Japan's potential pool of unicorns has hit record levels, posing both opportunities and challenges for the nation's economy. According to a survey conducted by Nikkei, the number of promising startups valued at $1 billion or more has reached 14 this year, with companies like microlender Gojo & Co. successfully securing overseas funding. While this marks an increase from last year, it still falls far short of the Japanese government's goal to grow the total number of unicorns to 100.
Meanwhile, the long-established machine tool industry is also facing significant changes. Japanese manufacturers are attentive to the automotive sector's pivot to electric vehicles (EVs) as this shift alters customer needs across the industry. Notably, at the Japan International Machine Tool Fair held last November, visitors were captivated by Yamazaki Mazak's display of an EV platform, showcasing the industry's adaptation to this transformative trend.
Despite these upward trends, Japan's economy grapples with increasing dependency on foreign digital services, resulting in what analysts refer to as a digital services deficit. Over the past decade, the country's expenditures on digital services—from software subscriptions to cloud computing—have escalated alarmingly. The digital deficit, which stood at ¥2.1 trillion ($18.5 billion) back in 2014, has soared to ¥5.5 trillion ($47 billion) by 2023. This growing concern highlights Japan's reliance on tech giants like Google, Apple, and Amazon, with its firms handing over substantial portions of their revenues to these foreign providers.
An analyst at the Mitsubishi Research Institute stated, "Japan's tech industry has unfortunately become akin to modern-day tenant farming, progressively turning to overseas providers for digital services." This observation encapsulates the industry's alarming reliance on foreign technology and the motivations behind increased spending on international digital services.
Japan's internal struggles to rejuvenate its tech capabilities are evident as it loses competitive ground. Historically, the nation once led technological advancements with its operating systems and database management tools. Unfortunately, industry giants chose to tailor their products primarily for domestic clients, with little regard for the global market, thereby stifling potential innovation and expansion.
Meanwhile, the drop-off from its previous heights can be tied to decisions by major Japanese tech firms to abandon innovative pursuits. Instead of creating proprietary cloud services, these companies opted to focus on system integration and customization. They invested substantial resources for projects aimed at fulfilling specific client requests, leading to mammoth contracts but at the expense of tech innovation.
The low level of IT and digital literacy among corporate executives poses additional difficulties for the sector. Many organizational leaders follow the guidance of consultants without fully grasping the broader technological transformation happening around them, resulting in wasted resources and unfulfilled potential. Ichishi Tatsuya, a senior director at Gartner Japan, succinctly said, "Tech just doesn’t offer much allure to members of the younger generations," indicating the need for the sector to rebrand itself to attract fresh talent.
To counter these trends, Japan must adopt strategies conducive to revitalizing its digital economy. This includes loosening traditional employment constraints to allow talented tech workers to flow from large corporations to innovative startups. Advancing collaboration between service providers and clients, rather than continuation of outdated system integration models, could pave the way for fresh, innovative ventures.
Bringing compensation for tech workers up to par with global standards is another imperative. The Japanese government aims to double average annual salaries for tech professionals from ¥6 million to ¥12 million by 2025, recognizing the need for competitive wages to attract and retain skilled developers. Improved remuneration has already started to catch the attention of skilled workers, with many positions now offering over ¥10 million annually; yet the path to achieving competitive pay remains lengthy.
Japan must enact serious reforms to establish its tech industry as not merely functional but vibrant and appealing. By nurturing startups and empowering young talent, Japan can achieve the digital transformation necessary for sustained economic progress. Without this shift, the nation's reliance on foreign tech will deepen, and Japan will continue stumbling behind other advanced economies.
