Japan Digital
Agenda 2030
Big moves to restore digital competitiveness and productivity

February 2021

www.digitaljapan2030.com

Contents
5

Foreword

6

Executive summary

9

The current state of digital in Japan

18

9Japan’s digital scorecard

12

The trends pushing for digital change

13Japan’s endowment

16

Contextual Japanese constraints on digitization

Big moves for Japan: change story and economic impact
25

Big move 1: Develop a deep bench of world-class talent literate in cloud tools, softwaredevelopment, artificial intelligence and other digital technologies and ways of working

31

Big move 2: Drive broad-scale upskilling across the workforce by shifting fromtraditional to adaptive learning to build digitally relevant skillsets

35

Big move 3: Drive end-to-end digitization of education sector from pre-school totertiary education with solutions for school and educator efficiency, as well as
student access

43

Big move 4: Industrial manufacturing to build on hardware, robotics, and automotive
endowments by leapfrogging with software, machine learning and deep learning

55

Big move 5: Retail to capitalize on shifting customer trends by delivering digitalomnichannel experiences

65

Big move 6: Healthcare to lead globally on next-generation personalized, remotesolutions targeting elderly care75

Big move 7: Financial services providers to build mobile and broad accessibility
solutions by leveraging cloud infrastructure and open network85

Big move 8: Government to define a vision and bold goals to provide digitalcitizen and business services

99

Big move 9: Government and industry collaborate to scale smart cities, buildingon Japan’s public infrastructure endowment

105

Big move 10: Startup ecosystem to develop a concept-to-exit formula that produces
globally scalable ventures

113

Big move 11: Systems integrators and technology providers to help their clients
accelerate transformation, by building talent in the core and leveraging global
best practices

117

Roadmap 2030: summary of recommendations

125

Lessons learned and the path forward

135

Acknowledgements

Japan Digital Agenda 2030

3

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4

Japan Digital Agenda 2030

Foreword
As the world enters a new and transformative digital era in which companies and governments
rapidly embrace digital technologies and digital ways of working, Japan faces a strategic
imperative: reigniting productivity and growth through digital transformation.
In 2009, the American Chamber of Commerce in Japan (ACCJ) published a White Paper on“achieving the full potential of the Internet Economy in Japan.” The White Paper detailed arange of recommendations across Japan’s still nascent Internet Economy, including changes ingovernment ICT procurement practices, measures to protect privacy and intellectual property,
steps to promote online commerce and digital government, and digitization and sharing ofhealthcare data under appropriate safeguards.
A decade later, many of these challenges remain, given Japan’s now declining total factor
productivity. Execution and enabling regulation have lagged in Japan, and elsewhere in the world
many of Japan’s competitors are moving ahead rapidly. Japanese government and industry needto fully embrace digitization across its economy from manufacturing to healthcare to finance tothe retail sector and in the delivery of government services.
The ACCJ and McKinsey & Company have partnered to develop a perspective to elucidate theissues facing Japan over the next decade in digitizing its economy and society. This partnershipbrought together the experience of a wide range of US companies, which are at the forefront of
the digital economy in Japan and globally.
The research identifies the “Big Moves” that Japan can pursue, highlighting the underlying
technology use cases, and describing the digital transformation barriers and enablers to achieve
them. The resulting analysis examines how Japan’s education system can support the creationof a broader base of digital talent, how Japanese industry and government can digitize theirvalue chains, and the respective roles that startups and existing systems integrators can play inaccelerating digital transformation..
The sources of insight to inform this perspective are derived from quantitative and qualitative
surveys of US and Japan business and policy leaders to benchmark progress over the past
decade. They also include in-depth interviews with over 100 government, business, andtechnology leaders in and out of Japan. Finally, over 200 data sources were consulted to gather
critical inputs across a range of industries, topics, and technologies.
We would like to give special thanks to the authors, sponsors and participants who joined in thisbroad-based research effort. Their contributions are noted in the acknowledgements section ofthis document.

Jenifer Rogers
ACCJ President 2021

Naoyuki Iwatani
McKinsey Japan Managing Partner 2021

Peter Fitzgerald
ACCJ President 2020

André Andonian
McKinsey Japan Managing Partner 2020

Japan Digital Agenda 2030

5

Executive summary
In 2020, the great nation of Japan stood as the world’s third largest economy, underpinned by an endowmentthat includes a top education system, leadership in sectors such as industrial and automotive manufacturing,high-quality infrastructure, as well as a professional culture infused with a strong work ethic and repeatable
methods to produce high-quality goods and services.
Yet, Japan’s productivity has gone from stagnant to declining, a course that needs imminent reversal to remain
globally competitive. On the rise are competing nations making significant productivity gains through thedevelopment of technical talent, and the application of proven digital technologies that include cloud based
infrastructure and software, mobile devices and apps, machine learning and deep learning, and many others.
Japan’s relatively low digital competitiveness is in stark and unexpected contrast to the country’s economic
strength. In 2020 the country ranked 27th in digital competitiveness and 22nd in digital talent, and it has
single-digit penetration in areas such as e-commerce, mobile banking, and digital government service usage.
The country has produced just 5 out of more than 500 unicorn startups globally (startups with a private or
public valuation of more than U$1B). These metrics fall far short of Japan’s full potential.
Standing in the way of digitization are some self-imposed constraints: a high-context culture with a riskaverse mindset; senior leaders focused on company longevity rather than productivity; limited exposureof some industries to global competitors; a gridlock effect between a private sector waiting for digitalendorsement by government and a government waiting for the private sector to forge ahead; and mostimportant, a deficit of more than half a million software-related engineers to build the software applications
that will take the country forward.
The technologies to build a digital future can be setup in the cloud today with a few clicks, and it has neverbeen simpler to hire talent from around the globe, or build talent up leveraging the wealth of online courses
and code available. In the coming decade, Japan needs to make a definitive and far-reaching commitment
to digitization. Absent such a change, current GDP growth and productivity rate trajectories suggest that
economies such as India and Germany would overtake Japan beyond 2030. This loss of competitivenesswould in turn undermine Japan’s strengths, and be an unfortunate outcome given the country’s intrinsic
potential.
Incrementalism will not close the digital competitiveness gap. Japan must undertake some transformative
steps which we call Big Moves – concerted efforts by major industries or stakeholders to reform theiroperations, capitalize on emerging trends, and embed digital technology across the value chain. These Big
Moves are anchored on four themes:— Digital Talent: A bold plan to more than triple the bench of digital talent, focusing disproportionately
on software developers, data engineers, data scientists, machine learning engineers, productmanagers, agile coaches, designers and other types of new jobs. This in contrast to the continued
deepening of hardware talent, which is already a strength. This requires a mindset shift that softwareexpertise is just as valuable as traditionally Japanese prized hardware or non-software engineering
disciplines. The big moves will also call for upskilling of workforces; and the digitization of theeducation sector itself.
— Industry transformation: Leapfrog moves by the four core industry sectors that contribute nearly
50% of Japanese GDP – Industrial and Automotive Manufacturing, Wholesale & Retail, Healthcare,and Financial Services. All of these sectors have single-digit digital penetration metrics; suchas the number of digital manufacturing lighthouse factories, or the percentage of e-commerce
penetration. Their value chains have potential to scale up more than 100 proven use cases thatleverage cloud based applications, machine learning, deep learning, e-commerce technologies, IoT,
5G, cybersecurity and others to drive an increase in revenues and reduction in costs and expenses.
By 2030, Japan needs an AI-enabled industrial sector, digital healthcare at scale for the elderly
population, omnichannel retail experiences, and a modern, streamlined mobile banking system
underpinned by a globally interoperable frictionless payment infrastructure.

6

Japan Digital Agenda 2030

— Digital Government: A strategic commitment from the Government to drive connectivity,
cybersecurity, and the availability of cloud resources to build a new wave of applications.
More importantly, the build out of digital applications in the public sector to digitize theservices it provides to citizens and businesses, doing away with lengthy processes that
require physical visits, paper, seals, fax, and other analog methods.
— Economic renewal: Japan has more than half of the world’s oldest founded companies,
many of those with declining revenues and profitability; it needs to inject economic renewal.
This renewal mandate is best suited for the startup ecosystem, which needs to boldly
address global customer problems with software, shifting from its current inward andhardware focus. Reforms are needed to encourage founders, attract talent, and enable
startups to scale. Another key to economic renewal involves the transformation of Japanesesystems integrators: they account for over 60% of Japanese technology related spend and
70% of IT hired talent, and it is crucial that they bring their clients along on the journey. Digital
may need talent and technology back in the core operations of businesses, and systems
integrators need to develop new business models to help their clients transition.

The execution of these big moves will require a formula that allows them to move from idea to impact.
A survey conducted for this effort on the progress of various information, communications, andtechnology initiatives over the past decade revealed some important lessons. Initiatives that show
progress start with dialogue between the various counterparts, are formalized in concrete actionplans, have single threaded leadership accountability, show positive momentum early on, andencourage participation throughout. Conversely, initiatives that did not show progress feel victim to
limited formalization, a prevalent risk mindset, and insufficient funding to see the initiative through tothe end.

In 2030, the Japan story could be one of the most inspirational transformations of our time. Japan has
the right endowment, with smart citizens and quality assets; the technology to build is readily available
today, and the barriers to transformation are largely mindset related. But changing entrenchedattitudes remains the top challenge of any transformation: strong leadership is required to meet it,
along with a laser-like focus on execution and a broad-based capacity to adapt.

Japan Digital Agenda 2030

7

8Japan Digital Agenda 2030

The current state of digital in Japan
Japan’s digital scorecard
Currently holding the position of the world’s third largest economy, Japan had in recent
years negative total factor productivity growth, and currently ranks 27th in overall digitalcompetitiveness (Exhibit 1). At the core of this is a void in digital talent that can apply technology
and transformation expertise to industry and government. Its effects are seen in industries,
where there is single digit penetration across applications such as e-commerce, telemedicine,
mobile banking, and cutting edge digital manufacturing. The effects are further felt ingovernment where only 7.5% of citizens use government portals and apps. The wide margin
between Japan and best in class digital economies presents substantial opportunity for Japan to
improve on the digital front.
Amidst a shrinking population, digital offers a pathway to reignite both Japan’s productivity
growth, as well as the national narrative around global leadership and competitiveness. However,
due to the stability of the business environment and society, and the generally high quality of
public infrastructure and services – including communications technology, healthcare andeducation – there is little sense of urgency for change. Digital can help further improve thestandard of living in Japan, and it is an imperative if Japan is to maintain its standing as a top
global economy with excellence across industries, the government, and the education system.
Exhibit 1:

Japan’s digital scorecard in 2020
Objectives

MetricDigital and global
competitivenessTotal factor productivity (5 year average % growth)-0.11%+2.81% – China

Digital competitiveness - IMD1

#27

#1/2 – US, Singapore

Digital talent

Universities with software-related programs

29

117 – US

Digital talent2 as % of workforce

1%

3% – US

Industrial Mfg.: Lighthouse 4.0 factories - WEF

2

5 – China

Retail: e-commerce penetration

9%24% – China

Healthcare: telemedicine penetration - IPSOS

5%

31% – Saudi Arabia

Finance: % mobile banking penetration

6.9%

35.2% – China

Government: % citizens using digital govt. apps

7.5%

99% – Estonia#79 (Tokyo)#1 – Singapore

Digital industry

Digital government,
infrastructure

Smart city ranking - IMD
Digital technology
leadership

Economic renewal

1.
2.
3.

Japan 2020

Best in Class

Public cloud spend (% of IT spend)3%

10% – US% of global published AI conference papers

6%

29% – US

Startup market cap as % of total market cap

1%

31% – US# of unicorn startups3

5

320 – USIMD World Digital Competitiveness Ranking measures the capacity and readiness of 63 economies to adopt and explore digital technologies as a key driver for economic transformation in business,government and wider society.
Engineering talent including software engineering, data engineers, and developers. Excludes consultants, project managers and process related occupations.
Companies with a valuation >$1B, including public companies that received such valuation before IPO: Mercari, Preferred Networks, SmartNews, Liquid, Playco.

