Why Japan finds it so hard to digitally transform

This article originally appeared in issue 32 of IT Pro 20/20, available here. To sign up to receive each new issue in your inbox, click here

Japanese culture is a hugely successful national export, working its way across the world thanks to the nation’s rich history, heritage, and cuisine – all married with technological supremacy. When picturing Japan, you might imagine a high-tech country where bullet trains zip across the countryside and into cities powered by futuristic systems.

Not all is what meets the eye, however. Japan has, surprisingly, been lagging behind in digital transformation for decades. A quarter of firms hold off digital transformation, while 9% shun it completely, according to Forrester. This is higher than other comparable countries, applying to just 2% of businesses in Malaysia and 1% in Indonesia. Moreover, just 39% of decision makers surveyed said their firm is engaging in digital transformation.

This may come as a shock, especially considering the global prominence of tech giants like Sony, Toshiba, or Fujitsu. Domestically, however, it’s a different story, with a sluggish approach to digitisation typified by the continued use of fax machines and floppy disks, underpinned by a cultural lethargy towards change at the heart of government.

Fax to the future

Most Japanese offices still use fax machines and, until two years ago, it was rather common to expect organisations to answer any questions through faxes, says Parissa Haghirian, professor of international management at Sophia University, Tokyo. Another tradition still in use is the hanko, or personal stamp, whereby, before COVID-19, almost every document had to be stamped instead of signed.

Online banking, meanwhile, was introduced almost a decade later than in many other countries, underlines Haghirian. “From what I know many banks still don’t have apps. Most Japanese [citizens] still use a small bank book if they need an overview on their spending,” she explains, pointing out that online banking records at Mizuho Bank are only available for the last three months.

The hanko stamp was still in widespread use before COVID-19

There are a number of reasons change is so slow, she says. Japanese workers don’t change jobs very often, meaning you won’t find many changing internal processes based on experience from their previous firm, so things stay as they are. There aren’t enough IT professionals, either, due to a labour shortage. This means companies begin developing their own platforms with employees who don’t have the right skills or background. There’s also little outsourcing to technology firms, meaning such companies don’t spread teachings across the wider business landscape, nor train employees in using specific software.

On top of this, Japan is grappling with a demographic challenge that underlines a wider reluctance to change. Its society is the oldest in the world, with people aged 65 or older numbering 36.21 million in 2021 – a record-high 28.9% of the population. By contrast, it’s 2020 figure (28.6%) was far higher than the likes of the US (16.6%), Sweden (20.3%), France (20.8%) or Germany (21.7%).

“The decision makers are old and they have no other experience than one firm,” adds Haghirian. “If something new comes up, they often cannot understand why this is necessary, and disapprove of change.”

Many customers are elderly, too, and Haghirian believes they aren’t comfortable using new systems or apps. They also have the time to physically travel into city offices and banks during the week, rather than rely on online services.

Haghirian believes it will be difficult for the Japanese government to move away from using outdated technologies, especially since – even in government – the right people aren’t in charge. She explains, in the past, individuals have been appointed as the cyber security minister but without the right expertise in the field. Meanwhile, many key responsibilities are devolved to regional governments, which makes coordination more difficult.

Market influences, on the other hand, are more effective. When Chinese tourists in Japan started using cashless payment services, for example, Japanese companies realised they were missing out on a big market, explains Haghirian. This led to SoftBank and Yahoo Japan starting a joint venture called PayPay, which now provides cashless payment services.

As for whether the government successfully digitally transform public services, she thinks Japan needs an overall long-term strategy for the whole country, managed and implemented by IT professionals, “not some Japanese grandfathers”. “Paternalistic decision-making structures, and the belief that anyone can do the job, are the biggest problems,” she explains. “Not only in the government, but also in many big Japanese firms.”

Let’s get digital

This paternalistic tradition is a major impediment that makes it difficult to get rid of outdated technology, agrees Jun Mukoyama, visiting senior research fellow at the Asia Pacific Initiative. Standards are set by the most senior participants in an organisation, who prefer a ‘business as usual’ approach to adopting new technologies. She adds the risk-averse and inerrant nature of government officials slows the change too.

