Most Apple Inc. AAPL 0.87% traders have focused their international attention primarily on China in recent years, but Japan may end up being a major thorn in Apple’s side. UBS analyst Steven Milunovich sees two reasons why Apple investors should be concerned about Japan.

First, Japanese carriers are no longer aggressively discounting iPhones to lure subscribers away from the competition. Second, a wave of cheaper competition has flooded the Japanese market.

“Our industry contacts indicate that while the Apple brand remains string, cheaper alternatives are making inroads with Apple’s share potentially declining over time from 50 percent to 30 percent,” Milunovich explained.

Why Japan Matters

While not the size of China, Japan represented 8 percent of Apple’s revenue and 11 percent of its profit in the most recent quarter. In addition, Apple’s Japan operating margin of 45 percent makes it one of Apple’s highest-margin markets in the world.

Despite the warning signs of tough times ahead in Japan, UBS remains bullish on Apple’s stock. The firm only sees…

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