Source: McKinsey, McKinsey Global Institute, IMD, WEF, Gartner, Stanford HAI’s Global AI Vibrancy tool, press search

Japan Digital Agenda 2030

9

Digitization is no longer a choice for Japan, but an imperative. The current momentum will not allow
Japan to keep its top 3 economy spot, as Japan’s digital competitiveness has been regressing. The
2020 IMD World Digital Competitiveness index ranked Japan 27th globally, four spots lower than in 2015
(Exhibit 2). Among Asian economies, Japan ranked 7th on digital competitiveness, trailing Singapore,
Hong Kong, South Korea, Taiwan, China and Malaysia. Other nations have been working hard to scale
the digital learning curve: Hong Kong climbed in the global ranking from 14th to 5th in five years, South
Korea from 18th to 8th, and China from 33rd to 16th.
Exhibit 2:

Global IMD digital competitiveness rankings (ranked by 2020)1
Country

2020 rank

2015 rank

USA

1

2

+1

Singapore

2

1

-1

Denmark

3

8+5

Sweden4

5+1Hong Kong, SAR

5

14

+9

Switzerland

6

7

+1

ChangeNetherlands

7

6

-1

South Korea

8

18

+10

Norway911+2Finland10

3-7

Taiwan, GC

11

15

+4

Canada124-8United Kingdom

13

12

-1

UAE

14

22

+8

Australia

15

9

-6

China

16

33

+17

Austria

17

26

+9
-

Germany

18

17

-1

Israel19

10-9Ireland

20

25

+5

Belgium

25

19

-6

Malaysia

26

21

-5

Japan

27

23

-4

1 Ranking can be decomposed by 3 factors: Knowledge, Technology, Future Readiness
Source: 2020 IMD World Digital Competitiveness index

Digital competitiveness and productivity are inextricably linked. The economies ranked highly for digitalcompetitiveness – namely Hong Kong, South Korea and China – all experienced positive labor andfactor productivity growth over the past five years, with China seeing 5.25% growth in labor productivity
and 2.81% in overall productivity (Exhibit 3). Japan’s labor and total factor productivity were a negative-0.17% and -0.11% respectively. Even compared with other developed economies such as the US,
Japan’s capital productivity has dropped, with return on investment for non-financial companies inJapan 23 percentage points less than equivalent companies in the US 1 .
With significant headroom for digital penetration across industries, government and education,
Japan has an opportunity to leverage digital in a new phase of growth in the next decade. Given the
demographic challenge - a shrinking workforce expected to reach 71 million by 2025, with a risingdependency ratio estimated to pass 70% - Japan needs a boost of productivity growth, and digital is aprime lever2.

1
2

10

“How a private-sector transformation could revive Japan”, McKinsey Global Institute, March 2015, McKinsey.com.
Ibid.

Japan Digital Agenda 2030

Exhibit 3:

Japan’s labor and total factor productivity have gone from stagnant to negative
over the last ten years
CAGR

Labor productivity (Output per Employee), 2010-19
USD per person (2010 base)%2010-14 2015-19

1.55
1.50
1.45
1.40
1.35
1.30
1.25
1.20
1.15
1.10
1.05
1.00

2010 -14

12

14

16

2015 -19

China

6.17

5.24

China

Taiwan1.50

1.64

TaiwanSouth Korea

0.96

1.43

South Korea

0.95
0.64

Hong Kong

0.97

1.05

Hong Kong SAR

0.50
0.43

Denmark

0.80

0.82

Denmark

USA

0.62

0.71

0.35
0.57

Japan

0.61

-0.17

2.81
1.00

3.43

1.60

0.09
0.10

USA
Japan

0.95
2010

Total factor productivity, 2010-19
Average percentage growth

-0.11

0.69

2018

Note: CAGR: Compounded Annual Growth Rate
Source: MGI Economics Platform

Digital competitiveness and productivity are just two elements of Japan’s digital scorecard. An
economy is only as productive as its people, and talent is a critical component where Japan has
scope to cultivate a broader digital bench that possesses the requisite skillset to drive digitaltransformation. According to a 2020 McKinsey Global Institute analysis, artificial intelligence –namely machine learning - is expected to contribute to the automation of approximately 19 million
jobs between 2018 and 2030, especially those focused on discrete repetitive tasks. However,long-term macro-trends and shifting demand for roles in areas such as cloud engineering, softwaredevelopment, machine learning, and new occupations are expected to gain 15.6 million new jobs3 .
The creation of new jobs calls for the availability of talent with the requisite digital knowledge.
Cultivating that talent may be key to enabling Japan’s digital transformation journey.
In addition to talent, is the importance of building trust around digital and data. Efforts fromgovernment to endorse digital to garner trust among Japanese citizens and corporations could prove
crucial in creating acceptance on digital adoption. Japanese society places a great value on trust,and effective governance and leadership that highlights both benefits and risk management arelikely key pillars for success. Setting governance frameworks (e.g., cybersecurity risk management
including secure handling of personal data) and leadership bodies can help accelerate thedigitization while maintaining a system that generates confidence, accountability, and in turn, trust.
A collective effort from multiple key stakeholders is required to drive Japan’s digitization forward:
the education system, the incumbent industry sectors of the economy, the government, the startup
ecosystem, and the technological community that includes Japan’s major systems integrators.
Government and four core industry sectors of the GDP – industrial manufacturing (which includes
automotive), retail, healthcare and financial services, which together made up nearly half of Japan’s
gross domestic product in 20184 – need to lead the way actually building applications and talent.
Japan is at a unique historical inflection point. In the last decade, China was the clear example ofleveraging digital to drive its economic growth and productivity goals to cement its position as thesecond largest economy. Other countries such as India and Germany are similarly turning to digital tobolster the bold growth and productivity agendas that could put Japan’s economic position at stakein the decades ahead.

3
4

MayaHoriiandYasuakiSakurai,ThefutureofworkinJapan:AcceleratingautomationafterCOVID-19,June2020,McKinsey.
com;analysisupdatedasofDecember2020.
National Accounts of Japan, Cabinet Office, December 7, 2020, esri.cao.go.jp.

Japan Digital Agenda 2030

11

The trends pushing for digital change
There are major forces at play pushing for digital change. The rate of change in Japan may need to matchthese trends, so that the country can become a center for technology and innovation.
Ageing population will bring a labor shortage, requiring digital solutions: Japan has the world’s
highest proportion of elderly citizens, around 29% of the population—or 36 million people—are over
the age of 65 5 , a number expected to reach 38% by 20506 . While, other developed nations are following
similar trends, Japan has the opportunity to be a pioneer in addressing the effects of ageing societies,
including increasing labor force participation and productivity by allowing older workers to continue
working with the aid of digital technologies.
A key implication of this trend is the need to automate expert labor that is retiring from the workforce
through machine learning, as well as accelerating digital application development in areas where theelderly population requires services, such as healthcare, financial services, and government.
Equally, as the workforce continues to shrink, new ways may need to be found to accelerate productivity
and growth. This means either supporting the workforce by automation or augmenting it throughglobal talent sourcing. In the former case, digital applications present a clear solution with automation
technologies potentially supplementing reduced labor in Japan by 2030.
Digital companies will capture more of the global economic profit. The distribution of economic
profit – profit after covering the cost of capital – in the global economy has been highly uneven: between
2014 and 2018 , companies in the top quintile of the economic profit distribution captured nearly 90% of
the economic profit, equivalent to $655 billion7. The winners were bolstered by digital, as they are able todraw insights from huge volumes of customer and operational data and use them to identify threats andopportunities and build new businesses. McKinsey’s Digital Quotient – which measures the degree ofdigitization of organizations - reveals that digital leaders achieve five times higher revenue growth andeight times higher EBIT than other players8 .
As the international competition continues to digitize, Japanese players risk seeing global market shareerode and ultimately losing out in winner-take-all markets. On the flip side, they also have the opportunityof becoming “digital reinventors” at a global scale - incumbents who compete in new ways throughdigitization. Global data show that half of firms that answer to the description of “digital reinventors”
achieve over 10% annual revenue growth compared with 33% of “analog” incumbents, and they canleverage their greater market share to compete with faster-growing “digital native” newcomers9 .
Workers and consumers have a preference for digital. Workers’ expectations continue to shift towards
the need for flexibility, making digital or remote interactions more commonplace. A 2020 survey of
employees across Japan revealed that nearly 82% of workers would like to keep working remotely postCOVID10 . Similarly, 66% of companies deemed “paperless and hanko-less” solutions as necessary, and
80% thought that digital communication tools were also key11 .
Globally, automation in the workplace is becoming commonplace. A global survey in 2020 showed 66%
of B2B companies were piloting automation processes, up from 57% in 201812, and 85% said they would
not require in-person support for simple or repeat purchases13 .
On the consumer side, procurement of goods and services is increasingly moving online: in retail,the penetration of e-commerce in the US grew to 35% in the first quarter of 2020 - the equivalent of
ten years of growth registered between 2009 and 201914 . Similar preference shifts are happening in
healthcare, financial services and education, and the Japanese market has yet to make these gains.

5“Older people account for record 28.7% of Japan’s population”, Japan Times, September 21, 2020, japantimes.co.jp.
2019 Revision of World Population Prospects, UN Department of Economic and Social Affairs, June 2019, population.un.org.
7
Corporate Performance Analytics, McKinsey; S&P Global, 2020.
8
Jochen Böringer, Brett Grehan, Dieter Kiewell, Soenke Lehmitz, and Philipp Moser, Four pathways to digital growth that work for B2B
companies, October 2019, McKinsey.com.
9“How digital reinventors are pulling away from the pack”, October 2017, McKinsey.com.
10
テレワークに関する調査2020 [Survey on remote work], Japan trade Union Confederation, June 30, 2020, jtuc-rengo.or.jp.
11
テレワーク導入実態調査結果 [Survey on remote work introduction], Tokyo Metropolitan Government, September 14, 2020, metro.
tokyo.lg.jp.
12“The imperatives for automation success”, August 25, 2020, McKinsey.com.
13
Christopher Angevine, Candace Lun Plotkin, and Jennifer Stanley, When B2B buyers want to go digital—and when they don’t, August
2017, McKinsey.com.
14
Five Fifty: The quickening, July 2020, McKinsey.com.
6

12

Japan Digital Agenda 2030

Digital technologies are no longer shiny objects, but have proven benefits. Unproven technology
risk is often a concern when assessing the adoption of a new technology: companies are confronted
with the risks of rapid obsolescence, disappointing performance, unrealized development, difficultyof usage, and limited interest by users. Many technologies now have demonstrated proven benefits,
for example, cloud technology can deliver up to 60% reductions in IT infrastructure and licensing
costs15 , and AI “power users” have shown profits up to five percentage points higher than the industry
average16 .
Even though corporate digital transformations are still difficult, with only 16% of companies reporting
complete success cases17, pitfalls and best practices are now well understood, and leadership andculture change play as crucial a role as technology. In fact, the broad availability of technologies suchas cloud infrastructure and data storage, data analytics, machine learning, and cybersecurity offered“as a service”, has further reduced the complexities of adoption.

Japan’s endowment
Endowments are the inherent assets and capabilities of a country, such as talent, resources, existing
infrastructure, and know-how which can be leveraged in a digital transformation.
Youth with math and science aptitude
A successful digital transformation requires skilled professionals and engineers in many disciplines.
In 2018, the OECD Program for International Student Assessment (PISA) index ranked Japan as 6th
worldwide in mathematics performance and 5th in science - both scores above the global average on account of its high-quality school system. The Japanese education system has proven its ability
to deliver the necessary skills to match industrial policy imperatives and, if transformed to align tothe digital future, it has the potential to cultivate appropriate talent . Its strengths in mathematics
and science can provide a foundation for future careers in digital-related fields such as software
engineering, machine learning and cybersecurity.
In terms of tertiary education, graduate degrees in fields such as software are limited. In keepingwith industry priorities and employability, Japan has historically placed more importance on degrees
focused on hardware or mechanical and electrical engineering18 . This expertise was critical to drive
the country’s economic growth between the 1970s and 1990s, but the basis of competition now
requires depth in design, software development, data science, and machine learning.
There are successes to scale: Rikkyo university, for example, has established a graduate school
specializing in artificial intelligence leading the way for students interested in this field19 . Similarly,
Japan’s Nara Institute of Science and Technology (NAIST) has formed a leading cybersecurity
program, host to an information security engineering laboratory20 .
In order to fully harness and direct its student population towards gaining the skillsets needed tonavigate a digital transformation, Japan’s education system may need to provide more opportunities
and emphasis on skills in these fields.
Robotics and hardware excellence, and deep engineering culture
According to the International Federation of Robots, Japanese manufacturers delivered just overhalf of the global robot supply in 2017 and have nearly 300,000 robots installed, giving them thesecond largest installed base after China 21 . Of the two basic components of digital technology hardware and software - Japan has deep expertise in hardware, and has an engineering culture
focused on delivering very high-quality products. Next generation hardware such as robots, andconnected devices are also critical to a digital future.
15

Joe Dertouzos, Ewan Duncan, Matthias Kässer, Satya Rao, Wolf Richter, Making the cloud pay: How industrial companies canaccelerate impact from the cloud, October 2020, McKinsey.com.
16
Jacques Bughin and Nicolas van Zeebroeck, Artificial intelligence: Why a digital base is critical, July 2018, McKinsey.com.
17
Hortense de la Boutetière, Alberto Montagner, Angelika Reich, Unlocking success in digital transformations, October 2018,
McKinsey.com.
18
Robert E. Cole, The Japanese Software Industry: What Went Wrong and What Can We Learn from It?, California Management
Review, November 2014.
19“Rikkyo University to establish Japan’s first graduate school specialized in AI in April 2020”, Rikkyo University, July 24, 2019,rikkyo.ac.jp.
20
Nara Institute of Science and Technology, Information Security Engineering laboratory, Jan 2020, isw3.naist.jp.
21“Why Japan leads industrial robot production”, International Federation of Robotics, December 17, 2018, ifr.org.

