Business | DAVOS SPECIAL 2018

Japan: A frontrunner to solve social challenges

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Achieving sustainable growth while coping with a population decline calls for “Society 5.0,” a super smart society where we can resolve various social challenges by incorporating the innovations of the fourth industrial revolution such as the “internet of things,” big data, artificial intelligence, robots and the sharing economy into every industry and society.

Japan, in a sense, is far ahead of the rest of the world in realizing this new society, as it is compelled to do so. About 27.3 percent of Japan’s 127 million people were aged 65 or higher in 2016, with the ratio expected to reach 38.4 percent by 2065, according to the Ministry of Internal Affairs and Communications.

The country’s medical expenses are also expected to increase. The Ministry of Health, Labor and Welfare reported ¥41.3 trillion in medical costs in fiscal 2016, and they are expected to increase to ¥57.8 trillion by fiscal 2025, according to the National Federation of Health Insurance Societies.

Being a frontrunner, a wide range of challenges — that will soon be faced by more and more countries — somewhat forces Japan to come up with innovative solutions.

Large corporations in Japan have traditionally driven innovation. However, on this front, the real boosters to the engine come from the rising startups. Without startups, “Society 5.0” will not be realized to its fullest potential.

Innovation from startups

There is a persistent perception of Japanese industry involving excessive “red tape” or “being slow on the innovative front,” but such ideas are outdated. Driving innovation — creating an ecosystem to promote continuous innovation — has been one of the top priorities in Prime Minister Shinzo Abe’s administration.

To facilitate the launch of startups, the government has implemented various measures, including the removal of the minimum capitalization requirement and the establishment of the Innovation Network Corporation of Japan to provide capital and managerial support. The Japan Venture Awards have been awarded to more than 260 entrepreneurs since 2000. Moreover, the government has supported entrepreneurial education programs at schools and plans to host a global venture summit in 2020, when the Tokyo Olympic and Paralympic Games are held.

These efforts have helped venture capital to rapidly grow, with more than about ¥261.2 billion ($2.4 billion) pouring into startups from Japanese funds, including both independent, as well as university-related funds, in 2016. According to Japan Venture Research Co., that level of investment has not been seen since 2008.

These positive trends have not only provided flexible funding to startups’ fresh ideas, but also expanded networks among entrepreneurs, investors, governments and research institutions. One of the most outstanding outcomes of such networking is the launch of The University of Tokyo Edge Capital Co. (UTEC) in 2004. UTEC nurtures cutting-edge technologies in Japan’s most prestigious academic institution, the University of Tokyo, and helps monetize their technology through investment and networking.

“I have huge expectations for startups,” said Tomotaka Goji, managing partner and president of UTEC, which has operated four funds totaling ¥45 billion, investing in about 80 companies since its foundation. Nine of them went public and 10 were acquired in mergers and acquisitions, according to the firm.

“If the university startups combine their original technologies with those from institutes and companies around the world, they could produce something even better on a larger scale,” Goji stressed.

Labor shortage solutions

Creation of a solid ecosystem has enabled startups to fully exercise their potential, bringing Japan closer to “Society 5.0.”

Goji noted Mujin, Inc. (“mujin” is the Japanese term for “unmanned”) could offer solutions to the growing labor shortage on the back of a decreasing population. The firm invented intelligent robotic controller technology that was displayed at a recent international exhibition in Tokyo.

“It moved as smooth as a human,” Goji recalled, who saw the firm’s technology at the event. Mujin Pick Worker can recognize a target object in 3-D, using collision avoidance and real-time motion planning technology, according to the company.

“As there is a tremendous need for loading and unloading amid today’s labor shortage, the scene showed me the actual realistic use of such technology,” Goji said.

The firm’s clients include many major companies, including Canon Inc., Honda Motor Co. and Askul Corp. Its technology is also sought after by JD.com, the second-largest e-commerce firm in China. It will reportedly start operating the world’s first fully automated operation at its warehouse in February, using Mujin’s technology.

Health care breakthroughs

A rapidly aging society will see ballooning medical costs, imposing a huge burden on its government’s fiscal condition. Innovation in health care to increase efficiency serves as one of the keys to solve such sustainability issues.

Two companies UTEC invested in could help curb health care expenditures as their technologies could be utilized for creating drugs better suited for individual patients and more effective in disease prevention, according to Goji.

Goji noted the analysis technology invented by Repertoire Genesis Inc. is useful for determining immunological status and abnormalities, enabling doctors to know the drug efficacy for patients in advance.

“This could facilitate the individualization of medical services more efficiently at lower costs,” he said.

The firm has developed a next-gen T cell and B cell receptor repertoire analysis that is based on unbiased gene amplification technology and bioinformatics.

