This fall, General Motors plans to start selling a "small car" called the Aveo in Japan. Though the company only expects to sell a few hundred, its purpose is to make the Aveo a "feeder model" that will prepare Japanese consumers for more upmarket models down the line. It will be interesting to see the reaction, since American car companies have never been very successful selling large numbers of cars in Japan.
Apparently, GM is thinking along the lines of fighting fire with fire. Small Japanese cars have sold like hotcakes in the U.S. ever since they were first imported there in the early 1970s, so it follows that Japanese prefer small cars, and GM will give them what they want. But the major appeal of import cars in Japan is based on image, so GM's competition is not Toyota-Nissan-Honda, but rather Mercedes-Volkswagen-Audi.
A Japanese person who wants to buy a small car is not going to buy one from GM, because the average Japanese doesn't equate GM with small cars. If GM actually wants to compete in a realistic way then they have to compete with something that's quantifiable, like gas mileage, regardless of the size of the car.