Japan Digital Agenda 2030

13

An unintended consequence of Japan’s focus on hardware is that software and services have taken aback seat. While software is developed as ancillary to hardware, it seems to be commonly viewed as the“glue” or the “support” rather than the core component of the business. Unlike other mature markets,
Japan has few stand-alone software offerings, especially in cloud based tools and software applications.
The key to future success will be creating a position as a “hardware + software” leader.
Some iconic Japanese companies such as Fanuc and Keyence produce a broad range of robotic arms
and high-quality sensors, all with integrated software. In addition to a mix of companies that includes
equipment manufacturers and suppliers, Japan also has an inherent advantage in assembly, and theknow-how required to integrate and assemble working products and devices from various components. If
Japan can leverage its existing production and assembly skills to create compelling integrated hardware
and software offerings, that could create a distinctive advantage.
Global leader in automotive industry
Japanese auto OEMs are commanding leaders in the global automotive industry, with the three top
manufacturers - Toyota, Nissan and Honda - producing over 25% of the global total in 201922. Theseworld-renowned companies have access to the capital, technology partnerships, supply chains,
distribution networks and customers - on a global level - necessary to make groundbreaking investments
in digital pay off.
Japanese auto companies can lead the way in new digital ways of working, and set an example for Japan’s
industry. Moreover, in the race for autonomous driving, these companies can compete on autonomous
systems which today leverage deep learning to navigate roads, and which are quickly reaching advanced
levels.
Some have already started investing in the space: Honda has partnered with GM and Cruise to create aself-driving electric vehicle with no steering wheel, while Toyota is collaborating with AWS for its mobility
services platform23 . Bigger bets may need to be made for Japanese companies to get the scale needed to
win in automotive, and emerge as world leaders in autonomous vehicle development.
Presence of three top patent generators
According to the World Intellectual Property Organization (WIPO), Japan accounted for 9.4% of total
patent applications in 2018, and was ranked 3rd globally when it came to patent filing24 . It is home to threeof the WIPO’s top 10 “innovation clusters” globally, namely Tokyo-Yokohama, Osaka-Kobe-Kyoto, andNagoya, which ranked 1st, 5th and 9th respectively based on patents filed25 .
Another noticeable feature of Japan’s patent performance is the wide variety of sectors issuing patents.
In 2017, the electrical machinery and energy sector filed the most number of patents from the TokyoYokohama cluster, accounting for 6.3% of all patents filed from within the cluster to the national patentoffice. For contrast, the digital communication sector accounted for 41.2% of patent filings from theShenzhen-Hong Kong cluster in Greater China 26 . While generating intellectual property in a variety offields is the genesis of innovation, and can be advantageous, these innovations need to be commercialized
and brought to market through new business models.
Execution excellence
Japanese companies such as Toyota have historically pioneered several ways of working, such as leanmanufacturing, gemba kaizen (continuous improvement), and just-in-time manufacturing. With a trackrecord of detailed project planning and thorough execution, Japanese companies are renowned for theirhigh quality products. The “Made in Japan” label is seen as an assurance of high quality worldwide, andJapanese companies have the fewest product recalls among the top 5 global manufacturing economies27.
Japan can capitalize on this reputation going forward by creating high-quality digital software
applications that consumers can trust, and that generate high customer satisfaction, yet adjusting for theagile needs and rapid release cycles of software development.
22

IHS Markit, 2020.
“Toyota and Amazon Web Services Collaborate on Toyota’s Mobility Services Platform”, Toyota, August 18, 2020, global.toyota.
24
World Intellectual Property Indicators 2019, World Intellectual Property Organization (WIPO), 2019, wipo.int.
25
Kyle Bergquist et al., Identifying and ranking the world’s largest clusters of inventive activity, WIPO, May 2017, wipo.int.
26
Ibid.
27
GlobalRecalls, OECD, accessed December 7, 2020, globalrecalls.oecd.org; recalls adjusted by industry size.
23

14

Japan Digital Agenda 2030

Highly developed public infrastructureWith a comprehensive train network featuring the world’s fastest bullet train, earthquake resilient
buildings with hi-tech structural engineering, 5G networks, wide broadband coverage and fastinternet speeds, Japan boasts some of the world’s best public infrastructure. Japanese cities are in
the top rank globally in terms of safety and standard of living, with indices such as Global Finance’s
2020 best cities ranking placing Tokyo first in terms of quality of life worldwide, and Japanese cities
such as Osaka and Fukuoka also ranking within the top 50.
The next frontier is to create smart cities by embedding digital technology into daily life. The
foundations for this exist, as well as a tried and tested system for successfully rolling out
infrastructure nationwide. These elements could be invaluable when digitizing Japan as a whole.
Moreover, Japan can generate value by exporting some of its technology globally: smart disaster
resistant buildings and connected city infrastructure are two examples of technology where it
already has achieved best-in-class status.
Active global collaboration on standards and policy
Japan presented the concept of Data Free Flow with Trust (DFFT) at the G20 Osaka Summit andexpressed its determination to promote international rulemaking on trade-related aspects ofelectronic commerce through the World Trade Organization. Japan is also actively involved in global
partnerships and frameworks related to digital policy, such as the Comprehensive and Progressive
Agreement for Trans-Pacific Partnership (CPTPP) and Asia-Pacific Economic Co-operation Cross
Border Privacy Rules (APEC CBPR). Japan, with its Act on Protection of Personal Information (APPI)
data regulations, secured the first adequacy agreement under the EU’s General Data Protection
Regulation (GDPR) standards, to enable data sharing28 . Furthermore, Japan has been an active
leader in cybersecurity policy discussions globally, participating in various bilateral and multilateraldialogues on policies such as 5G and IoT security. On 5G in particular, cooperation on policy
standards also brings opportunities to encourage support for Open RAN solutions, which would
allow domestic and international players to collaborate and ensure the benefits of 5G are widely
accessible.
Japan also signed a Digital Trade Agreement with the US, which recognizes it as a leader in global
digital rulemaking29 . Japan’s digital policies are, in many aspects, aligned with global standards, andJapan can leverage its global position to emerge as a key country in the adoption and shaping of
forward-looking digital policy.
Global leadership and expertise in gaming and virtual character development
Gamified experiences, relatable characters, and games themselves are a key component of
the digital economy. Japanese companies such as Nintendo and SONY, together accounted forapproximately $30 billion in revenue in 2019. Japan has proven expertise in creating unrivalledvirtual experiences that combine software (games) and hardware (controllers). This expertise can beextended and capitalized upon to give Japanese digital products – whether they be robots, gamified
interfaces, or wearables – a competitive edge globally.
Moreover, in a digital world where software-based AI, robots, and virtual avatars will be enablinghuman tasks and interaction, there is a need to humanize digital technology to improve customer
engagement and experience. No country in the world excels at creating virtual characters more thanJapan, which has been producing world-famous virtual characters such as Pokémon’s Pikachu,
pop idol Hatsune Miku whose sales topped ¥50 million during her debut year in 200730, and virtual
YouTuber Kizuna Ai with over 2 million followers31 .

28“European Commission adopts adequacy decision on Japan, creating the world’s largest area of safe data flows”, European
Commission, January 23, 2019, ec.europa.eu.
“U.S.-Japan Digital Trade Agreement Text”, United States Trade Representative, October 7, 2019, ustr.gov.
30
Yuka Okada, “「初音ミク」発売からもうすぐ1年 開発者が語る、これまでとこれから” [Almost a year since the release of“Hatsune Miku”, developers talk about past and future], IT Media News, July 23, 2008, itmedia.co.jp.
31
Kazuaki Nagata, “Japan’s latest big thing: ‘virtual YouTubers’”, Japan Times, July 17, 2018, japantimes.co.jp.
29

Japan Digital Agenda 2030

15

Contextual Japanese constraints on digitization
Now is the time to embrace digital boldly across sectors and the companies that make up those sectors,
but there are some constraints that have been preventing Japan from gaining momentum“High-context” culture with risk averse mindset
The business culture in Japan tends to be high-context; favoring nuanced communication, andprioritizing interpersonal relationships, group harmony and consensus – over making rapid decisions
and changes which might disrupt the work environment and potentially alienate certain parties.
Moreover, due to the high importance of trust – which is often put at the center of decision-making –there is an inherent resistance to taking risks that would potentially break trust; for example, through afailed attempt at a new technology that might break the trust of company stakeholders, or a data breachthat would break the trust of customers. All these conditions contribute to a setup that intrinsicallystruggles to adopt the type of management system needed for digital transformation – one that callsfor empowered teams, agile execution, a test and learn mindset, a fail fast approach to building new
products, taking risk with the prospect of leading in a new space, and embracing any occasional
setbacks or “failures” as acceptable investments in innovation towards accelerating long-term growth.
Senior leader agendas focus on extending company lifespanIn 2017, the average lifespan for companies listed on the Tokyo Stock Exchange was approximately 89
years, versus 15 for the New York Stock Exchange and nine for the London Stock Exchange32. Company
longevity, often at the expense of growth, increased profitability, and global competitiveness, arepriorities for many Japanese CEOs. Bold transformation agendas focused on digitization, automation,and cost savings can appear to work against the status quo, even though digital can be a way of gaining
advantage in an uncertain future.
Strategic top-down commitment is needed in any transformation. A McKinsey survey revealed that 36%
of Japanese managers cite insufficient commitment from senior management as the main obstacle todigital transformation. At the leadership level, if CIOs are firstly not present, and then do not gain support
from other executives and their organizations, teams building digital initiatives struggle to mobilize.
The private sector is waiting for the government to endorse digitization
In 2020 Japan’s public sector has showed increasing awareness of the need to digitize its processes andservices, while aligning with global standard technologies for the sake of speed. Digital Government willbe crucial to enable broader industry transformation in two ways.
Conversations with executives across industry reveal that companies hesitate to embrace digital until thegovernment explicitly endorses or adopts them. In other countries, the private sector may find creative
ways to foster transformation and circumvent potential inefficiencies in the public sector; in Japan,
there is an expectation for government agencies to pave the way by showcasing examples of successfultransformation and putting systems in place for easy adoption.
Moreover, current regulations often require companies to submit printed documents, store hard copies
of records and approve processes by manual means, so that even companies that are willing to digitizeneed to maintain parallel, labor-intensive processes to remain compliant. On the other hand, government
agencies, not seeing a strong push for digitization from the private sector, may not feel sufficientpressure to drive the process or craft sufficiently specific guidelines for companies.
Deeply rooted legacy systems under vendor-lock in core industry sectors
In Japan, 20% of mission-critical IT systems are older than 20 years; and this is expected to increase to
60% by 2025 33 . Limited executive focus and a shortage of talent have been constraints on IT investment.
Since 1995, annual investment in ICT by Japanese companies has remained at the same level, while forexample, American and French businesses have increased their spending threefold34 . Lower spending
32

Tsukasa Morikuni and Mio Tomita, “Corporate Japan struggles to scale up as longevity limits dynamism”, Nikkei Asia, November 18,
2018, asia.nikkei.com.
ITシステム「2025年の崖」克服とDXの本格的な展開 [Overcoming the IT System “2025 Cliff” and full-scale deployment of DX], Ministryof Economy, Trade, and Industry, March 2019, meti.go.jp.
34
ICT投資の状況 [Status of ICT investment], Ministry of Internal Affairs and Communications, 2019, soumu.go.jp.
33

