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When Japan was hit by the mega-earthquake on March 11, 2011, people struggled to get in touch with their families and friends to see if they were safe, as use of voice networks was restricted and email exchanges were delayed.

That was what prompted the birth of the Line messaging app — to provide a simple communication tool that could be a hotline in an emergency. The service kicked off on June 23 that year.

A decade on, Line has morphed into a piece of communications infrastructure in the country with 86 million active users in Japan, while a government survey showed 87% of respondents use the app for communication. The app has even expanded its services to e-commerce, finance and health care, dominating the domestic market.

As a result, it came as a shock to users, especially those in the public sector, when concerns over the operator’s handling of user data and sensitive information recently came to light. And it may affect the business strategy of Yahoo Japan operator Z Holdings Corp., which recently merged with Line Corp. to become a tech behemoth under the SoftBank group, analysts say.

“I think the impact is tremendous,” said Togo Masubuchi, an analyst at Kyokuto Securities Research Institute. “Some local municipalities have reportedly stopped using Line. I believe others will follow suit.”

The Asahi Shimbun first reported that Line users’ personal information stored on servers in Japan was accessible to engineers at a Chinese firm to which Line outsources work. Concerns were raised that Beijing may have access to the data based on its national security law that came into effect in 2017.

The legislation requires companies to store their data within the country and also mandates their cooperation with the country’s security apparatus, giving them access to users’ data. Line also said it was storing data including images, videos and transactions using Line Pay on servers in South Korea.

Last week, Line apologized for not giving users a clearer explanation of how their data was handled and in which countries, saying it no longer allows access to users’ information and data from China and will also move data from South Korea to Japan. In addition, the company denied that there had been inappropriate access or leaks of user data.

Line will have to shoulder the extra cost of moving sensitive data to Japan from South Korea, while managing data mainly in Japan could hinder cross-border collaboration between engineers, slowing down the development of products and technologies.

The data management scandal was exposed at an inopportune time, as Line was just embarking on its next chapter after the completion of the merger with Z Holdings on March 1.

Taking advantage of each other’s technology and assets, the beefed-up Z Holdings was supposed to be readying for further growth, eyeing ¥2 trillion in sales — double the figure it reported in fiscal 2019 — and an operating profit of ¥225 billion in fiscal 2023. It also plans to invest ¥500 billion in the next five years.

Line Corp. CEO Takeshi Idezawa leaves a news conference on March 23 in Tokyo. The messaging app operator said it has blocked access to private information from its Chinese affiliate. | KYODO
Line Corp. CEO Takeshi Idezawa leaves a news conference on March 23 in Tokyo. The messaging app operator said it has blocked access to private information from its Chinese affiliate. | KYODO

But more importantly, the revelation has caused upheaval, especially within the public sector.

In recent years, many local governments have teamed up with Line to improve their administrative services, while even the central government has made use of the messaging app. Last year, the government conducted surveys via Line to check on people’s health amid the pandemic.

Many of them have now halted services using the app, however, damaging its credibility. And if the trend continues, it will be a blow to the business plans of Line as well as Z Holdings.

Through the merger, Z Holdings is planning to facilitate the digital transformation of the public sector. But Masubuchi said the damaged trust will likely derail the strategy.

The fact that Line was working with numerous public entities proved that it had earned a high level of trust, which in turn solidified the Line brand.

Although Line has cut access from China and will transfer its data to Japan, “I don’t think local municipalities will really rely on Line again for their services,” he said.

The firm had said about 200 local municipalities were planning to accept reservations for COVID-19 vaccinations through Line. But some mayors have reportedly said they will not use Line until the concerns are allayed.

Chief Cabinet Secretary Katsunobu Kato said Monday that municipalities can use Line for vaccine reservations, since Line will store all the related data in Japan. Kato also said Japan will draft guidelines for the administrative use of Line.

With the app practically becoming a key piece of infrastructure, it’s unlikely that Line will lose a significant chunk of users in the immediate future, simply because there is no alternative of comparable scale to replace it, other analysts say.

“It is not realistic for users to switch to other communication tools. So, I think the risk of losing users is not imminent at this point,” said an analyst who wished to remain anonymous.

Although the public sector has raised concerns, it will probably continue to use Line once they have been dealt with, as there is no alternative tool to reach more than 80 million people, the analyst said.

As long as Line maintains its user base, it won’t really affect the business strategy of Z Holdings, the analyst said.

“The biggest point is that there is no alternative. If there was something else and distrust grew more among users, the outlook would not be so bright. But since there isn’t, people have no choice but to keep using it.”

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