Japan struggles with digital transformation

Japan’s future — like that of almost every country — depends on its mastery of the digital transformation, often called “DX.”

Business competitiveness demands the incorporation of new technologies to increase productivity. Overcoming emerging social problems, such as an aging society or addressing climate change, requires all levels of government to include and utilize those same technologies.

Politicians, bureaucrats and business professionals understand this and they are beginning to make structural changes in their operations that will allow them to do so. Unfortunately, they face powerful barriers. Overcoming those obstacles is critical to Japan’s future.

The Japanese government gets it. After struggling with the COVID-19 pandemic, the administration of former Prime Minister Yoshihide Suga declared that it sought the “realization of a digitalized society,” and created the Digital Agency in 2021 as “a pillar of the new growth strategy.” Its chief executive, currently Taro Kono, is tasked with overseeing the country’s transition to a digital economy.

It has not been easy. At the end of 2023, Japan hit a new low in an international comparison of digital competitiveness. According to the International Institute for Management Development, a Swiss business school that produces an annual assessment of the ability of countries to adopt digital technologies, Japan ranked 32nd of 64 economies surveyed, a fall of three places from last year and its worst showing since the list was launched in 2017. In comparison, South Korea was sixth, Taiwan ninth and China 19th.

Several factors contribute to Japan’s poor performance. A formidable obstacle is attitudinal: resistance to changes that challenge entrenched policy and practices. Past successes and a more general tendency toward risk aversion reduce the readiness to adopt new policies, procedures and technologies. Weighing heavily on decision-making is a “not invented here” mentality that is skeptical of imported innovation. This encourages reliance on legacy systems and infrastructure that may not be suited to evolving needs. Culture too can be a problem, as is evident from the glacial pace at which the hanko (a carved stamp that serves as a personal seal) is being abandoned.

There is a critical shortage of digital skills. While Japan faces a potential total labor shortage that could reach as high as 11 million workers, the gap among digital workers, critical to managing the country’s digital transition, is acute. Last year, Japan was estimated to have 1 million digital workers; the government forecasts that number will fall short of projected needs by 2.3 million in 2026 as demand increases with the spread of cloud services, big data analytics and other technologies.

Competition for skilled workers is heating up as Japan pushes to reshore supply chains that were located overseas. The drive to rejuvenate national semiconductor production is having a profound impact, with wages being pushed up as a result. More than 75% of technology hiring managers in Japan found recruitment to be “very” or “quite” competitive last year.

That shortfall is behind the decision last week to begin issuing six-month visas for digital nomads — individuals who work remotely while staying in one place for the short- or medium-term. The program, which is expected to start at the beginning of the next fiscal year (April 1), will allow those specialists with an annual income of at least ¥10 million to stay in the country for up to six months and work despite not having a job in Japan.

It is estimated that there are over 35 million digital nomads worldwide, generating economic value of $787 billion. More than 50 countries have such visas, which allows individuals to work remotely, an increasingly popular option since the COVID-19 pandemic. Even if they don’t work for Japanese companies, they contribute to the local economy — paying rent, shopping, being tourists — and can stimulate domestic innovation as they interact with locals. Ideally, some of those nomads will come to Japan, enjoy their time and stay permanently, helping to fill some of the digital skills gap.

In addition, there are local programs, such as that introduced last year by the Fukuoka Municipal Government to fast-track visa applications by foreign engineers. It uses the National Strategic Special Zone system, a national program that delegates authority to local authorities so that they can tailor initiatives to support the growth of companies operating in the area. (Fukuoka has a similar project that targets entrepreneurs.)

Another way to fill the digital worker gap is to better utilize women workers. Japan is making progress. Government programs have boosted the female labor-force participation rate from 63% to 74% between 2012 and 2022. The number of female IT specialists in Japan has grown in tandem, reaching 22% of all engineers in 2021, a 7-percentage point increase over the decade, and reaching a level like that of the United States and Europe.

Future growth will be difficult, however, given the low numbers of female university students majoring in science, technology, mathematics and engineering (STEM), which are the foundation of a digital future. In Japan, a mere 7% of female university students major in STEM, compared with 36% of male students; that’s less than a third of the number in South Korea and less than half that of the U.S. and Europe.

While Japanese workers get on-the-job training instead, the lack of university education means that they don’t have the more general foundation acquired in academia, which limits their ability to do more basic — as opposed to applied — work.

Mastery of English is another constraint. Much of the cutting-edge work in digital technologies, especially in artificial intelligence, is done in English. Similarly, foreign workers in this field are far more likely to speak English than any other language (regardless of their native tongue) and companies will need to make them feel at home if they are going to compete with foreign competitors. That means improving English skills among management of those businesses.

These are business culture problems but they are sustained by an education system that needs to be reformed to better prepare students for digital challenges.

A final factor shaping this process is security. The success of the digital transformation depends on embedding technology deeply into all dimensions of daily life. That demands confidence in the safety and integrity of those products and the information they transmit and use. While this sounds obvious, the steps needed to acquire that confidence demand transformation of many standard business and social practices.

Companies have been reluctant to acknowledge data leaks and hacks for fear of reputational damage. They have tended to view security as a cost to be paid and minimized rather than a fundamental responsibility and obligation of doing business. Citizens must learn how to protect their information and minimize the dangers posed by products that they use. At the most elemental level this means such basic steps as changing factory-installed passwords of digital devices and using two-factor authentication.

The government must do more to educate society about how to safely and securely navigate the digital transformation and create the legal infrastructure that encourages needed changes. The creation of the digital nomad visa is a good step, but it is just one in a wide range of responses that are required.