16Japan Digital Agenda 2030

often results in outdated IT infrastructure, which becomes progressively more costly and timeconsuming to maintain. A Gartner survey showed that 30% of Japanese CIOs and their budgets are
so focused on maintaining legacy systems that they are unable to initiate digital transformations.
Without a concerted effort to modernize legacy infrastructure, a feedback cycle is created whererising development costs and longer go-to-market times act as a further deterrent to management.
Unlike modern software development, which thrives on standardized solutions, “open-source”
software and libraries and shared best-practices, older infrastructure is often developed according
to proprietary frameworks, heavily customized and hosted in dedicated systems. This situation isoften referred to as “vendor lock”, where it is very difficult for companies to update or replace theirown software without significant time, fees and contextual expertise.
Inward innovation and sub-scale startup ecosystem
Out of nearly 500 unicorns worldwide, only five (including Mercari which is now a public company)
have emerged from Japan35 . Venture capital investment is limited in relative terms, totaling about$15 billion in the last five years36 , while US startups received over $130 billion in 2019 alone37.
Rather than investing in high-risk/high-return startup-style ventures, Japan’s industry culture
historically has promoted “intrapreneurship”, where large established businesses encourageinternal experimentation targeted at the domestic market: however, when kept within the scope ofa single company, new innovations are often not scaled at the industry or global level, and miss theopportunity to unlock significant value.
The 2018 Global Entrepreneurship Index - an annual index measuring the health ofentrepreneurship ecosystems across 137 countries - placed Japan as 28th globally and 5th in
Asia 38 . The top 20 startups in Japan have a combined value of $9.2 billion39; relative to China where
the top two startups have a combined value of $196 billion40, Japan has potential for growth inentrepreneurship in order to leverage what is coming out of its high volume of intellectual property
generation.
Shortfall of digital talent; existing talent concentrated within systems integrators
Digital transformation requires designers, data scientists, data engineers, machine learning
engineers, software developers, product managers, cybersecurity engineers, Agile coaches andother jobs that did not exist a few decades ago. In Gartner’s Digital Business Initiative survey, 67%
of Japanese respondents cited talent availability as an obstacle to transformation, compared to
38% globally. According to the Ministry of Economy, Trade and Industry, Japan faced a shortage of
170,000 digital professionals in 2015, a number expected to rise to 430,000 by 202541 .
Within digital talent, looking at software talent in particular reveals that such professionals makeup just 1% of the Japanese workforce, compared to 3% in the United States. Moreover, Japan’scurrent technology talent is largely outsourced and therefore highly concentrated within systems
integrators. While in other advanced economies such as the US or Germany, close to 70% oftechnology engineers are employed by companies whose main business is not provision of IT
services, in Japan the majority of technology professionals work for systems integrators 42. Given
the increasing strategic relevance of digital, companies need to begin bringing digital talent andcapabilities back into their core business operations.
Looking ahead, the future supply of digital talent – especially software talent – could also beconstrained by current education trends: in 2019, only 1% of undergraduate students enrolled incomputer science-related courses in Japan43 , compared to 4% in the United States 44 .

35

Complete List Of Unicorn Companies, CB Insights, accessed December 3, 2020, cbinsights.com.
Japan Startup Funding 2019, Initial, June 16, 2020, initial.inc.
US Venture Capital Investment Surpasses $130 Billion in 2019 for Second Consecutive Year”, Pitchbook, January 14, 2020,
pitchbook.com.
38
Global Entrepreneurship Index, GEDI, 2019, thegedi.org.
39
Kenjiro Suzuki, “Japan’s top 20 startups surpass 1tn yen in total value”, Nikkei Asia, November 12, 2019, asia.nikkei.com.
40
Katharina Buchholz, “The Highest-Valued Startups in the World”, Statista, November 20, 2020, statista.com.
41
Overcoming the IT System “2025 Cliff”, 2019.
42
IT人材白書2015, Information Technology Promotion Agency, April 2015, ipa.go.jp.
43
学校基本調査 [Basic school survey], Ministry of Education, Culture, Sports, Science and Technology (MEXT), 2020, mext.go.jp.
44
Integrated Postsecondary Education Data System, National Center for Education Statistics, 2019, nces.ed.gov.
36
37

Japan Digital Agenda 2030

17

Big moves for JapanTo surpass the current state of digital requires bold action. Big moves are broad
actions taken by a large stakeholder group, and which seek to capitalize on a major
trend, build on an endowment, or overcome a constraint. They are not meant to be
incremental. In Japan’s case, the education sector, industry, government, startup
ecosystem, and systems integrators need to pull together do drive big moves thatwill enable Japan to retain its global economic position, and restore productivity.

Education, industry, and government
sector to create a globally competitive
and adaptive pool of digital talent
1.
Develop a deep bench of world-class talent literate in cloud tools, softwaredevelopment, artificial intelligence and other digital technologies and ways ofworking. Digitization will require cloud architects, data engineers, full-stack softwaredevelopers, machine learning engineers and many other technical roles. It will also
require new team roles to bring products to life such as user interface designers,
product managers, Agile coaches, and cybersecurity experts. These roles are in short
supply in Japan and not traditionally produced by a system that values hardware
related engineering. New university curricula may be needed, as well as partnerships
with online platforms that provide certifications, and broad new corporate andgovernment programs that focus on modern digital technologies. Japan may need tosignificantly create new digital talent to build the future applications that underlie theimpending transformation.

2.

Drive broad-scale upskilling across the workforce by shifting from traditional toadaptive learning to build digitally relevant skillsets. A dwindling workforce, thedemand to build thousands of new digital applications to transform industry sectors,
and an increase in automation will necessitate the upskilling of workers into newroles. Re-skilling, vocational courses, counseling, and customized learning pathways
will support individuals in continuously acquiring new and digitally relevant skills
throughout their working lives, so they can adapt to shifting demand and participate
in digital transformation.

3.

Drive end-to-end digitization of education sector from pre-school to tertiary
education with solutions for school and educator efficiency, as well as student
access. Teachers and students alike can leverage digital tools for lesson creation,delivery, learning, administration, performance management, and communication.

18

Japan Digital Agenda 2030

Digital tools let teachers reduce the time spent on administrative tasks,
increase flexibility and accessibility of education while reducing costs toschools, and have the potential to improve learning outcomes. Digital tools
can also let students have access to educational content and attend new
immersive experiences.

Major incumbent industries to pursue
digital transformation to drive global
competitiveness through differentiationand productivity
4.
Industrial manufacturing to build on hardware, robotics, and automotive
endowments by leapfrogging with software, machine learning and deeplearning. Japanese industrial companies lead across many hardware related
sectors such as industrial machinery, industrial components, and automotive.
In many industrial sectors, software applications and machine learningand deep learning can be applied across the value chain to develop new
differentiated offerings and higher productivity. The next frontier of industrial
manufacturing will involve creating global cloud platforms, software
applications coupled with hardware, and applications that leverage machineand deep learning for new offerings or significant productivity increases.
The stakes are highest for Japan’s automotive industry, as software will beat the center of the connected car, and deep learning is at the center of theautonomous driving revolution.

5.
Retail to capitalize on shifting customer trends by delivering digitalomnichannel experiences. Japanese retail stores are known for their urban
accessibility, broad assortment, and high quality of customer service.
With e-commerce penetration on the rise due to customer preferences,
this force can be harnessed to create new omni-channel experiences thatdrive continued retail growth through the interplay of online and offline
experiences. Mobile customer ecommerce applications, securely digitizedin-store experiences, augmented and virtual reality to experience products,
and machine learning for pricing optimization are some of the many
applications that the retail sector can build to unlock value.

Japan Digital Agenda 2030

19

6.
Healthcare to lead globally on next-generation personalized, remote solutions
targeting elderly care. Japan’s unique demographic could prove an asset.
When developing digital healthcare offerings, players in the space – including
pharmaceutical companies, medical device companies, pharmacies, and hospitals –can focus on creating solutions aimed at the elderly and wellness including
nutrition, exercise and mental health. These can include telehealth, deep learningfor disease detection, or machine learning enabled monitoring and treatment. Japanis positioned to build deep expertise in elderly care, and these solutions can thenbe exported globally as software platforms enabled by Japanese hardware where
needed.

7.
Financial services providers to build mobile and broad accessibility solutions byleveraging cloud infrastructure and open network. In spite of low interest rates
and investment incentives, the Japanese population is relatively savings-minded;
new digital banking applications and “smart” robo-advisors can empower broader
population segments to invest with confidence. However, while momentum isbuilding around Open Banking, legacy banking engines and costly payment
networks still pose barriers for incumbents and newcomers to develop new
solutions. Japan’s current digital payment landscape is rich but fragmented, which
reduces incentives for adoption. There is an opportunity to create a consolidated
payment infrastructure to move further towards a cashless economy.

Government to invest in digitalprocesses and lead in secure andconnected infrastructure
8.
Government to define a vision and bold goals to provide digital citizen and business services. Japan’s government processes often require multiple physical visits,
paper, and hanko stamps. The Japanese government has an opportunity to lay out
a bold goal to aspire to 100% over the next 10 years, in line with world leading
eGovernments. With a core focus of providing citizen and business services,
government will also need to address underlying challenges such as the
procurement of underlying technologies, data sharing, interoperability acrossgovernment agencies, electronic authentication, and the build-up of digital talent
within government.

20

Japan Digital Agenda 2030

9.
Government and industry collaborate to scale smart cities, building on Japan’s
public infrastructure endowment. Through collaboration between public andprivate sector industries, Japan can build world-class smart cities that combine
digital applications across all areas – such as education, healthcare, transport andenergy usage – to improve safety, health, mobility, environmental impact and qualityof life. These applications can also create smart-city platforms in which Japan canbecome a global center of excellence and exporter.

Startups and systems integrators tobuild the next generation of digitalbusinesses to refresh the economy
10.
Startup ecosystem to develop a concept-to-exit formula that produces globally
scalable ventures. Japan can further refresh its economy by tweaking the formula
to produce new global companies. This will require making adjustments to theentrepreneurship formula to attract more founders both local and international,
improve the ease to setup new companies, expand the provisions to provide
seamless angel financing, and foster work mobility of digital talent that is
encouraged to move to new startups and bring their talents and learnings to build
the next big thing.

1 1.
Systems integrators and technology providers to help their clients acceleratetransformation, by building talent in the core and leveraging global bestpractices. Japanese systems integrators have a structural position in manyindustry sectors, as they manage and upgrade the legacy systems of major industry
and government organizations. They also employ over 70% of technical talent inJapan. Japan’s digital transformation will require bringing talent back into the core
to build new applications. In that, SIs need to play a role building capability with theirclients, and developing new approaches that deliver digital outcomes using available
proven technologies rather than focusing on cross-cutting proprietary technology.

Japan Digital Agenda 2030

21

Japan’s change story
Executing big moves could create a fundamentally different picture in Japan. Exhibit 4 explores
the current state and how it could look different in 2030 should these moves be realized.
Exhibit 4:

A ten-year digital journey in Japan
From (2020)

To (2030)

A gap of in digital talent of 400k - 500k engineers to build digitalapplications, and the majority of talent outsourced - outside thecore business operations

Three times the digital talent with global competitiveness across
software, data, artificial intelligence; engineering talent back in thecore operations

Existing talent focused on repetitive manual tasks, expert knowledge retiring, limited automation driving productivity

Productivity increase driven by automation of manual and repetitive
tasks; workers upskilled into new roles via large-scale programs forindividuals and employees

Low digitization from primary to tertiary education; teachers withlimited tools focused on administrative activities 40% of time,<50% device connectivity across students

Teacher tools broadly available to automate administrative tasks,
100% device availability and connectivity for students, adoption ofdigitized learning tools underpinned by data-driven impact tracking

Industrial manufacturing in leading position on hardware,robotics, and automotive; albeit limited digital manufacturing
lighthouses and automotive at risk of connected car and autonomous disruption

Industrial manufacturing cementing leadership position with differentiated hardware and software offerings, autonomous vehicles
transitioned into connected future and Level 5 autonomous driving

Strong retail sector, with continued focus on physical stores,
with low <10% e-commerce penetration and limited adoption oftechnology

World class omnichannel experiences leveraging digital stores ofthe future, high e-commerce penetration, and unique omni-channel
digital experiences for consumers

Fragmented healthcare system with nascent telemedicine,
limited digitization for diagnostics, consultations, prescriptions;limited regulation enabling digital; and <10% of population taking advantage of connected health devices

Digital healthcare with remote telemedicine at scale, deep learning
powered diagnostics, digital pharmacies; 40% of population using
connected health devices; and shared secure patient data acrossnetworks leveraging the cloudLegacy banking system back-ends, with paper based long customer processes in the front-end; <7% mobile banking penetration and limited adoption of other value add services

Modernized banking and payment infrastructure and broad OpenBanking participation enabling mobile front-ends for all major banking and insurance processes and products; at least 75% penetrationof mobile banking<10% of government services for citizens and businesses
conducted online, with strong affinity for paper, hanko seals
and underlying issues in procurement, fragmented prefecturetechnology, and limited interoperability

Redefined citizen and business journeys across government with
100% of processes fully digitized, with unified applications andmobile interfaces, underpinned by secured networks

Advanced infrastructure with world class buildings and transportsystemMultiple scaled up smart cities with connected infrastructure andcitizens

Sub-scale startup ecosystem with inward focus contributing
to 1% of total market cap; bias towards hardware, robotics andgaming; limited angel and follow-on funding, and early exits inlocal exchanges

At-scale ecosystem where companies grown from startups contribute to at least a quarter of market cap, with global ambitions on scalable software platforms, expanded angel network with favorable
regulation, deep bench of talent and large value creating exits

Systems integrators focused on providing technology products,
maintaining legacy technology and harboring majority of technology talent outside of organizations; limiting transformation

Systems integrators transform to deliver digital outcomes and build
talent capability for their customers; and support transition of core
sectors – banking, government, telecom, retail – securely to thecloud to build modern use cases

Source: McKinsey, McKinsey Global Institute, IMD, WEF, press search

22

Japan Digital Agenda 2030

Impact of the big moves on Japan’s GDP
If Japan can overcome its constraints, capitalize on the trends, and build on its endowments to drivea successful digital transformation, there is significant value at stake. This value will come fromproductivity gains in the core sectors of the economy. (Exhibit 5).

