Japan Frets Over Its 'Digital Deficit'

Digitalization is also seen as a way to better prepare for and respond to natural disasters, which are frequent in Japan; to deal with the rising environmental burden of waste disposal; and to improve health care.

All of these issues are made more urgent by Japan's declining population and steadily worsening shortage of labor.

In addition, as digitalization proceeds, so does the need for cyber security. To meet this challenge, the Japanese government plans to increase the number of certified information security specialists from 20,000 to 50,000 by the end of the decade. In doing so, it wants to ensure that the specialists' expertise is available to small and medium-sized enterprises – not just major corporations – and to government offices at the regional and local as well as the national level.

There is also a problem combining obsolete and inadequate corporate computing systems with the looming retirement of most of the employees charged with keeping them running. This is being called the“2025 digital cliff.” Japan's Ministry of Economy, Trade and Industry (METI) estimates potential losses at ¥12 trillion ($75 billion).

For the most part, this is a risk faced by smaller companies that lack the resources to hire or train IT experts or to pay for the digital systems and services they require. Japan's large multinational companies do not have this problem. NEC and Hitachi are two prominent examples of companies that are ahead of the Digital Agency and METI in this regard.

NEC, Japan's largest provider of telecommunications equipment and social infrastructure software and services, bases its long-term growth strategy on the transition from 5G to 6G, digital government, smart cities and digital finance. It works with Amazon Web Services and Microsoft Azure cloud computing. NEC also provides the facial recognition systems used at Japanese and some foreign airports.

Hitachi, Japan's largest industrial conglomerate, now gets nearly 30% of its sales from the digital transformations in national and local government, finance, telecommunications and media, energy, transport and logistics, healthcare and, of course, manufacturing.

This was accomplished in large part through the acquisition of US digital engineering services company GlobalLogic for $9.6 billion in 2021. GlobalLogic, which is now growing at a rate of more than 15% per year, is forecast to provide 22% of Hitachi's consolidated revenue this fiscal year.

These and other Japanese companies are pursuing digitalization in cooperation, not competition, with US companies, and the digital deficit is partially offset by direct foreign investment. Amazon has built numerous logistics centers in Japan, while Google and Microsoft build data centers.

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Another example: KDDI, Japan's second ranking mobile telecom carrier, is in discussions with US server provider Supermicro to acquire space in Japan for a large new data center using Nvidia AI processors.

Taro Kono, Japan's minister for digital transformation, told reporters last week that the key metric is“how many of the [digital] systems and programs that everyone uses are made in Japan.”

In terms of the Digital Agency's efforts to improve productivity and overcome the labor shortage, that may be true, but from an overall economic perspective it is not. In 2023, Japan's overall trade surplus with the US (in both goods and services) was $63 billion, or more than 10 times its digital deficit, which is mostly with the US. The two countries have a complementary trade relationship based on comparative advantage.

In contrast, China is building its own, increasingly autonomous digital economy. Japan has no corporate equivalents of Alibaba, Baidu or Huawei, but as things stand now, it doesn't need them. Follow this writer on
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