Meanwhile, the technology of MiRTeL Co., a startup founded by a Hiroshima University professor, could lead to increasing health care productivity and lowering medical costs while achieving longevity. It utilizes a microRNA measurement test, Japan’s first disease-specific technique for the early detection of illness, that identifies irregularities in blood.

“This technology can detect diseases at an earlier stage, even before doctors are able to give a diagnosis,” Goji noted. “Given that, the technology could prevent the onset of a disease as it will enable a patient to take necessary measures in their daily health management.”

Environmental impact

Environmental protection is another important sustainability issue for which innovation can provide creative solutions. One such example is, according to Goji, the development of electric vehicles (EVs) by Japanese startups.

GLM Co., which started as a Kyoto University venture, manufactures and sells EVs, in addition to providing chassis for such cars produced by other makers.

“More and more makers of EVs are being launched in emerging countries, so the firm eyes those markets in providing chassis,” Goji said.

In the development of EVs, proper battery management is crucial as the vehicles are powered by a laminated battery pack, requiring solid control systems, Goji noted. NExT-e Solutions Inc. is developing next-generation battery management systems, as well as the technology to facilitate the reuse of lithium-ion batteries.

Goji said the company’s battery management system has been adopted in the most popular small EV in China, manufactured by Zhidou Electric Vehicle Co., as well as in the electric forklifts of Germany’s Jungheinrich AG.

To meet growing demand for lightweight EVs as the development and use of such vehicles advance, Advanced Softmaterials Inc. might offer a suitable product, according to Goji. The firm is engaged in the development of resin for use in the bodies of EVs with Toray Industries, Inc.

“We are planning to test-drive a concept EV equipped with the body utilizing the material when the Tokyo Olympic and Paralympic Games are held in 2020,” Goji said, adding that the mass production could start in 2022.

Further promoting innovation

Japan is ranked third among major countries in terms of research and development spending after the U.S. and China, according to a 2017 report by the Center for Research and Development Strategy, yet investment value in startups has been quite small compared to other countries. In North America, venture capital funds raised around ¥3.7 trillion ($34 billion) in 2016, while Europe raised about ¥663.9 billion ($6.1 billion) and Asia saw about ¥1.4 trillion ($13 billion), with China-focused funds accounting for 64 percent, according to figures released by Preqin Ltd. Japan raised approximately ¥276.3 billion the same year, according to Japan Venture Research.

Stepping out of the “go it alone” principle of closed innovation among large firms might be a key to further nourish the startup ecosystem. If they were to redistribute part of their R&D money to joint businesses with startups, including M&A, that could cause a rippling effect of innovation in Japan. Recently such a trend has been observed more and more.

In the past, state-of-the-art technologies and products developed by large corporations only to suit unique needs of Japanese customers were often ironically called “Galapagosized,” a term coined after the famous isolated island in the East Pacific that is home to unique animals. At that time the Japanese market by itself was big enough and rapidly growing, but it will not last forever due to a shrinking and aging population. Partnership with more flexible startups with eyes and ears to constantly changing needs of the global market would help avoid such “Galapagosization” in the future.

At the same time, according to Goji, Japan needs to take advantage of its uniquely challenging environment that caused “Galapagosization” in the past, to lead the world now. For example, in the field of autonomous driving, Japan’s unique road environment is offering developers, including startups, great opportunities to polish their technology to strengthen safety and create better products for practical use.

“Japan has many winding roads and lots of traffic lights, bringing cars to a stop many times,” Goji noted. If autonomous technologies have developed through adapting to such challenging circumstances and overcoming topographic difficulties, they can meet various traffic situations, paving the way for them to be used elsewhere in the world, he said.

Vulnerability of cyberspace

In a society where everything is connected in cyberspace, it means one intrusion can damage the whole system.

The increased connectivity in “Society 5.0” could mean that the world, including Japan, will be more prone to cyberattacks, but the vulnerability could be eliminated or greatly reduced if necessary measures are properly introduced.

The recent WannaCry ransomware attack hit companies and organizations worldwide, causing extensive damage in around 150 countries, according to media reports.

“The cyberattack hit through the internet, but it was minimized in Japan thanks to what can be deemed a firewall that was in place in many businesses,” said Toshio Nawa, executive director and senior security analyst at Cyber Defense Institute, Inc.

Here, a simple question comes up: “Why did Japan manage to minimize the damage from the cyberattack?”

One possible answer can be attributed to the fact that Japanese cybersecurity technologies are developed from the bottom up, rather than from the top down, according to Nawa.

In general, the management in many Western countries was highly interested in the introduction of cybersecurity measures as systems without them could badly affect their production lines or sales in the event of accidents, Nawa said.

