“Digital deficit” has become a buzzword in Japan, where the annual balance of payments deficit in digital services has doubled over the past five years to about 5.5 trillion yen ($34 billion) and imports of artificial intelligence processors have gone through the roof. Amazon, Apple, Facebook, Google and Microsoft dominate Internet-based businesses, while Nvidia and other foreign companies supply Japan with advanced computing-related logic integrated circuits.
Digital services include e-commerce, online advertising, social media, generative artificial intelligence, email, search and other Internet services, smartphones, computer operating systems, application software, subscriptions, cloud computing, data storage, and related consulting services.
Recent market research data shows high market shares for
- Amazon in e-commerce (48.6%) versus the Japanese company Rakuten (32.4%);
- Apple in mobile phones (60.2%) versus Samsung (7.5%) and Sony (4.6%);
- Microsoft Windows (43.3%) vs. Apple iOS (23.8%) and Google Android (16.3%); And
- Google Search (78%) vs. Microsoft Bing (11%) and Yahoo! Research (10%).
Rakuten is the only Japanese company with a significant presence in these markets and has lost share to Amazon.
Japan’s digital deficit is almost identical to the overall deficit in trade in goods and services, which reached 6.0 trillion yen in the fiscal year ending March 2024. This deficit has grown larger than domestic tourism revenues, which rose significantly due to the end of the coronavirus. The epidemic and the depreciation of the yen.
In an attempt to rectify this situation, the Japan Digital Agency has come up with a “Detailed Priority Policy Program for Realizing the Digital Society.” The program aims to enhance the use of data along with generative artificial intelligence and other digital technologies in order to strengthen the country’s industrial base and reverse the decline in worker productivity.
The agency also wants to raise the currently low level of satisfaction with government digital services, including My Number identification, by making them more convenient and reliable.
Digitization is also seen as a way to better prepare for and respond to natural disasters that are common in Japan; To deal with the increasing environmental burden of waste disposal; and improving health care.
All of these issues have become more urgent due to Japan’s declining population and worsening labor shortages.
In addition, as digitalization advances, the need for cybersecurity is increasing. To meet this challenge, the Japanese government plans to increase the number of certified information security professionals from 20,000 to 50,000 by the end of the decade. In doing so, it wants to ensure that the expertise of specialists is available to small and medium-sized enterprises – not just large companies – and to government offices at the regional and local level as well as at the national level.
There is also the problem of the combination of outdated and inadequate computing systems in companies and the imminent retirement of most of the employees charged with keeping them running. This is called the “digital cliff of 2025”. The Japanese Ministry of Economy, Trade and Industry estimates potential losses at about 12 trillion yen (75 billion US dollars).
Most often, this is a risk faced by small businesses that lack the resources to hire or train IT experts or to pay for the digital systems and services they need. Large Japanese multinational companies do not suffer from this problem. NEC and Hitachi are two notable 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 for cloud computing. NEC also provides facial recognition systems used in Japanese and some foreign airports.
Hitachi, Japan’s largest industrial group, now gets nearly 30% of its sales from digital transformations in national and local government, finance, telecommunications and media, energy, transportation and logistics, healthcare and, of course, manufacturing.
This was largely achieved 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% annually, is expected to provide 22% of Hitachi’s consolidated revenue this year. fiscal year.
These and other Japanese companies are pursuing digital transformation in cooperation, not competition, with American companies, and the digital deficit is partly offset by foreign direct investment. Amazon has built several logistics centers in Japan, while Google and Microsoft have built data centers.
Another example: KDDI, Japan’s second-largest mobile carrier, is in discussions with US server provider Supermicro to acquire space in Japan for a new large data center using Nvidia AI processors.
Taro Kono, Japan’s digital transformation minister, told reporters last week that a key metric is “how many people… [digital] The systems and software everyone uses are made in Japan.
Regarding the digital agency’s efforts to improve productivity and overcome labor shortages, this may be true, but from a macroeconomic perspective it is not. In 2023, Japan’s overall trade surplus with the United States (in goods and services) is $63 billion, or more than ten times its digital deficit, most of which is with the United States. The two countries have a complementary trade relationship based on comparative advantage.
In contrast, China is building its own increasingly autonomous digital economy. Japan doesn’t have the equivalent of Alibaba, Baidu, or Huawei, but as it stands, it doesn’t need them. Follow this writer on X: @ScottFo83517667