Exhibit 5:

Estimated impact of big moves on Japan’s GDP till 20301
GDP

Value at stake% increase overcurrent base GDP

Industry-wide GDP and economic value at stake from digitalization
Trillion JPY, 2018

Industrial
manufacturing

114

7~13

5~10

75

Retail

9~15

11~17

Government& education

47

2

4~52

Healthcare

39

4~6

11~15

Financialservices

23

Other

10~19

2~4

219

25~39

10~16

1. Contingent on timeline for use case execution and resource mobilization
2. Refers to direct effect on GDP; indirect effect is not included in government and education value at stake
Source: Cabinet Office of Japan, McKinsey Global InstituteAn analysis done by the McKinsey Global Institute for this effort shows that the gains from buildingout discrete use cases in Japan’s four core industries alone could be expected to unlock an overall
economic value between ¥22 and ¥37 trillion over the next decade. Including the gains fromgovernment and education boosts the value at stake to between ¥24 and ¥40 trillion. In addition
to the top four industry sectors, government and education, are other sectors such as professional
services, transport and agriculture, where extrapolated gains could be substantial, ranging between¥25 and ¥39 trillion. Altogether, the Japanese economy could expect an increased value of up to¥78 trillion45 .
This value – denoted in the exhibit in blue – could be generated through the execution of data
science, machine learning, and deep learning use cases across each sector; and has beencalibrated based on McKinsey experience, research and expert inputs. The timeframe for value
generation could vary, based on how quickly specific companies are able to mobilize resources andexecute use cases; which in turn depends on company-specific timelines, as well as availability of
talent and resources that can be dedicated to use case execution.
Further ahead, we will explore each of the big moves across education, industries, government,
startups and systems integrators, exploring discrete use cases that Japan can build to unlock thisvalue.

45

Methodology from “Notes from the AI frontier: Applications and value of deep learning”, McKinsey Global Institute, April 2018,
McKinsey.com; analysis updated in December 2020.

Japan Digital Agenda 2030

23

24

Japan Digital Agenda 2030

Big move 1: Develop a deep benchof world-class talent literate incloud tools, software development,
artificial intelligence and other digitaltechnologies and ways of working
Japan faces a shortage of digital talent that can be deployed in industry, government and thestartup ecosystem. As of 2019, the country had a total of 787,000 digital professionals such assoftware developers, data scientists, and cybersecurity experts. As shown in Exhibit 6, there were
62 software developers per 10,000 workers, compared to 156 in the US46 . To reach a similar level,
Japan would need to at least triple its digital workforce by 2030, and add more than 430,000
digital professionals by 2025, as estimated in the “2025 Digital Cliff” report from the Ministry of
Economy, Trade and Industry (METI).
Exhibit 6:

Comparison of technology professionals in Japan and the US
Number of tech professionals

Number of technology professionals per 10,000 workers,
2019

Software development

US

Japan

156

62

(% of total workforce)US

4.5 Mn(3%)
System and security analysts,
IT training, other

101

10
Japan

Operations and administration

19

13

Architecture and infrastructure

727

Data and research

33

0.7 Mn(1%)

Source: Information-technology Promotion Agency, IT Human Resources White Paper 2020; US Bureau of Labor Statistics

46

Current Population Survey 2019, Bureau of Labor Statistics; IT人材白書2020, Information Technology Promotion Agency,
August 2020, ipa.go.jp.

Japan Digital Agenda 2030

25

Talent is required to pursue any kind of digital transformation. Digital requires advanced criticaltechnical roles such as cloud architects, data engineers, machine learning engineers, and fullstack developers. Beyond “hard” engineering skills, it also requires user experience designers,
product managers, Agile coaches, digital marketers, and growth hackers. These jobs are core to
the modern digital teams that can propel digital transformation, and they are still somewhat rarein the Japanese workforce of 2020. Executive interviews reveal that many traditional companies
struggle to find and retain such skilled talent, even for a limited number of posts. The gap isfurther highlighted by the IMD World Talent Ranking, which in 2020 saw Japan 38th for its ability
in developing, attracting and retaining talent.
While shortage of talent within industry and government can partly be addressed via re-skillingand up-skilling programs, universities remain the core engine of future talent development. In
2019, 1% of Japanese undergraduate students were enrolled in computer science courses 47,
compared to 4% in the US 48 . In order to ensure sufficient labor supply for the digital journeyahead, the Japanese education system needs to develop a robust set of programs to build digitaltalent. Building on their world-class mathematics and science capabilities, Japanese universities
can create new curricula in areas such as cloud application development, data engineering,
cybersecurity, data science and traditional machine learning, deep learning for computer visionand natural language processing (NLP), hardware- and software-based applications for IoT,
and more. Even before university, digital education of the workforce could start as early as
elementary school: in 2017 and 2018, the Ministry of Education, Culture, Sports, Science andTechnology (MEXT), announced the introduction of programming education in elementary,
middle, and high school curricula from 2020, 2021, and 2022 respectively49 .
One way several countries have also addressed the talent gap is attracting professionals
from overseas, through favorable conditions and competitive work opportunities. Japan has
been taking regulatory steps to encourage an influx of professionals: since 2017, highly skilled
professionals can qualify for permanent residency in as little as one year, affording greater
stability and access to loans and employment opportunities. As of June 2020 an estimated
24,000 people held the Highly Skilled Professional visa, which allows high-earning and highly
educated talent to engage in a broader number of activities and benefit from preferential
procedures. Hoping to nearly double this number, the government set a goal of having 40,000
visa-holders by 202250 . Japan can be bolder in attracting talent given the size of the talent gap.
On top of technical skills, developing critical thinking and international exposure is also
fundamental to being able to compete in a global scale. Programs that foster creative,
personalized, and interactive learning are key to produce a workforce made of individuals who
can contribute flexibly and proactively to their environment. MEXT, in its “Third Basic Plan for
the Promotion of Education” from 2018, clearly emphasizes this need, and calls for educational
policies to foster creative and independent thinking, as well as English proficiency andinternational experience. However, challenges still exist at present, as Japan ranks at the bottomof league tables for the international experience of its workforce 51 .

47

学校基本調査 [Basic school survey], Ministry of Education, Culture, Sports, Science and Technology (MEXT), 2020,
mext.go.jp.
Integrated Postsecondary Education Data System, National Center for Education Statistics, 2019, nces.ed.gov.
49
新学習指導要領のポイント（情報活用能力の育成・ＩＣＴ活用）[Key points of the new course of study (information
utilization skills, and utilization of ICT)], MEXT, May 2019, mext.go.jp.
50
高度人材ポイント制の認定件数（累計）の推移 [Changes in the number of certified cases (cumulative) of the advanced
human resources point system], Immigration Services Agency of Japan, July 2020, moj.go.jp.
51
IMD World Digital Competitiveness Ranking 2020, International Institute for Management Development, 2020, imd.org.
48

26

Japan Digital Agenda 2030

This new wave of talent may need to become proficient in the 12 major digital technologies thathave significant scale-up potential in Japan, and that, when applied to industry sectors, can bringabout significant productivity gains in the coming years. An understanding of these technologies
is also critical at the executive level, which is why we dive into these with enough detail to provide
an understanding and grasp of their potential. Readers can dive into the areas they deem most
relevant. In each section, there are explanations of core concepts and key applications, as well as
illustrations of current adoption and trends.

Japan Digital Agenda 2030

27

12 technologies to build new talent around

28

1.

2.

3.

AI – Traditional
Machine Learning:
Numbers andprobability prediction

AI – Deep Learning:
Computer Vision

AI – Deep Learning:
Language andSpeech Processing

4.

5.

6.

Cloud-based
softwareapplications

E-commerce anddigital marketing

5G infrastructure andcommunications

Japan Digital Agenda 2030

7.

8.

9.

Next-gen mobile
devices and AR/VRInternet ofThings (IoT)

Additive
manufacturing anddigital products

10.

11.

12.

Robotics in thefactory floor,
workplace, and home

Cybersecurity

Digital ways of working– User-centered design
and Agile delivery

Japan Digital Agenda 2030

29

30

Japan Digital Agenda 2030

Big move 2: Drive broad-scale upskilling
across the workforce by shifting fromtraditional to adaptive learning tobuild digitally relevant skillsets
Digital technologies will make it possible to automate an increasing number of tasks: repetitive
cognitive tasks such as data collection and handling can be carried out by robotic process automation,
while robots will be able to handle predictable physical tasks in a variety of industries. Automation –implemented through machine learning and deep learning – creates opportunities to increase efficiency,
lower costs, and allow workers to focus on less monotonous tasks; however, it will displace jobs that arelargely automatable. According to the McKinsey Global Institute, up to 46% of the Japanese workforce
in 2030 might need to shift to other activities, amounting to an estimated 27 million workers. Compared
to a global benchmark of 14%, and 33% for advanced economies52, the projected impact of automation
is highest in Japan, driven by relatively higher wages that encourage adoption and by a shrinking labor
force.
In Japan, more than half of the time spent on work activities involves highly automatable tasks, suchas processing and collecting data, or predictable physical work (Exhibit 7). For nearly all occupations,
automation will change the mix of activities involved in each job, with a shift towards tasks involvingsocial, emotional, and cognitive skills. Japanese workers can learn new skills in new jobs: for example,
user experience designers, product managers, digital marketers, data engineers, software developers
are all relatively new roles in growing demand in Japan.
Exhibit 7:

Automation potential by activity type in Japan
Time spent on total work
activities in 2018, %Sampleoccupations

Automation
potential, %Processing data

17

Payroll officers
Transaction processors

72

Predictable physical work

20

Production workers
Machine operators

71

Most susceptible activities
to automation account for56%

of total working hours inJapanCollecting data

19

Legal-support workers
Mortgage originators

67

Unpredictable physical work10

Gardeners
Construction laborers

40

Stakeholder interactions

15

Personal caretakers
Salespersons

27

Applying expertise

12

Artists
Scientists

23

Managing others

7

CEOs
Project managers

14

Source: O*NET OnLine; Statistics Bureau of Japan; McKinsey Global Institute analysis

52“Jobs lost, jobs gained: Workforce transitions in a time of automation”, McKinsey Global Institute, November 2017, McKinsey.com.