The Japanese government’s failure to use digital technology in response to the pandemic sparked criticism in Japan. Mukoyama explains it took months to deliver cash grants to citizens, and the government couldn’t capture real-time patient data since hospitals and health centres use telephones and fax machines to communicate. This was much unlike the experience in countries like the UK, in which digital transformation actually accelerated.

“The shock of such a ‘defeat in the digital war’ has led it to establish the Digital Agency in September 2021. It has been a year since its inception, and the government is making gradual progress,” says Mukoyama.

Recently, the new digital minister Taro Kono declared a war on floppy disks. This was because a government committee discovered around 1,900 areas in which businesses are required to use storage media like floppy disks when making applications, or holding data.

The digital minister Taro Kano (pictured) has declared a war on floppy disks

This issue came to light as part of the committee’s broader aim to audit the nation’s processes, explains Mukoyama. It’s been working on evaluating around 60,000 laws, orders, circulars, guidelines, and administrative procedures to check whether “analogue procedures”, like requiring floppy disks for specific processes or conducting a process in-person when it can be done online are still in place.

The nation’s Digital Agency is hoping to introduce a bill to revise all such regulations in 2023, while guidelines and orders that don’t require a legal amendment will be revised within 2022.

Over the past year, it’s focused on laying the groundwork for digital transformation in government, says Mukoyoma. It’s cleaning up fragmented or non-standardised data, for instance, to create proper base registries which will act as a reliable source of information on data points like people, companies and locations. It’s also created inter-ministerial roadmaps to plan for the years ahead, and handed out My Number Cards, which is part of the social security and tax number system. Mukoyoma hopes digital transformation will be implemented more smoothly in the coming years, with this groundwork meaning companies and municipal governments have fewer obstacles.

Change begins at home

In 2018, Japan’s government realised it needed to transform digitally, which is why it introduced a paper on digital transformation which warns of the ‘Digital Cliff 2025’, says Tsuneo Fujiwara, vice president and Gartner fellow with the CIO Research team. Reaching the Digital Cliff means the country could suffer an economic loss of up to ¥12 trillion (roughly £71.6 billion) per year if it can’t digitally transform.

There are a number of challenges that needed to be overcome, he says. The Ministry of Economy and Trade (METI), for example, was concerned about the combination of an ageing population and the insufficient availability of IT talent.

Japan’s leadership around digital transformation is also fragmented. One of the most outspoken pro-digitisation prime ministers was Yoshihide Suga of the Liberal Democrat party. He was elected in September 2020, and created the Digital Agency, but resigned just a year later after struggling to contain COVID-19. The first head of the digital ministry, Yoko Ishikura, was also forced to resign. Beyond this, it appears other ministries often ignored the Digital Agency’s recommendations on how to digitise internal processes.

The government’s track record is poor, says Fujiwara. He thinks, however, the leadership is there with Digital Agency chief Taro Kano. He underlines that METI, too, has, been a serious and continuous force in pushing the digital transformation agenda.

The government's record is poor, but there are signs of optimism for the future

The ministry, for example, has published a digital governance code, which encourages companies to kickstart digital transformation projects. If companies show they have adhered to the code, they can apply for special recognition, with certified businesses able to use a prestigious logo in their marketing to show they’ve embraced modernity.

“You have these incentive programmes to get companies to transform which will, in turn, transform the citizens,” believes Fujiwara, adding these schemes, combined with consistent leadership in the Digital Agency, should be incentive enough to get people – including the government – to digitalise.

Like in any country, digital transformation will help modernise Japan, he continues. It could also once again spark a culture of innovation the nation has lacked for the last 30 years. He says Japan was highly innovative after WW2, but has, in recent decades only been making incremental improvements to existing processes rather than implementing new ideas. From a cultural perspective, he believes introducing digital transformation could be a breath of fresh air for the country, and set it back on the right path.

Japan is running out of time. Although the country’s making encouraging steps, it continues to face an ageing population, leaders who refuse to embrace change, and public services in desperate need of modernisation. Failing to get a grip was devastating during COVID-19, and might lead Japan to the digital cliff-edge by 2025. This need to digitise, however, will only become more urgent and challenging the longer it takes, with Japan’s leadership charged with fundamentally transforming business culture alongside, simply, the tools and systems organisations use.