Security from the bottom

Contrary to such a trend, in Japan cybersecurity technologies have developed through the needs of the gemba (the actual worksite) with the purpose of purely protecting their own systems. Japanese cybersecurity products have often been proprietary, leaving top-quality technologies long buried within small and medium-sized companies without having a chance to be globally recognized.

Such technologies were hardly a cash product, but this is no longer applicable for Japanese vendors now, as they are increasingly recognized domestically, as well as in the world.

Through the development of cybersecurity products, vendors acquired deep knowledge of the internal mechanisms of computer systems, leading them to create unique products with the focus on those detailed aspects, Nawa said.

Nawa noted FFRI, Inc.’s Yarai as such an example. The product eliminates threats before they begin with a patented precognitive defense. It has such features as static analysis and sandbox engines that monitor unusual programs at pre-execution.

According to the company, the product and its relevant systems have been introduced at public organizations and infrastructure providers, including Hanshin Expressway Company Ltd. and Tokyo’s Toshima Ward Office.

Nawa went on to introduce F.TRON Inc.’s INTΦ, a software that takes control of a computer, fully protecting the system. The product doesn’t allow malicious programs to execute since it boots up right after the computer powers up. It works in a memory space that the operating system can never access, according to the company.

He also mentioned Blue Planet-works, Inc.’s AppGuard, which has received high evaluations through many years of use at various U.S. government agencies. The product protects all systems connected to the internet from cyberattacks. Its unique platform prevents illegal behavior of malware in the early stages of attack and the violation of important systems, according to the company.

As a matter of fact, a recent international event showed increased attention on Japanese cybersecurity products. About 1,000 people visited the Japan Pavilion at the Interpol World 2017 global exhibition in Singapore in July, in which 10 companies from the Japan Network Security Association participated, including UBsecure, Inc. and Infosec Corp. The number of visitors was twice as large as their initial target of 500, implying growing attention on the Japanese technologies on the back of increasing need for high-quality services.

Further changes ahead

While Japan moves toward “Society 5.0” with the integration of the physical world and cyberspace in sight, the country has to undergo a big challenge surrounding its cyberspace. By 2025, metal cables, on which the familiar integrated services digital network (ISDN) is operated, will no longer be used. ISDN has been utilized in automated teller machines, building control systems, electronic data interchanges and other areas.

This means that everything must be transitioned to optical fiber, forcing industries to go through major evolution, creating “a huge change in the foundations of cyberspace of businesses,” Nawa pointed out.

Thus, Japan will stand in a unique position to completely renew the current networks at once. This gives the country a chance to learn from global best practices and implement them with a touch of their own knowledge of cybersecurity.

“These transitions would surely create further needs for secure and stable internet usage, leading to the development of more sophisticated and higher-quality services,” Nawa said.

Public-private cooperation

To further strengthen cybersecurity, public and private cooperation is essential to address the growing threats of cyberattacks. Japan has something that could contribute to the world.

The Cyber Clean Center project, which operated from 2006 through March 2011, showed great success in terms of public and private cooperation, even providing a benchmark for countries such as the U.K. and Singapore.

Led by the Ministry of Internal Affairs and Communications and the Ministry of Economy, Trade and Industry, the project promoted the removal of malicious bots. More than 80 internet service providers and relevant firms took part and coordinated to analyze bot characteristics, providing information on removal from computers.

‘Society 5.0’ at 2025 Expo

Japan will showcase the above mentioned “all Japan” efforts in realizing “Society 5.0” to the rest of the world during the Tokyo Olympics and Paralympics in 2020, and hopefully at the World Expo in Osaka, Kansai, in 2025, which is currently under the bidding process.

At the 2025 Expo, Japan aims to present what the country can offer in terms of solving global challenges, including those in health care, medical treatment, food, the environment and disaster prevention, on the artificial island of Yumeshima (Dream Island) in Osaka Prefecture.

Osakans are well known for their yatteminahare or “give it a try” attitude that signifies their spirit of trial and error.

“Jumping in with both feet and giving it a shot. That’s the important spirit Japan needs in realizing this ‘Society 5.0,'” the prime minister once noted, emphasizing that the area is suitable to host the international event.

The World Expo 2025 in Osaka is proposed to take place for 185 days from May 3 through Nov. 3, with the number of visitors expected to be about 28 million. Osaka successfully hosted Japan’s first expo in 1970, attracting more than 64 million visitors.

The host country will be selected at the General Assembly of the Bureau International des Expositions in November.

$/¥ exchange rates based on the 2016 Bank of Japan average (¥108.83/$)

“Society 5.0” pages are sponsored by the Government of Japan.

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