• Japan aspires to become a technology leader in the digital economy despite having one of the least digitised government systems among developed economies. 
  • The IMF wrote that Japan’s digitalisation efforts “can add momentum to its economic rebound post-pandemic”.
  • “Japan has tried to digitise many times before, but this time the pandemic has provided a real push, particularly in digital services related to Covid testing,” says IMF economist Rui Xu.
  • However, the country's ageing population may slow down the country's effort to digitise its economy and society. 

In the 21st century, Japan possesses two digital reputations: it is known as both the innovator and the laggard.

Back in the 1980s, Japan was a world leader in memory chips, with a few companies dominating the market, before being overtaken by the US with the arrival of logic chips. Now, it aspires to get back in the race, despite having one of the least digitised government systems among developed economies.


In November, the government unveiled a new chip company called Rapidus. Backed by a consortium of eight major Japanese companies, it is slated to mass produce cutting-edge two nanometre logic chips over the latter half of the 2020s. These are semiconductors that process data and are vital in sectors such as 5G communications, artificial intelligence (AI), green energy and quantum computing. 

New economy, new society

Yasutoshi Nishimura, Japan’s minister of the economy, trade and industry (METI), told reporters that this is “an extremely important technology from the viewpoints of creating a new economy and society”, as well as ensuring “economic security” amid the intensifying US–China rivalry. 

The Rapidus deal coincides with a broader push from the Japanese government to protect critical infrastructure and supply chains following the passing of its economic security bill earlier this year. Despite not being at the forefront of chip production, it is still a notable player in the global chip supply chain, with a share of more than 30% of semiconductor manufacturing equipment and 50% of semiconductor materials, according to US government statistics. 

At the same time, the country is getting serious about digitisation. In September 2021, the government set up the Digital Agency, which aims to strengthen Japan’s digitalisation and coordinate between national governments, local governments and business interests. In a report earlier this year, the IMF wrote that Japan’s digitalisation efforts “can add momentum to its economic rebound post-pandemic”.

Arthur Mitchell, senior advisor at law firm White & Case in Tokyo, says that “Japan is reforming”, citing that METI’s pursuit of economic security and the digitisation of Japan are both “positive for foreign direct investment (FDI)” flows into the country. On top of that, the depreciation of the yen can only help, he says.


FDI has already been flowing into digital technology in Japan. A record estimated capital expenditure of $2.4bn went into ICT and internet infrastructure in Japan in 2021, according to fDi Markets — up from a yearly average of $663m in the 2010s. 

Alongside major Japanese companies of the likes of Toyota, NTT, Sony and NEC, US IT giant IBM is set to partner with Rapidus, according to the Financial Times. IBM declined to comment further. The government is set to give Y70bn ($504m) in research and development (R&D) subsidies to establish the manufacturing base. 

Foreign and domestic

Dexter Thillien, lead technology and telecoms analyst at the Economist Intelligence Unit, says we should expect more deals like Rapidus which involve foreign and domestic players. Foreign investment in chips and data centres, he says, will “not just come from the US, but also from other allies such as Europe and other Asian countries”. 

Last November, Taiwanese chip giant TMSC announced a $7bn factory in southern Japan, in partnership with Sony, on which construction has already begun. Production is due to begin by the end of 2024, although this is to make legacy, rather than cutting-edge, chips.

Meanwhile, Tokyo and its surroundings have become something of a hot spot for data centres. Equinix announced an investment of $115m in a data centre in November, following Google’s annoucement in October that it will establish its first data centre in Chiba in 2023, as part of its $730m infrastructure investment in Japan. Last year, Princeton Digital Group invested $1bn in a data centre in Tokyo. 

According to the independent research firm Structure Research, Tokyo’s data centre colocation is set to grow by 9.2% compound annual growth rate between 2021 and 2026, with the hyperscale and retail data centre markets projected to be worth a total of $3.4bn by 2026.

Piyaporn Sodsriwiboon, an economist at the IMF, says that “digitisation can be used to leverage foreign investment”, but she warns that this should be complemented by other reforms, namely in improving the business environment, simplification of FDI processing and R&D investment.

Post-pandemic growth

In a recent report, the IMF points out that the impact of the Covid-19 pandemic has also forced the acceptance of technology in a country that has been slow to digitise.

“The pandemic underscored Japan’s uneven embrace of technology,” the report reads. “Even though it’s one of the world’s biggest users of industrial robots and home of a major electronics industry, it still lags other economies in the adoption of digitalisation by businesses — for example, continued reliance on legacy IT systems — government and the financial sector.”

Rui Xu, another IMF economist, says that the pandemic was a “wake-up call” for Japan as it emerged from the pandemic, even if an ageing population undoubtedly changes the nature of digital transformation.

“Japan has tried to digitise many times before, but this time the pandemic has provided a real push, particularly in digital services related to Covid testing,” she says. “But as Japan’s society is much older, the government is very cautious about moving digitisation along [and] leaving behind their senior citizens.”

Part of the government’s plan for societal transformation is Society 5.0 — harnessing AI, big tech, robotics and the Internet of Things (IoT) to address the country’s falling birth rate and ageing population. Elsewhere, METI wants to double the IoT market from $500m in 2020 to $1tn by 2030.

But the country’s demographic woes are not getting any easier. As of January 1, 2022, Japan’s population had fallen by some 726,000 to 125.9 million — its sharpest drop in both absolute number and as a percentage since records began in the 1950s, according to government data. 

Reflecting on the Japanese government’s ambitions, Mr Mitchell points out that “there are macro-determinants that you cannot ignore, such the declining population and a small talent pool”. Based on government data, Japan will have a shortage of 270,000 AI and IoT posts by 2030, according to Nikkei. 

All things considered, 21st century Japan looks likely to remain in the shadow of its former glory.

“It is a mixed picture. Japan is likely to continue to dominate the supply of materials used in semiconductors, but many observers here believe it is unlikely that Japan is going to repeat the big splash it made in the 1980s with memory chips with logic chips,” Mr Mitchell says.

“It’s very hard to make radical changes to catch up with leading companies,” he stresses.

This article first appeared in the December 2022/January 2023 print edition of fDi Intelligence. View a digital edition of the magazine here.