In 2020, Japan stood as the world’s third-largest economy, underpinned by an endowment that includes a top education system, leadership in sectors such as industrial and automotive manufacturing, high-quality infrastructure, as well as a professional culture infused with a strong work ethic and repeatable methods to produce high-quality goods and services.
Yet, Japan’s productivity has gone from stagnant to declining, a course that needs imminent reversal to remain globally competitive. On the rise are competing nations making significant productivity gains through the development of technical talent and the application of proven digital technologies that include cloud-based infrastructure and software, mobile devices and apps, machine learning and deep learning, and many others.
Japan’s relatively low digital competitiveness is in stark and unexpected contrast to the country’s economic strength. In 2020, the country ranked 27th in digital competitiveness and 22nd in digital talent, and it has single-digit penetration in areas such as e-commerce, mobile banking, and digital government-service usage (Exhibit 1). The country has produced just five out of more than 500 unicorn start-ups globally (start-ups with a private or public valuation of more than $1 billion). These metrics fall far short of Japan’s full potential.
Standing in the way of digitization are some self-imposed constraints: a high-context culture with a risk-averse mindset, senior leaders focused on company longevity rather than productivity, limited exposure of some industries to global competitors, a gridlock effect between a private sector waiting for digital endorsement by government and a government waiting for the private sector to forge ahead, and, most important, a deficit of more than half a million software-related engineers to build the software applications that will take the country forward.
The technologies to build a digital future can be set up in the cloud today with a few clicks, and it has never been simpler to hire talent from around the globe or build talent up leveraging the wealth of online courses and code available. In the coming decade, Japan needs to make a definitive and far-reaching commitment to digitization. Absent such a change, current GDP growth and productivity rate trajectories suggest that economies such as India and Germany would overtake Japan beyond 2030. This loss of competitiveness would in turn undermine Japan’s strengths and be an unfortunate outcome given the country’s intrinsic potential.
Incrementalism will not close the digital-competitiveness gap. Japan must undertake some transformative steps, which we call big moves—concerted efforts by major industries or stakeholders to reform their operations, capitalize on emerging trends, and embed digital technology across the value chain (Exhibit 2). These big moves are anchored on four themes:
- Digital talent: A bold plan to more than triple the bench of digital talent, focusing disproportionately on software developers, data engineers, data scientists, machine learning engineers, product managers, agile coaches, designers, and other types of new jobs. This is in addition to the continued deepening of hardware talent, which is already a strength. Achieving this requires a mindset shift that software expertise is just as valuable as traditionally Japanese-prized hardware or non-software-engineering disciplines. These big moves will also call for upskilling of the workforce and the digitization of the education sector itself.
- Industry transformation: Leapfrog moves by the four core industry sectors that contribute nearly 50 percent of Japanese GDP: industrial and automotive manufacturing, wholesale and retail, healthcare, and financial services. All of these sectors have single-digit digital-penetration metrics, such as the number of digital-manufacturing lighthouse factories or the percentage of e-commerce penetration. Their value chains have potential to scale up more than 100 proven use cases that leverage cloud-based applications, machine learning, deep learning, e-commerce technologies, the Internet of Things (IoT), 5G, cybersecurity, and others to drive an increase in revenues and a reduction in costs and expenses. By 2030, Japan needs an artificial-intelligence-enabled industrial sector, digital healthcare at scale for the elderly population, omnichannel retail experiences, and a modern, streamlined mobile-banking system underpinned by a globally interoperable frictionless payment infrastructure.
- Digital government: A strategic commitment from the government to drive connectivity, cybersecurity, and the availability of cloud resources to build a new wave of applications. More importantly, this big move requires the build-out of digital applications in the public sector to digitize the services it provides to citizens and businesses and doing away with lengthy processes that require physical visits, paper, seals, faxing, and other analog methods.
- Economic renewal: Japan has more than half of the world’s oldest founded companies, many of which are facing declining revenues and profitability. The country needs to inject economic renewal. This renewal mandate is best suited for the start-up ecosystem, which needs to boldly address global customer problems with software, shifting from its current inward and hardware focus. Reforms are needed to encourage founders, attract talent, and enable start-ups to scale. Another key to economic renewal involves the transformation of Japanese systems integrators: they account for over 60 percent of Japanese technology-related spend and 70 percent of IT hired talent, and it is crucial that they bring their clients along on the journey. Japan’s digital transformation will require bringing talent and technology back into the core operations of businesses, and systems integrators need to develop new business models to help their clients make the transition.
The execution of these big moves will require a formula that allows them to move from idea to impact. A survey conducted for this effort on the progress of various information, communications, and technology initiatives over the past decade revealed some important lessons. Initiatives that show progress start with dialogue between the various counterparts, are formalized in concrete action plans, have single-threaded leadership accountability, show positive momentum early on, and encourage participation throughout. Conversely, initiatives that did not show progress fell victim to limited formalization, a prevalent risk mindset, and insufficient funding to see the initiative through to the end.
In 2030, the Japan story could be one of the most inspirational transformations of our time. Japan has the right endowment, with smart citizens and quality assets; the technology to build is readily available today; and the barriers to transformation are largely mindset related. But changing entrenched attitudes remains the top challenge of any transformation: strong leadership is required to meet it, along with a laser-like focus on execution and a broad-based capacity to adapt.
Japan Digital Agenda 2030 was informed by quantitative and qualitative surveys of US and Japanese business and policy leaders to benchmark progress over the past decade and provide insights into developing a road map for Japan’s digitalization through 2030. The research included in-depth interviews with more than 100 business, government, and technology leaders in and out of Japan and a review of more than 200 data sources across a range of industries and technologies.