Overview
Japan is a leading producer of technology products, but its digital economy lags behind other advanced nations. The IMD’s World Digital Competitiveness Ranking, which seeks to measure “the capacity and readiness of 64 economies to adopt and explore digital technologies as a key driver for economic transformation in business, government and wider society” put Japan at #32 in 2023, ahead of only Italy among G7 countries and behind regional competitors Korea (#6), Taiwan (#9) and China (#19). According to a Japanese government survey, more than a quarter of Japanese households still had fax machines in 2023; 65 percent still had a DVD or BlueRay player. The Japanese government has belatedly realized the benefits of digitizing processes, recordkeeping and services and is pressing broadly for a digital transformation or “DX” of government, business and society.
DX: Digital Transformation
In Japan, the concept of “Digital Transformation” (DX) refers to the use of digital technology to fundamentally change how businesses operate, create value, and interact with customers. The goal of DX is to enhance business processes, improve customer experiences, and create new business models by integrating digital technologies like cloud computing, artificial intelligence (AI), big data, and the Internet of Things (IoT). DX has gained attention as organizations in Japan face increasing pressure to modernize and stay competitive in a rapidly evolving global market.
The Japanese government promotes DX as part of its strategy to boost productivity and innovation across various industries, including manufacturing, healthcare, and finance.
The Ministry of Economy, Trade, and Industry (METI) leads the country’s efforts to promote DX by establishing guidelines and supporting its implementation. Japanese companies aim to maintain competitiveness by leveraging digital technologies to create new value and achieve sustainable growth. However, full-scale DX implementation in Japan is proving to be difficult as many companies face challenges related to technological barriers, talent shortage, and a rigid work culture resistant to change. The shortage of technical talent is acute. Data from Japan’s Information Technology Promotion Agency (IPA) indicates s that 62 percent of Japanese companies reported that they are experiencing a significant shortage of workers with the skills necessary for DX implementation
Despite these difficulties, the IPA reports that Japan’s efforts to implement DX across industry sectors are steadily advancing. An IPA survey indicates that the percentage of companies actively pursuing DX initiatives has from 55.8 percent in 2021 to 73.7 percent in 2022.
Artificial Intelligence (AI)
In 2024, Japan established the AI Strategy Council in the Cabinet Office to develop foundational guidelines on AI regulation. These guidelines are composed of seven principles that AI developers, providers, and users should follow in engaging with AI efforts. The AI Strategy Council also developed an additional three AI principles to inform AI social collaboration. These 10 AI principles were designed to ensure that AI activities in Japan are ethical, transparent, and reliable so that they can most effectively promote technological innovation and address social impacts.
Japan continues to deliberate on the regulatory framework for AI with a goal of having specific policies defined by the end of FY 2024. In furtherance of this goal, in 2024 METI issued guidelines for AI businesses that emphasize ethical standards and accountability for AI system development and operation. These guidelines advocate for enhanced transparency, the elimination of biases, and proper data management to improve AI’s societal acceptance.
Japan’s AI Strategy Council has identified potential risks associated with AI, including the leakage of confidential data, leakage of personal information, social instability due to AI-related crime or misinformation, and cyber-attacks. At the same time, generative AI is anticipated to accelerate digital transformation, enhance productivity, and contribute to resolving various social challenges in Japan. Japan’s AI Strategy Council also advocated for the implementation of certain safeguards to ensure the secure and effective deployment of AI technology in Japan.
Japan is utilizing AI across a wide range of industries – including entertainment, finance, healthcare, manufacturing, smart cities, and transportation. In the financial sector, Japan has utilized AI for risk management and fraud detection, with a strong emphasis on FinTech applications. AI is playing a crucial role in Japan’s healthcare sector, particularly in diagnostic support systems and patient management. Japanese manufacturing industries are leveraging AI for quality control and predictive maintenance. These applications are expected to boost production efficiency and reduce costs.
Japan’s Ministry of Internal Affairs and Communications (MIC) predicts that Japan’s AI systems market will grow to approximately $ 7.3 billion by 2027.
Japan Artificial Intelligence Systems Forecast, 2023–2027 (IDC)
https://www.idc.com/getdoc.jsp?containerId=JPE50537323 (English)
Ministry of Internal Affairs and Communications (MIC)
https://www.soumu.go.jp/johotsusintokei/whitepaper/ja/r05/html/nd249100.html (Japanese)
AI Strategy Council
https://www8.cao.go.jp/cstp/ai/ai_senryaku/ai_senryaku.html (only Japanese)
AI Strategy 2022
https://www8.cao.go.jp/cstp/ai/aistratagy2022en_ov.pdf (English)
METI’s AI Guideline for Business
https://www.meti.go.jp/english/press/2024/0419_002.html (English)
Hiroshima AI Process
https://www.mofa.go.jp/files/100573471.pdf (English)
Financial Technologies (FinTech)
Digital Trade Opportunities for the FinTech Industry in Japan
There are significant opportunities for U.S. FinTech companies in the Japanese market to enhance productivity, efficiency, and functionality in digital banking, payment and finance.