Japan Digital Agenda 2030

31

Automation will bolster demand for roles in the technology and professional services sectors,
as well as new jobs that did not exist until recently, such as digital marketing and productmanagement. In Japan, the McKinsey Global Institute’s future employment model forecasts thatabout 19 million jobs could be automated between 2018 and 2030. Conversely, several longterm trends could create demand for nearly 16 million jobs, either in existing roles or in new ones,
reaching full employment (Exhibit 8) 53 . In order to maximize occupation and sustain GDP growth,
it will be necessary to shift workers to new roles efficiently and on a large scale, so as to fully
employ the available workforce and avoid loss of productivity due to friction during the transition.
Ensuring this happens will require action by various stakeholders.
Exhibit 8:

Change in employment due to automation in Japan, 2018-30 projection
Projected change in employment, millions
67.0

2018 baseline

Jobs displaced via automation and COVID-19 trends1-19.0

Jobs gained via long-term and COVID-19 trends2+8.5

New occupations3 and exogeneous job growth2030 employment

+7.1

63.6

1. COVID-19 accelerated automation, e-commerce, increased remote working, and reduced business travel
2. Rising incomes, aging population, increased technology use, infrastructure investment, climate change, rising education levels, marketization of unpaid work,
and COVID-19-accelerated e-commerce
3. Studies show that on average, 0.5% of the workforce has been working in “new jobs’ every year (Lin, Jeffrey, “Technological adaptation, cities, and new work,”
The Review of Economics and Statistics, issue 93,May 2011)
Source: McKinsey Global Institute analysis; UN population projections; ILO projections on participation rates; Oxford Economi cs unemployment forecasts; Japan
Institute for Labour Policy and Training; O*NET OnLine; Statistics Bureau of Japan;

Government agencies to expand transition support and job creation for workers
As a result of automation, the need for workers to adapt will increase, presenting newopportunities for government agencies and institutions to act.
First, labor agencies could move beyond providing financial support for unemployment andplay an active role in reskilling mid-career workers. In Denmark, for example, a partnership ofgovernment, employers, and unions provides career guidance and training for unemployedindividuals, as well as vocational courses open to anyone. In Sweden, employers can pay
into private “job-security councils”, which provide financial support and career counseling toemployees who lose their job.
Governments can also encourage job creation and worker re-deployment in a number ofways. First, companies could be incentivized to invest in human capital through subsidies ortax incentives that reward the establishment of training programs. Second, the McKinsey
Global Institute points to the potential job creation effect of large projects in such areas as new

53

32

Maya Horii and Yasuaki Sakurai, The future of work in Japan: Accelerating automation after COVID-19, June 2020,
McKinsey.com; analysis updated as of December 2020.

Japan Digital Agenda 2030

infrastructure, climate change abatement, and affordable housing, supported by public or private
investment. Finally, new small- and medium- sized businesses can create employment: in orderto encourage entrepreneurship, streamlined regulations and incentives to encourage risk-taking
could be put in place 54 .
Business to create new learning pathways for required talent
In addition to hiring new digital talent, retraining the existing workforce is a strategy forbusinesses to secure the skill mix required while retaining internal culture and know-how. Given
the prevalence of lifelong employment in Japan, it is important for employers to change how theytake a stake in their employees’ development. Companies can achieve large-scale reskilling by
exploring partnerships with universities, as well as leveraging education technology (EdTech).
With the latter, employers can use Learning Management Systems (LMS) to create self-paced,on-demand courses that reduce time commitment from instructors and allow learning teams
to focus on content development; moreover, enterprise LMSs allow managers to monitor the
training progress of team members, reducing the related admin overhead.
To succeed, companies would first have to first identify their talent needs and necessary skills foreach profile; after defining distinct learning pathways, they can build learning platforms to create
trainings, or leverage third-party providers to create customized curricula from available course
portfolios.
Employees to embrace global online learning platforms and certifications
It will be increasingly difficult for workers to rely solely on the skills they acquired in school oruniversity, as technology rapidly evolves and companies become more agile in responding tochanges in the market and customer demand. Individuals should plan to upgrade their skillsets
continuously by considering what skills will be in demand, and proactively plan their learning.
Technology can facilitate learning, by granting access to high quality supplementary education
via online university degrees, MOOCs (Massive Open Online Courses), available at lower costs
than formal education, and tailored adaptive learning tools, enabled by technologies such as
cloud computing and machine learning. For example, some of the world’s leading machinelearning content is available for free on platforms such as Coursera. However, for courses that are
not provided in Japanese, the language barrier to education could provide a stronger reason for
more workers to learn English, perhaps by resorting to widely accessible EdTech solutions. At thesame time, many learning platforms are already using machine learning to automatically generatetranslated captions or support community-driven contributions.
Professional training programs such as “coding bootcamps” are also becoming increasingly
popular worldwide as a reskilling pathway: these programs offer intensive programmingcourses over a few weeks, provide micro-accreditations, and connect participants with industry
sponsors for opportunities. Also important in the cybersecurity realm are technical cybersecurity
challenges, such as “Security Camp,” a study program and competition for students and thelargest such challenge in Japan. METI’s Information-technology Promotion Agency (IPA) reported
that many graduates of the “Security Camp” are now active in a wide range of activities in Japan’s
IT industry55 .
While such programs are common in the technology sector, they are still rare in other areas,
where employers typically prioritize formal education and past professional experience over
online programs as hiring criteria. This perception gap can discourage the adoption of such
resources and reduce the incentive for employees to pursue additional training. In order to unlock
the most value from alternative forms of education and stimulate the continued creation of suchprograms, governments, companies and universities alike could challenge the establishedparadigm by supporting micro-accreditation schemes and adapting their hiring criteria toincorporate a broader set of indicators.
54
55

Jobs lost, jobs gained”, 2017.
“セキュリティ・キャンプ協議会について” [The Security Camp council], Security Camp, accessed December 14, 2020,
security-camp.or.jp.

Japan Digital Agenda 2030

33

34

Japan Digital Agenda 2030

Big move 3: Drive end-to-end digitizationof education sector from pre-school totertiary education with solutions forschool and educator efficiency, as well as
student accessAs of 2017, two million teachers were responsible for the development of almost 19 million students
enrolled in the Japanese education system, of which 13 million in were in elementary and highschools, and nearly four million in tertiary education56 . With nearly 40,000 public institutions serving
70% of the school population, the Japanese government spent about 3% of the country’s GDP
on public education in the same year57. As for the informal education industry, in 2018 the Ministryof Economics, Trade and Industry (METI) estimated 2015 revenues of about ¥2,500 billion, withtutoring schools capturing 38% of the market, followed by corporate training services and language
schools at 20% and 12% respectively58 .
Starting with primary-secondary education, the Japanese school system has been consistently
ranked among the most effective in the world: in the latest Programme for International Student
Assessment (PISA) conducted by the OECD in 2018, Japanese students ranked 5th in science,
6th in mathematics, and 16th in reading. In order to maintain leadership in educating top talent, thegovernment has launched several initiatives to promote digitization and innovation in education via
its “Society 5.0” vision.
One such initiative is GIGA (“Global and Innovation Gateway for All) launched by the Ministry of
Education, Culture, Sports, Science and Technology (MEXT) in 2019. GIGA is a two-pronged effort
aimed at enhancing technology in schools and enriching learning with digital solutions.
GIGA subsidizes and guides technology procurement, with plans for every school in Japan tohave access to high-speed network connections by 2020, and one laptop per child by 2023. As
an example of network implementation, in 2020, Sagamihara City partnered with Cisco Systems
to deploy Meraki, a cloud-based school network solution, across all 105 local schools59 . In termsof device access, Hirakata City provided its entire elementary and junior high school populationof 32,000 students with Apple iPads, in order to equip children for seamless switches to remotelearning and enable new multimedia or outdoor learning activities60 . GIGA also promotes the use ofhigh-quality digital textbooks and teaching materials, publishing guides on technology educationand digitally enabled teaching of traditional subjects61 .
In addition, the government is pursuing education innovation at the tertiary level. In June 2020,
a MEXT initiative named Scheem-D (“Student-centered higher education ecosystem throughdigitization”) was announced to provide a platform for university teachers and technology companies
to experiment with new digital use cases and scale up and disseminate successful innovations toinstitutes nationwide 62.
Digital can unlock the effectiveness of teachers and administrators. In many cases, teachers spend
almost half of their working hours not directly engaging with students, but preparing lessons,assigning and grading homework, and managing student records. By one estimate, up to 40% ofteacher hours are spent on activities that could be automated63 . In Japan, data from MEXT shows
56

文部科学統計要覧（平成 30 年版） [MEXT Statistics Handbook, 2018 Edition], MEXT, 2018, mext.go.jp.
UNESCO Institute for Statistics, December 2020, uis.unesco.org.
教育産業の現状 [Current state of the education industry], METI, January 2018, meti.go.jp.
59“相模原市の公立学校、「GIGAスクール構想」に基づく学校ネットワークにCisco Merakiを採用” [Sagamihara City’s publicschools adopt Cisco Meraki for school networks based on the GIGA school concept], September 8, 2020, news-blogs.cisco.com.
60
Kazumi Oda, “クリエイティブなiPadは｢教育委員会のお気に入り｣になれるか？” [Can the creative iPad Become a favorite ofboards of education?], Gizmodo, September 10, 2020, gizmodo.jp.
61
教育の情報化に関する手引 [Guide for computerization of education], MEXT, June 2020, mext.go.jp.
62
大学教育のデジタライゼーション・イニシアティブ [Initiative for university education digitization], MEXT, June 2020, mext.go.jp.
63
Jake Bryant, Christine Heitz, Saurabh Sanghvi, and Dilip Wagle, How artificial intelligence will impact K-12 teachers, January 2020,
McKinsey.com.
57

58

Japan Digital Agenda 2030

35

that on average middle school teachers work 64-hour weeks, well past guidelines for avoiding
overtime, and this excludes work done outside of school64 . Such long hours likely contributeto Japan having the second largest shortage of teaching staff among OECD countries asreported by school principals 65 . By leveraging digital solutions such as Learning Management
Systems (LMS) and dedicated automation tools, technology can free up teacher time, allowing
them to reduce overall working hours and spend more time teaching and inspiring children.
In response to these new trends and opportunities, technologies that aim to digitize
education, known as “e-learning” or “EdTech”, are on the rise. The sector is attracting growinginterest: the global e-learning market was estimated at $194 billion in 2019 and is predicted to
grow annually by 10.3% through to 2023, reaching an estimated $287 billion66 . Japan is also
expecting a steady growth of 5% annually in EdTech, from an estimated $2.2 billion in 2019 toa projected $3 billion by 2023 67.

Potential for digitization along the education journey
An individual’s lifelong learning journey can be divided into four phases, from pre-school andkindergarten, through primary and then secondary education, to tertiary and professional.
The digital use case roadmap shows applications of digital technologies across all four phases(Exhibit 9).
Exhibit 9:

Digital use case roadmap across the education journey
Use case deep dive follows

Non Exhaustive

Learners

Pre-school andkindergarten

Primary andSecondary

Tertiary

Professional

Content platforms for literacy

Collaboration tools for group work

Peer tutoring marketplaces

Self-serve company education
platforms

Story-based programming languages

Online homework and test submission

VR situational training(leadership, sales, HR)

AR/VR immersive learning
Online and hybrid learning

Special needs education: accessibility and tailored learning
Language training Adaptive lessons and conversational AI practice Literacy training
Tuition centers and test prep
 Mastery-based study schedules and homework 1:1 remote tutoring

Standardized tests: adaptive tests, automated grading, realistic testing environment
Student forums and knowledge bases
Educators

Enriched development journaling

Interactive curriculum design tools

Multimedia lesson design and delivery
Online homework delivery and grading
Online teacher collaboration platforms

Schools andthird parties

Admin management (shifts, etc.)

Admission and exam management

Tuition benefit platform

Student management and parent communication

Student portfolios and reports

Employee learning tracking
dashboards

Career counselingand alumni affairs

Credential networks
for professional associations

Curriculum design and analytics
Early warning systems
Source: McKinsey

64

教員勤務実態調査 [Survey of teacher work conditions], MEXT, 2016, mext.go.jp.
Education GPS, OECD, December 2020, gpseducation.oecd.org.
E-Learning Trends 2019, Docebo, 2018, docebo.com.
67
eラーニング市場に関する調査を実施 [Survey of the e-learning market], Yano Research Institute, April 2020, yano.co.jp;
ITナビゲーター2020 [IT Navigator, 2020 edition], Nomura Research Institute, December 2019, nri.com.
65

66

36

Japan Digital Agenda 2030

Various digital solutions can provide benefits not only to learners but to key
stakeholders in the education journey:— Student-focused technology for personalized and enhanced learning— Educator-focused tools for increased teacher effectiveness— School-focused platforms for student management and broader reachStudent-focused technology
Mastery-based study schedules and homework

Impact: detailed insights on student performance for more efficient learning
In Japan, supplementary education is very common, with 50% of pupils attending
after-school classes to support learning achievements and prepare for university
entrance examinations 68 . In order to increase the effectiveness of coaching programs,
EdTech solutions can be leveraged to personalize study content and timing delivery
to suit each child’s needs. Japanese startup atama plus has developed a learning
platform that uses machine learning to analyze students’ strengths, weaknesses,
growth and concentration levels. It then creates a more efficient learning program forthem; blending software-based and in-person teaching, teachers can quickly assess
progress, and use the service to deliver homework, optimizing time spent on these
activities.

