The Urgency of Digital Transformation in Japan Part 1

DIGITAL TRANSFORMATION, ALSO CALLED DX IN JAPAN, IS A HUGE TOPIC THESE DAYS. TO START THIS INTERVIEW OFF, CAN YOU EXPLAIN A BIT ABOUT WHERE JAPAN IS IN TERMS OF DIGITAL TRANSFORMATION?

Yes, I’d love to. This is a very big topic, so to gain a better understanding about DX in Japan, we have to look at the history of digital transformation in Japan. The Japanese government actually put out the initial initiatives to make changes and set up the structure for digital transformation back in 2000. Since then Japan has been trying for over 20 years to enact these necessary changes. 

20 years ago Japan was well positioned to become a global digital leader. They had the second fastest internet speed on the planet and an early shift to broadband internet with a high individual usage rate. However, during that time, a lot of Japanese traditional work processes slowed that process down. 

So right now we have the odd situation that the private sector is waiting for government guidance and the public sector is waiting for private sector readiness. This led to Japan becoming a digital transformation laggard instead of a leader over the past 20 years.

BUT ISN’T JAPAN ONE OF THE MOST TECHNOLOGICALLY ADVANCED COUNTRIES?

Yes and no. A lot of people have this image of Japan being this technologically advanced nation with bullet trains and robots you can interact with in day to day life. And this is correct in hardware, in tangible items.

Japan has this tradition where most engineers want to work in hardware and we also have a strong manufacturing culture here monozukuri as well as a general understanding in society that making things is good.

So there haven’t been much initiatives in human machine interfaces HMIs, the more intangible items and software. And that’s why Japan is a bit behind when it comes to frontend development and design. That’s also why there hasn’t been enough adoption of the overall digital services. 

CAN YOU EXPLAIN IN MORE DETAIL WHY THIS IS SO IMPORTANT FOR JAPAN’S ECONOMY?

Let’s take a macro economic perspective on why this is important. Japan is still the third largest economy in the world. It has the third largest GDP. However in contrast to the US or China, Japan’s GDP is actually stagnant. If you look at what makes the GDP, we look at the productivity of the average person, the GDP per capita and the total population. In other words, what is the average person’s contribution to the economy.

In Japan the GDP per capita has been at around $40,000 for the past 20 years. In contrast, the US was a bit lower 20 years ago at around $35,000, but this has shot up to $65,000 over the past 20 years. Other Asian economies like China or Singapore have also seen growth whereas Japan has been stagnant.

Another factor is the declining workforce. This has been well documented and I won’t get into too many details but a third of Japan’s population is 65 and older and Japan’s population is declining since 2011 when it peaked at 127 million. It is expected to shrink to 107 million in 2040 and to 97 million in 2050.

So if you have both stagnant productivity and a declining population, it will lead to a drop in GDP. That’s why Japan needs digital transformation to increase productivity in order to keep a high GDP.

SO, HOW DIGITALLY COMPETITIVE IS JAPAN TODAY? 

Let’s say there’s a great opportunity to catch up (laughs).

Looking at the figures, Japan ranks 27th in terms of digital competencies among the OECD countries. In terms of digital workers, it ranks 22nd in the world. But in terms of ability to engage in agile business practices, which is also a measure of adoption of IT, it ranks 57th in the world. You can see that Japan ranks very low for many factors that influence its digital competency. A lot of these issues com down to Japan’s work processes being so slow. 

THAT IS ACTUALLY MUCH LOWER THAN I THOUGHT. CAN YOU TELL US A BIT MORE ABOUT THE SLOW WORK PROCESSES? 

We know anecdotally that Japanese people work very long hours. There is this culture of hard work equating team participation and the longer you spend in the office working with your team, the better a team player you are. Any middle manager who hasn’t been trained on how to measure overall effectiveness and productivity will look at participation as an important metric. So, if Tanaka san for example is going home early before everyone else every night, the manager will probably ask him what’s going on.

This is in sharp contrast to cultures that put productivity first. In some of those cultures, the US for example, if Tanaka san is going home early every night, because he finishes all his work, he would be looked on as a hero. Everyone would be impressed by how effective he is, as long as he hits his targets and KPIs. So it’s a matter of setting KPIs and giving middle management the tools to understand and measure productivity in order to see what makes a “good worker”. Measuring an employee’s work performance simply by how much time he or she spends at work is outdated and has many negative effects.

This ties to another cultural issue. The average Japanese company doesn’t look at productivity and competitiveness in the market because their focus lies on maintaining longevity. This covers corporations as well as family run businesses. Current management believes that the organization will outlast them and so they always look at maximizing stakeholder value in contrast to a focus on maximizing shareholder value in markets like the US.

Stakeholder value includes everyone in the company and their families as well business partners, customers and greater society. This means they value stability to a large extent and this focus on stability has led to Japan being behind in digital transformation. Why would you change business practices or processes that have worked well for decades?

CAN THIS ALSO BE CONNECTED TO JAPAN’S TENDENCY TO RISK AVOIDANCE?

I’m glad you brought that up. Because I don’t believe that’s correct. International observers of Japan often bring up the tendency towards risk avoidance whereas in reality it is an uncertainty avoidance. The reason uncertainty avoidance is so important in Japan is because of its geographical nature. Japan is a country with a lot of national disasters like typhoons, earthquakes, tsunamis, volcanos etc. You can’t change that but what you can do is to make contingencies to have backup plans when things go wrong. That’s probably a strong indicator for why Japanese culture is so focused on processes, plans and backup plans. They are trying to remove the uncertainty by thinking ahead and having a clear set of steps to follow.

So thinking about uncertainty avoidance is more important than risk avoidance. If you look at Geert Hofstede’s research into cultural dimensions, you can see that Japan scores 92 on the Uncertainty Avoidance Index. The US for example scores 46 and Singapore scores 8. Contrary to Japan, Singapore is very accepting of uncertainty. This might be one reason why they have such a strong start up and entrepreneur culture right now. Although this research has been done decades ago, I think we can still see that Japan is an uncertainty avoidance culture.

I hope this gives some insights and understandings into why Japan structures the things they do and why things are slow to change. Digital transformation, in particular, is viewed as being uncertain.

In part 2 we will talk about recent changes, innovations that can help Japan and how it is trying to avoid the 2025 digital cliff.