Enhanced Productivity Through Digital Integration
Japan’s FinTech market allows for the integration of financial services with AI, blockchain, and big data analytics. Japanese companies are increasingly exploring options for utilizing AI to automate routine tasks and free up resources for problem-solving, whereas blockchain streamlines these companies’ cross-border transactions and regulatory compliance efforts. Japanese companies are increasingly seeking AI and blockchain to reduce the time necessary to complete manual tasks and reduce associated costs.
Big data analytics can further help Japanese FinTech companies tailor their services to customer needs. For example, cloud-based platforms and application programming interfaces allow firms to offer services worldwide, increasing market reach and innovation. Digital trade allows Japanese companies to engage in the ongoing global dialogue on harmonizing regulatory standards that can help Japanese, and U.S. companies agree on global FinTech regulations that support innovation and protect consumers.
Challenges for U.S. Companies in Japan’s FinTech Market
U.S. companies exploring Japan’s FinTech market can face regulatory and cultural hurdles. Japan’s financial sector is heavily regulated with strict requirements for compliance and data privacy, which can be difficult for U.S. firms to navigate. Securing the necessary licenses is often a complex and lengthy process. Additionally, Japanese consumers are generally conservative and prefer traditional financial institutions, making it challenging for new FinTech solutions to gain traction. The market is also dominated by established players, including major banks and local FinTech firms, creating high barriers to entry. Building consumer trust and adapting to local preferences is crucial in the initial stages.
Cybersecurity
Japan’s cybersecurity market is estimated to be $3.6 billion. The endpoint security market, including Endpoint Detection and Response (EDR) expanded in 2023, and the ID management market grew in tandem. Japan has faced increased cybersecurity threats such as phishing, malware, and credential theft in recent years and has experienced many large-scale security incidents and costly ransomware attacks. Japanese companies, government agencies, and other organizations are seeking to strengthen their networks and endpoint security, identity verification systems, and cloud computing networks. Only 41.9 percent of Japanese companies have a Chief Information Security Officer; for companies with over 10,000 employees, that figure stands at just 68 percent.
Recent policy developments in Japan highlight the government’s focus on bolstering the nation’s cybersecurity defenses. These include the designation of 14 critical infrastructure sectors or industries in the June 2022 Cybersecurity Policy for Critical Infrastructure Protection published by the Cybersecurity Strategic Headquarters, a Japanese Cabinet-led group. Those 14 critical infrastructure sectors are: airports; aviation; chemicals; credit; electricity; financial; gas; government and administrative; information and communications; logistics; medical; petroleum; railways; and water.
In December 2022, Japan released its first National Security Strategy (NSS) in nearly ten years. The document specifically addresses the need to improve the country’s cybersecurity response capabilities. Notably, the NSS outlines the establishment of a mechanism to regularly assess information systems of government agencies, improve measures against cyber threats, and constantly monitor vulnerabilities. The NSS also addresses the development and implementation of active cyber defense mechanisms.
In January 2023 METI and the U.S. Department of Homeland Security signed a Memorandum of Cooperation on strengthening the countries’ cybersecurity engagement. The memorandum commits the United States and Japan to introduce same-level safety standards for government-procured software; establish a system that seeks safety-related information from software suppliers; and advance efforts to strengthen their Indo-Pacific partners’ cybersecurity capabilities. Japan’s National Center of Incident Readiness and Strategy for Cybersecurity establishes the country’s cybersecurity standards.
Quantum Computing
Japan is a leader in quantum computing technology. With applications from national security to healthcare, the country believes that this nascent technology requires global collaboration with likeminded countries and domestic incubation through strategic investment in Japanese startups. In furtherance of these objectives, Japan has established goals for quantum research and industry which include growing the sector to $ 337 billion, enabling 10 million quantum users, and fostering quantum unicorns to lead the market by 2030. Details on the country’s plans can be found in its April 2024 Promotion Measures for the Development of Quantum Industries.
Japan has a number of quantum technology initiatives including Riken, Osaka University’s QSRH, the National Institute of Information and Communications Technology’s Quantum Security, and the Okinawa Institute of Science and Technology’s Quantum Technology International Collaboration Hub. In January 2024, the United States, Japan, and the Republic of Korea announced the signing of a trilateral partnership between the Universities of Chicago, Tokyo, and Seoul to train a quantum workforce and strengthen competitiveness in the global economy. Earlier at the 2023 G7 Summit in Hiroshima, the United States and Japan announced partnerships between the universities of Chicago and Tokyo, IBM, and Google which provides $150 million to support the countries’ quantum research efforts.