Language training with adaptive curricula
Impact: faster progression towards literacy and proficiency

Digital technologies can optimize new language learning while also reducing costs forlearners. Duolingo leverages machine learning to identify a learner’s proficiency levelat any given time and provide them with tailored learning opportunities at the best
moment. This can help novice learners gain the equivalent of four college semestersof learning with half the time commitment69 . In 2020, Google released its Readalong
application worldwide, which uses speech processing to improve children’s literacy
by providing real-time feedback; first released in rural communities in India, it helped
64% of subjects significantly increase their reading scores70 .

Immersive learning with AR / VR

Impact: vivid learning experiences, lower costs, lower risk for situational learning
Just as school trips and laboratory classes can inspire students via experiential
learning, there is growing interest in applying AR/VR (Augmented Reality and Virtual
Reality) to create joyful experiences. Microsoft’s Hololens, for example, is a headsetthat allows the user to see digital objects overlaid onto the real world and interact
with them: students wearing the headset can enjoy vivid learning experiences touringhistorical sites, inspecting human anatomy or exploring the solar system while in68

Shadow Education: Private Supplementary Tutoring and Its Implications for Policy Makers in Asia, AsianDevelopment Bank, May 2012, adb.org.
Jiang et al., Duolingo efficacy study: Beginning-level courses equivalent to four university semesters, Duolingo,
August 2020, duolingo.com.
70
Kyle Wiggers, “Google’s Read Along taps AI to improve kids’ reading skills”, VentureBeat, May 7, 2020,
venturebeat.com.
69

Japan Digital Agenda 2030

37the classroom. Interviews with participants attest to benefits in retention, test scores, andengagement71 . In tertiary and professional education, VR shows potential as a means tosimulate complex social or technical situations with lower risk and costs: for example, EdTech
company Mursion provides VR-based workplace training for leadership, inclusion, customer
service, and even teacher training, allowing employees to practice a wide range of situations
and receive coaching.

Educator-focused technology
Online collaboration and homework delivery
and grading

Impact: increased efficiency of learning activities, greater resilience for remote teaching
Spurred by the 2020 COVID-19 pandemic, remote collaboration is playing an increasing rolein the school system: several EdTech players aim to simplify the provision of online teachingwhen in-person education is not possible, and also reduce the amount of time spent byteachers and students assigning, completing, and grading homework. Google and Microsoft,for example, have each built on their workplace productivity suites to offer education-focused
products Google Classroom and Microsoft School Dashboard: teachers can use them todeliver lessons remotely, share materials, and distribute and collect assignments. Additional
cloud solutions can also be integrated by schools to foster creativity and teamwork. The
Adobe Creative Cloud, for instance, allows teachers to design interactive projects wherestudents can collaborate to practice multimedia storytelling, using accessible, browser-based
tools such as Adobe Spark.

School-focused technology
Online and “hybrid” university education

Impact: broader access, reduced operating costs

Online education has long been available in a variety of forms, from massive online open
courses to formally accredited university courses. However, until the COVID-19 pandemic
in 2020, the latter was not a mainstream option: for example, in 2018 only one third of US
students attended at least one online course, but in 2020 the proportion was close to100% 72 ; in Japan, institutions such as the University of Tokyo have made lecture recordings
and courseware available online, and several have temporarily adopted online learning.
For universities, hybrid or fully remote instruction presents several opportunities: it lowers
operating costs from lecture halls and accommodation facilities, makes it possible for more
students to attend courses, and allows for more flexible academic calendars. Moreover, theuse of cloud and other technologies allows educators to leverage resources from multiple newsources, such as other universities or education programs. In order for these models to be
successful, however, universities need to carefully design programs that allow for academic
mentorship and feedback, social interactions, and equitable access.

71
72

38

Alice Bonasio, Immersive Experiences in Education, Microsoft, 2019, microsoft.com.
André Dua, Jonathan Law, Ted Rounsaville, and Nadia Viswanath, Reimagining higher education in the United States,
October 2020, McKinsey.com.

Japan Digital Agenda 2030

Online student management and parent communication

Impact: reduced administrative overhead for teachers

Repetitive and unwieldy administrative tasks, such as attendance recording, grade and form
management and parent communication, can take up to 10% of teachers’ time73 . School
Management Systems are suites of tools that digitize and automate many of these tasks, andseveral EdTech companies in Japan offer them: for example, CoDMON is a tool that allows
kindergartens and primary schools to automate attendance tracking with access cards, manage
children’s health checks, billings, and emergency alerts, and communicate with parents safely
and quickly; in a similar fashion, BLEND allows teachers to manage student grades and reports
in a central digital system, reducing the time spent handling and creating paperwork.

73

How artificial intelligence will impact K-12 teachers, January 2020.

Japan Digital Agenda 2030

39

Barriers to digital transformation
For this big move to come to realization, addressing mindsets, talent constraints, legacy technology
issues or regulatory changes may be need. A few examples are:Resource and skill gaps for schools and teachers limit advanced use-cases: As of March 2020,
MEXT’s GIGA effort has led to 91% of classrooms having internet access and 60% of public schools
being equipped with projectors or digital whiteboards74 . However, only 8% of schools are using digitaltextbooks for students75 , and just 24% of principals agree that an effective online learning support
platform is available, one of the lowest rates among OECD members. Moreover, and perhaps most
crucially, the PISA survey highlighted gaps in teachers’ tech skills, placing Japan at the bottom in terms
of principals’ confidence in their staff’s technical and pedagogical skills for digital education76 . This skill
and confidence gap could reduce the willingness of educators to experiment with new solutions.

Disparity in device access poses the risk of deepening education inequality: The OECD reports thatin 2018 Japan was the only country where the rate of desktop or laptop computer usage for 15-year-old
students had declined since 2009, falling from 48% to 35% 77. Access to a personal digital device isbecoming increasingly necessary as digital learning (both formal and informal) spreads, a need that was
sharpened by the COVID-19 crisis of 2020, which caused many schools to resort to remote learning,and parents to work remotely, in some cases on shared devices. Uneven access to technology can undomany efforts to make learning settings more equitable for children from various backgrounds. To avoid
unfairness, teachers may hesitate to employ digital solutions until all children have access to technology.

Mixed learning outcomes from inappropriate use of technology create uncertainty over further
adoption: Equal access to devices will be a key factor for widespread adoption of EdTech; however,
simply supplying them to students does not automatically result in better learning outcomes, unlessthey are used as part of a well-considered educational experience. The ICT survey of the 2018 PISA
assessment explored correlations between technology usage and student performance: in Asia,
technology in the hands of students only (e.g., laptops and e-readers) was associated with lower
student scores in reading than for peers who did not use them; conversely, usage of teacher-controlled
devices (e.g., projectors) generally correlated with more positive results than with tablets or laptops78 .
Such results may discourage teachers and policymakers from pursuing digital learning. Conversely,
they should serve as a reminder that digital is a powerful tool for education, as long as educators andlearning experts are careful in its implementation: just like evidence-based medicine is deliberate about
using data to care for patients, an “evidence-based digital education” approach should use data fromexperiments and previous experience to identify and scale the solutions that best improve learning
outcomes.

Local privacy regulations pose challenges for cloud learning solutions in schools: Although the GIGA
program promotes cloud adoption to a certain extent, it has prioritized distribution of computing devices
to each student and improvement of the network environment, without setting a clear mandate for cloud
adoption. Since the COVID-19 crisis in 2020, the promotion of ICT systems in schools has gained greater
political attention, but personal information protection ordinances of local governments have been abarrier: local regulations differ by jurisdiction, with the majority prohibiting online access from computerdevices that handle personal information. While driven by the desire to protect individuals’ privacy, thecomplexity and multiplicity of such provisions present a major impediment, particularly in implementing
remote-based education at scale.
74

令和元年度学校における教育の情報化の実態等に関する調査結果（令和２年３月現在） [Survey results on the situation ofdigitization of education in schools in FY2019 (situation as of March 2020)], MEXT, October 2020, mext.go.jp.
75
Ibid.
76
Education GPS, OECD.
77
Toshihiko Maida, “世界で唯一、日本の子どものパソコン使用率が低下している” [Only in the world, the PC usage rate of Japanesechildren is declining], Newsweek Japan, January 8, 2020, newsweekjapan.jp.
78
Jake Bryant, Felipe Child, Emma Dorn, and Stephen Hall, New global data reveal education technology’s impact on learning, June 2020,
McKinsey.com.

40

Japan Digital Agenda 2030

Enablers for digital transformation
Enablers are strategies, mindsets, talent, technology, or regulation that need to evolve to acceleratetransformation. For this move, some potential areas to address include:
Focus on solutions for teacher effectivenessto reduce administrative working time anddrive adoption: While EdTech tools can provide
stimulating learning experiences, they cannot
replace good teachers and their ability to inspireand connect students. Moreover, the PISA
results on technology and performance showthat implementing student technology beyond
hardware is very difficult. In the classroom, EdTechshould rather focus on liberating teachers from
non-teaching tasks, so they can spend moretime on personalizing lessons for their students.
According to a global survey by McKinsey, theareas where technology could unlock most time
are lesson preparation, evaluation and feedback,and administration79: for example, existing
technologies in natural language processing(NLP) and robotic process automation (RPA) canbe used to automate homework assessmentand equipment procurement. Schools could
focus on tangible “quick wins” that can generate
enthusiasm among teachers and momentum toexplore more holistic solutions.

Build digital capabilities of teachers and schoolleaders to enable use of learning management
systems: As suggested by the PISA ICT survey,
schoolteachers in Japan may not yet be equippedwith the technical and pedagogical skillsets
necessary for e-learning. Upskilling teachers
by including digital literacy and pedagogy intheir training can help them harness technology
effectively and build the competencies to pilot
EdTech solutions and decide on their roll-out.
Beyond training, dedicated teacher networks
could be put in place to enable cross-school
collaboration and mentoring. Moreover, teachers
could be trained to educate students on simple
everyday habits that can improve cybersecurity for
all, such as choosing complex unique passphrases,
thinking critically about which links to click, andbeing careful about connecting to potentiallyinsecure public Wi-Fi networks.

79

Create a knowledge base of best-practice
EdTech tools to simplify procurement andimplementation for schools: The range of digitalsolutions on offer can be overwhelming, andwithout guidance teachers may find it hard to
identify the best tools. The Ministry of Economy,
Trade and Industry (METI) lists over 140 EdTechsolutions on its Learning Innovation portal:
exploring synergies with MEXT, the government
could support schools by impartially reviewing
EdTech tools and defining “implementation
recipes”, so that schools may confidently choose
best-practice solutions.

Foster collaboration between EdTech,education publishers, and teachers to design
solutions with proven positive learning
outcomes: Each of these players brings
significant expertise in its field - technology,
content creation, and teaching delivery
respectively. They are all needed in the productdevelopment process. By involving all parties,businesses can ensure they develop high-quality
digital solutions that are also easy to adopt,
instructive for students, and do not impose
significant training requirements.

Harmonize privacy regulations countrywide toenable wide solution rollout: Privacy regulations
among the nearly 2,000 local governments
are colloquially known as the system of “2000ordinances”. A harmonized regulatory framework
would facilitate the deployment of cloud-basedlearning solutions countrywide. Given the scale ofthe task, a concerted effort by various agencies
and commissions in partnership with EdTech
players will be crucial for success. With that inplace, it will be possible to provide additional
educational value through technology, such as
personalized learning with performance analytics
and continuous collaboration.

How artificial intelligence will impact K-12 teachers, January 2020.

Japan Digital Agenda 2030

41

42

Japan Digital Agenda 2030

Big move 4: Industrial manufacturing
to build on hardware, robotics,
and automotive endowments byleapfrogging with software, machinelearning and deep learning
Valued at nearly ¥114 trillion in 2018 80, industrial manufacturing is the largest sector of Japan’s
economy, and covers a range of innovative industries such as automotive, industrial machinery, building
technologies, electrical and power equipment. The industry is mature, and has a heritage of high quality,
durability, and innovation through continuous improvement.
Shaping the overall industry and accounting for nearly a quarter of its revenues is Japan’s automotive
sector, the largest manufacturing segment overall in Japan. Japanese automotive companies produce
approximately one third of the global total automobile supply across a broad network of sites. Leading
Original Equipment Manufacturers (OEMs) include Toyota, Nissan and Honda. Industrial machinery also
includes world-class organizations such as Keyence and FANUC.
Japan has many decades of manufacturing prominence in its history, and a starting point that alreadyleverages continuous productivity improvements, the application of robotics, and hardware based
technologies. The next frontier of digital for Japan’s industrial sector lies in the broad adoption ofsoftware, machine learning, and deep learning across all core operations in the industrial value chain.
In sub-sectors such as automotive this will mean putting applied AI in the form of autonomous driving
at the heart of vehicles, and in others such as industrial machinery, leveraging AI for key supply chain,manufacturing, and aftermarket processes.

