Japan sets its sights on a software revolution
World in Motion – Global equities blog

Japan sets its sights on a software revolution

Japan has a reputation for being a technological powerhouse. Whether in consumer electronics, robotics or infrastructure, it has developed world-leading hardware products. However, when it comes to software the country has fallen well behind the rest of the world. According to Gartner1 , Japan is seven years behind the US in the adoption of cloud computing technology. It predicts that by 2022 14% of US IT spending will be on cloud services. In comparison, the level for Japan will rise to just 4.4%, up from 3% in 2019. In addition, the IMD World Competitiveness Ranking (2020) put Japan 27 in digital competitiveness2 ; in 2018, penetration of software-as-a-service (SaaS) products against the overall accounting and HR software market was just 14% in Japan versus more than 50% in the US3 ; and in 2019 spending on customer experience and relationship management (CRM) software was three times higher in the UK and five times higher in the US than in Japan as a percentage of overall sales and marketing expenses.4
Why is a country that is so technologically advanced in one area, so behind in another? Regulatory red tape hasn’t helped the adoption of software. But there are also cultural barriers: shūshin koyō, or lifetime employment, has historically been a central feature of Japan’s labour market. With many large companies traditionally employing engineers responsible for developing and maintaining customised IT systems, they were reluctant to replace these systems with newer technologies, such as cloud computing, especially if that meant existing workers would be left redundant.

Times are changing

However, it has become increasingly clear that Japan needs to embrace the use of innovative software solutions. Companies can get better results by using fewer resources and spending less time and money developing software internally. Effective use of software can give a company an advantage over its competitors, and those that fall behind may find it difficult to catch up. Cosmetics company Shiseido5 , for example, uses software to collect, monitor and review sales data on a daily basis, which in turn enables it to better allocate sales and marketing expenses, manage its supply chain more efficiently and develop new products that meet customer needs.
Meanwhile, at a macroeconomic level Japan suffers from severe labour shortages. Many companies are struggling to find the talent needed to grow or even run their businesses. Companies need to change how they operate and are turning to software for solutions.
Improved corporate governance has helped Japanese companies understand the benefits of changing their business practices, including adopting new technologies, to enhance their value. The government now also recognises the need for Japan to change. In his inaugural speech as prime minister, Yoshihide Suga spoke of “the necessity of digital transformation”6 and announced the establishment of a digital agency to drive change.

Change brings opportunity

Corporate Japan is now leading this charge. For example, HR technology and marketing media company Recruit is developing a set of software tools to help small and medium businesses digitise their operations. Its Air BusinessTools, a suite of SaaS-based solutions for business and management support, range from cashless payment support to online reception and waiting list management. The idea is to allow companies to devote fewer resources to back-office related work and more to their core operations, enhancing productivity and profitability.
But it’s not just large companies that are looking to profit from Japan’s need to embrace digital transformation. The convergence of technological enablement and social need catalysed the establishment of a host of young, dynamic SaaS companies led by visionary founders that want to use software to solve the problems facing Japan today. To name a few, cloud native ERP provider Freee formed in 2012 and listed in 2019, no-code mobile app development company Yappli was founded in 2013 and listed in 2020, and real estate AI tech company SRE was established in 2014 and also listed in 2020.

A new sun rises

Japan was slow to embrace digitalisation, but now wants to catch up. It has the tools to do so, as well as the political and social determination. Digitalisation can help transform Japan’s economic and corporate landscape, helping to alleviate labour shortages, boost productivity and economic growth, and improve corporate competitiveness and profitability.
But this digitalisation is still at a very early stage. This will inevitably give rise to many long-term investment opportunities. As always, we will be looking to invest in great, innovative companies that will be the long-term winners as the country continues to evolve. We believe it is an exciting time to invest in Japan.

Like this blogpost? For an extended viewpoint version with additional data and more detailed discussion click here: Japan’s software revolution is making up for lost time.

1 July 2021
Alex Lee
Portfolio Manager
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July 2021
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1 https://www.gartner.com/smarterwithgartner/cloud-adoption-where-does-your-country-rank/
2 https://www.mckinsey.com/business-functions/mckinsey-digital/our-insights/how-japan-can-make-digital-big-moves-to-drive-growth-and-productivity#
3 https://contents.xj-storage.jp/xcontents/AS08692/18254c56/ab7b/4311/820c/f70b08bcd8e1/20200214211939176s.pdf
4 https://ssl4.eir-parts.net/doc/4165/tdnet/1934539/00.pdf
5 Mention of specific companies should not be taken as recommendation
6 https://japan.kantei.go.jp/99_suga/statement/202009/_00001.html

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