Telecommunications
Japan has a highly developed telecommunications industry valued at $95 billion. With 203 million mobile phone subscriptions and a population of 125 million, Japan has a mobile penetration rate of 162 percent. Japan’s leading mobile operators are NTT Docomo, KDDI, SoftBank, and Rakuten Mobile. These leading carriers rolled out their 5G services beginning in 2020 and will spend an estimated $14 billion establishing their networks.
Japan’s internet penetration rate of 86 percent is lower than that of the United States (95%) Great Britain (97%) and Australia (98%). As of 2023, 93 percent of Japan’s connected households had broadband service. Japan’s Ministry of Internal Affairs and Communications (MIC) oversees the telecommunications industry.
Data Privacy
Japan’s data privacy is governed by the Act on the Protection of Personal Information, updated in April 2022. The Act lays out the rights of data subjects, the responsibilities of data information handlers (including cross border data transfers), reporting requirements in case of breach, and sanctions for violations of the law. The Personal Information Protection Commission (PIPC) has published guidelines on how to comply with the Act. In June 2024, the PIPC released an interim report on expected amendments to the Act. The PIPC is expected to release a final report on the amendments by the end of 2024, so they can be introduced to the Diet in 2025.
Cross-Border Data Flows
Japan is a member of the Global Cross-Border Privacy Rules (CBPR), an international certification system for data privacy. A company may apply to an accountability agent to receive certification under Global CBPR, which demonstrates that the company adheres to a set of unified privacy requirements that meet a globally recognized standard.
Public Sector Procurement
The Digital Agency maintains a list of cloud services vendors authorized to provide cloud services to government offices (“Government Cloud”). The authorized vendors must meet approximately 330 benchmark standards. In 2023, the Digital Agency allowed companies to form partnerships in order to meet the benchmark standards. This change enabled Sakura International to be certified as the first authorized Japanese Government Cloud vendor. As of September 2024, Amazon Web Services, Google Cloud, Microsoft Azure, Oracle, and Sakura Internet are the only companies certified as providers to the government.
Japan Digital Trade Barriers
Telecommunications Business Act
U.S. and foreign companies involved in providing telecommunications services in Japan, including those offering only streaming and cloud-based services, became subject to regulation under Japan’s Telecommunications Business Act (TBA) in April 2021. Businesses that intermediate communications with users in Japan, including providers of cross border services, must register as telecommunications providers with MIC, appoint a representative or agent physically domiciled in Japan, and comply with regulations imposed on domestic operators under the TBA, including disclosure and reporting obligations.
The TBA’s strict privacy rules, particularly around protecting the “secrecy of communications,” could be challenging for companies, especially those operating digital services. They need to carefully manage user consent and communication data while adhering to these strict regulations. Such requirements could be particularly burdensome for small and medium-sized enterprises. The MIC has flagged user consent policies that require users to relinquish their right to secrecy of communications to access the service as “inappropriate,” even when services are provided free of charge or do not require the identity of the user. The MIC has signaled that blanket consent and the exceptions for automated communication are unlikely. Additionally, mandatory reporting of service outages may be overly burdensome if they are triggered by very low levels of service disruption.
Specified Digital Platform Providers
In February 2021, the Act on Improving Transparency and Fairness of Digital Platforms (the Transparency Act) went into effect, which provides METI and the Digital Market Competition Headquarters (DMCH) with the authority to designate certain providers of digital services with obligations to provide increased transparency, including with regard to the terms and conditions of use of their service. The Transparency Act’s provisions apply only to digital companies “larger than a certain size in areas that are particularly important parts of society” and “for which the state of transactions has been clearly ascertained through surveys.” In April 2021, METI designated several large providers of online electronic commerce services, including Rakuten and Yahoo! Japan, as well as the Japanese subsidiaries of Amazon, Google, and Apple as “specified digital platform providers” under the Transparency Act.
In April 2022, the DMCH released two interim reports evaluating competition for mobile operating systems and for voice assistants and wearables, with the eventual goal of possible regulation under the Transparency Act. U.S. industry flagged several concerns related to the drafting process for these reports, including a short public comment period that coincided with a major national holiday, and a lack of opportunities to provide information to the DMCH during the drafting process. Following an earlier Japan Fair Trade Commission (JFTC) market study report citing Google’s dominant market position in digital advertising, in October 2022, METI designated several digital advertising service providers (including Google, Meta, and Yahoo! Japan) as “specified digital platform providers” in the digital advertising sector under the Transparency Act.
Digital Platform Guidelines
In December 2019, the JFTC released guidelines on applying the Antimonopoly Act (AMA) to transactions between digital platform operators and consumers. In these guidelines, the JFTC asserts that platform companies are in “a superior bargaining position” when customers have no choice but to provide their data to use the services and platform companies may commit an abuse of that position when use of personal data is not fully and accurately disclosed or protected. After receiving input from stakeholders concerned about insufficient guidance, the JFTC provided several examples of practices that would or would not constitute abuse of superior bargaining position.