumers accustomed to clean, simple lines. "One reason, apart from its fantastic applications, that the iPhone is doing well in Japan is because it is so easy to use," says Tadayuki Shinozaki, chief researcher at MM. "Japanese manufactures will have to look at that carefully."

But those manufacturers bring plenty to the table, including large, lucid screens, quick applications and sharp design – when they temper the instinct to chuck in the kitchen sink. And they are inventive: solar power and waterproofing are two recent innovations. A current Sharp model includes face-recognition technology that stops the phone powering up for anybody but its owner. NTT DoCoMo's e-payment system Osaifu-Keitai (wallet phone), which uses Sony's FeliCa technology, has also been heavily praised. It features RFID chips in handsets, turning them into electronic wallets that work with ticket barriers, shop checkouts and vending machines.

With DoCoMo preparing for an assault on the US, Hiratsuka says it should be pushing for a worldwide phones standard for contactless payments/ ecash. "Do that, instead of fussing about having more features than the next guy, and they'll be gods."

Coming soon: Future Eastern exports

* E-novels: The mobile phone could kill the great Japanese novel, frets the local press, which has coined the phrase "oya yubi seddai" – "the thumb generation" – to describe the army of huddled twiddlers. Many of Japan's top 10 bestselling novels are now born on mobiles, sometimes tapped out by novice authors on long commutes, uploaded on blogs then serialised in print. The genre has its own literary stars, and the annual market for e-novels is growing by 200 per cent, says the Nikkei Business newspaper.

* Pocket movies: Japan hosts one of the world's largest annual pocket film festivals, featuring movies shot on camera-equipped mobile phones. Full of blurry, vertiginous MTV-style shorts, the shortest of the 150-odd screenings at this year's festival in Yokohama clocked in at a giddy 12 seconds – but patient visitors could watch full-length features shot on hand-held gadgets the size of a cigarette box.

* 1-seg: Since being launched in 2006, Japanese manufacturers have sold millions of handsets equipped with digital TV receivers. Known as 1-seg because it occupies one segment of the digital bandwidth, the technology is now loaded on over half of all mobile phones bought in the country. Recent advancements have led to crisp, clear images and record and playback functions. Critics say the TVs work poorly and are already threatened with extinction by internet-delivered mobile TV.