Potential for artificial intelligence across the value chain
Traditional machine learning for numbers and probability predictions, and the more powerful deeplearning for computer vision and natural language processing, open up a new range of digital use cases
for industrial companies (Exhibit 10). These use cases represent an evolution from human observationand data analytics methods. AI in summary involves the labeling of data by experts, to train models, andobtain high accuracy predictions to automate tasks. Japan’s industrial sector can continue applying
many technologies such as robotics and hardware, but it is in the application of AI where Japan canleapfrog and create a defensible globally competitive advantage.
There are four broad areas involving artificial intelligence that can be applied across the industrial value
chain.
— Traditional machine learning, to predict numbers and probabilities in key tasks— Deep learning – computer vision, used to classify images and detect objects— Deep learning – natural language processing for text and speech— End-to-end application of fully autonomous driving, which is specific to the automotive sector

80

National Accounts of Japan, Cabinet Office, December 7, 2020, esri.cao.go.jp.

Japan Digital Agenda 2030

43

Exhibit 10:

Digital AI use case roadmap across the industrial manufacturing value chain
Use case deep dive follows

Non Exhaustive
R&D

Sales and
distribution

Manufacturing

Installation

Aftermarket

P ro c u re m e n t

Man ufacturin g

Aftermarket Parts
and Services

D at a - d r i ve n s e r v i c e s

Automated
dynamic
procurement

Predictive
manufacturing
line stoppage

Logistics optimization
through geospatial
analysis

Installation cost
predictive sizing

Predictive targeting
P re d i c t i v efor service agreement maintenance using
IoT and over-theattach rateair (OTA) updates

Traditional
machinelearning

P re d i c t i v e p ro d u c t
f e a t u re s e l e c t i o n

Deep learning –computervisionPrediction ofPrediction of‘designed in’ quality vendor “supplied
using computerin” quality
aided design

Man ufacturin gd efe c t d e te c t i o n-v i s u a linspection

Automated sales lead
identification using
satellite imagery

Automated fieldinstallation support

Af t e r m a r k e t ‘ s n a p
a n d s w i p e’ p a r t s
c o m m e rc e

Prediction of time toreplacement basedon field condition

Deep learning –sound, speech& language
processing

NLP for collectionof early sentimenton prototypes

Audio-based
defect prediction

NLP for prediction ofB2B deal successprobability

Audio-based
installation quality
testing

F i e l d ex p e r t i s e
c h at b ot

Vibrationinterpretation andcontrol

NLP for predictionof suppliernegotiation
potential

Sector specificapplication ofmachine & deeplearningKeyte c h n o l o g yenablers

Fu l l y a u t o n o m o u s v e h i c l e d e p l o y m e n t

Robotic automation, cloud platforms and infrastructure, IoT and connected sensors

Source: McKinsey

Traditional machine learning, to predict numbers and probabilities
Machine learning for product feature selection

Impact: Reduced R&D costs, reduced manufacturing costs from efficient design, faster time tomarket, improved customer satisfaction with end-product
Deciding the feature specifications of a product - and on a broader level an entire product portfolio - isrequired to launch successfully in a market. Product teams must optimize for features that customers arewilling to pay for, whilst considering product development and manufacturing costs. There are always
trade-offs to determine which features should be prioritized, and which should be discarded.
The known toolset to analyze and prioritize product features is vast, and the process is often an inductive
one requiring the collection and analysis from multiple data sources, such as customer reviews, conjoint
analyses, actual product performance data, market share, price lists, and the bill of materials among
others. Sifting through this data is time-consuming, and gaining actionable insights, given the size andformat of the data, is even more challenging.
Machine learning will enable the next frontier of product development. Data sets of historical features
can be labeled to specify whether those features were liked or not liked by customers; and labeled todetermine their actual manufacturing time, cost, or if they faced any manufacturing issues. This canenable future predictive product development questions to be asked such as ‘what may a future feature
cost?’ or ‘what is the probability that this feature can be produced without an issue?’. Moreover, deeplearning can leverage deep feed forward neural networks, that can process a wide range of data inputs,and ‘one-shot’ the process of picking those inputs that best predict the cost, quality or incremental valuethat features add to a product.

44

Japan Digital Agenda 2030

Machine learning driven predictive maintenance using IoT data
and Over-the-Air updates

Impact: lesser downtime of equipment, slower wear-and-tear

Asset maintenance has been evolving rapidly, with many companies or customers having moved from‘break-fix’ maintenance to ‘preventive maintenance’ in order to avoid products failing in the factory,
on the road, or in the field. Data science and analytics has enhanced maintenance schedules, byidentifying ideal times to drive preventive maintenance, thereby enabling labor and parts savings.
Today however, machine data extraction is largely done manually via hardware ports, and bespoke
analyses need to be run to determine broad ‘predictive’ maintenance schedules. The next wave ofdigital involves more advanced IoT sensors at scale, which coupled with 5G connectivity, can relay
back machine and contextual information that can aid in the prediction of potential failure. Moreover,the same connectivity can be used for over the air updates to resolve select issues as more hardwareis ‘software-ized’.
Machine learning enables ongoing predictions, using streaming data to predict the probability
that an asset will fail, and making it possible to deliver pre-emptive updates or truly hands-on
maintenance when needed. AT&T is an example of a company enabling 5G connectivity, live video
and IoT sensors to support factory automation. AT&T’s Automated Material Handling System isequipped with 4K wireless cameras and IoT sensors to enable remote monitoring and collection ofdata involving acceleration, position, temperature, humidity and gas flow; and 5G allows for near realtime transmission of large volumes of data collected, at a large scale across a full suite of connected
devices81 . The collected data is analyzed and used for proactive maintenance of factory equipment.
Similar use cases exist in the field of construction, Caterpillar Inc. has over one million connected
machines that produce large amounts of data 82. Machine learning models are used to harness thisdata into actionable insights that include predicting unplanned downtime for equipment or rebuilding
schedules for main components, in order to save operators money and keep work on schedule.

Deep learning – computer vision, to classify images
and detect objects
Deep learning for manufacturing defect detection

Impact: reduced manufacturing operational costs due to automation of visual inspection,
improved quality of products, higher customer satisfaction, lower warranty costs
Defective products mean rework at the end of a production line, or warranty costs paid out tocustomers once the product is in the market. Many manufacturing sites today still have visualinspections done by operators. In the auto industry for example, operators are required to check thepaint on the car in various checkpoints, as well as the flush gaps between stamped and assembled
metal parts. Detecting small dents or defects takes operators, time, and some defects can be
missed.
The next frontier for visual inspections leverages deep learning computer vision, where datasets withdefects can train models that detect issues automatically. Cameras in the production line can takehigh resolution pictures, and edge processing can be used to predict the probability of a defect in
the picture. Should there be a defect, then an operator can take over for further investigation. Deeplearning models can be updated and retrained for new types of defects, making this scalable at low
cost.

81
82

“AT&T and Samsung Bring 5G to Life for the Manufacturing Industry”, AT&T, June 21, 2019, about.att.com.
“Machine learning: Caterpillar Inc.’s Metamorphosis into Big Data”, Harvard Business School Digital Initiative, November 12, 2018,
digital.hbs.edu.

Japan Digital Agenda 2030

45

This technology is available today. Startups such as Landing AI have visual inspection platforms, andthere are various options that leverage robotics, software, and sensors. For example, Japanese robotics
manufacturer Keyence provides an array of machine vision and image processing technologies that can
detect even the minutest of flaws - as small as 0.03 mm - and support 100% in-line inspection83 .

Deep learning enabled aftermarket parts commerce

Impact: improved customer experience due to streamlined ordering process, increased aftermarket sales, reduced operational costs in after-market due to automation of customer support
functionality
Aftermarket parts are often a high double digit margin business for industrial companies. In someindustries, the gross margins of aftermarket parts oscillate between 40-80%. Most aftermarket parts
end-customers often fall into a Do It Yourself (DIY) segment that wants to buy a part quickly and performthe fix, or a DIFM (Do It For Me) customer that wants to buy a part, but get expert help to install andperform the repair.
Many industrial players have already setup e-commerce portals with a part number search, that allow
customers or dealers to search for a part and purchase online. AI will further transform this experienceby enabling DIY and DIFM customers to ‘search’ for a part by simply taking a picture of it with theirphone, and instantly purchasing without going through a funnel process that involves searching partnumbers, assessing fit, and providing other inputs such as location.
Computer vision enabled “snap and swipe” parts purchasing – involving snapping a photo of the partneeding replacement, and then simply swiping to order for delivery – can improve the customer journeyand expedite the buying process for aftermarket parts. Japanese companies have the technology
available to get started today. Car and machine OEMs often have datasets of parts photos. These need
only be labeled, and models trained on available tools such as AWS Rekognition or Google’s AutoML todetect what type of part the picture should detect. In inventories with thousands of SKUs (stock keeping
units), starting with high turnover SKUs is a sensible choice. Once this functionality is integrated into a
mobile app, all the customer has to do is snap a photo, and then swipe to purchase.

Deep learning – natural language processing for text and speech

Field expertise chatbots

Impact: reduced service cycle time, improved repair quality, lower labor costs
With industry experts in the field reaching retirement age, expert knowledge on how to install, run,
maintain, and repair products is gradually being lost. Conversational AI (also known as chatbots) is anelegant solution to automate the otherwise retired and lost knowledge of expert field workers, andcodify it in an efficient question-answer form, versus lengthy physical documents or hard to searchknowledge bases.
Companies with distinguished field engineers that are knowledgeable on how to troubleshoot issues,
can train and deploy models that answer key questions. Once again, the technology to do this is available
today. Using cloud tools such as AWS’s Polly or Google’s Dialogflow, companies can build chatbots totroubleshoot common maintenance issues in the field, with which junior engineers and technicians canconverse to get their questions answered.

83

46“Appearance inspection (foreign particles, flaws, defects)”, Keyence, accessed December 4, 2020, keyence.com.

Japan Digital Agenda 2030

Fully autonomous vehicle deployment
As a global leader in automotive production today, Japan may need to successfully transition its
future fleets into the world of autonomous driving and connected cars. A consumer survey by the
McKinsey Center for Future Mobility done in 2019 found that 40% of Japanese respondents wereinterested in trading in their manual vehicle for an autonomous one – 7 percentage points higher
than the global average of 33%. In the same survey, 36% of survey respondents globally said they
were willing to change car brands to achieve better connectivity. These trends will only accelerate.
Over the next decade, much of the race to enable autonomous will involve software. Key areas ofsoftware development involve deep learning for training, decision making, and actuation. The basisof competition will increasingly shift from traditional areas such as engine development, to software
related areas. In particular, progressing from L1/2 autonomous driving to L5 is likely to be thechallenge for Japanese and global automotive players over the next decade.

Exhibit 11:

Definition of autonomous vehicles based on levels of automation
Level 0Level 1

Level 2

No automation
Human driver performs all aspects ofdriving task (steering, acceleration,
braking, etc.)

Driver assistanceDriving assistance for certain aspects(e.g. adaptive cruise control) withhuman driver performing all
remaining aspects of driving task

Partial automation
Vehicle performs steering andacceleration, while human drivermonitors all driving tasks and cantake control at any time

Human driver monitors the driving environment

Automated driving system monitors the driving environment
Level 5

Level 4

Level 3Full automation
Automated driving system performs
all aspects of driving task, under
all roadway and environment
conditions that could have been
managed by a human driverHigh automation
Automated driving system performs
all aspects of driving task, undermost roadway and environment
conditions, even if a human driver
does not respond appropriately atrequest to intervene

Conditional automation
Automated driving system performs all
aspects of driving task, under certain
ideal conditions and limitations (e.g.
limited-access divided highway withspeed limit), with expectation thathuman driver will respond
appropriately at request to intervene

Source: Society of Automotive Engineering, McKinsey analysis

Japan Digital Agenda 2030

47

The automotive industry is progressing from level 0 to level 5 of autonomous driving. In the final quarterof 2020, an evaluation of active driving assistance systems (level 2) rated Comma Two’s Open Pilot,
Cadillac’s Super Cruise, and Tesla’s AutoPilot as the top driving assistance systems84 . Japanese OEMs
did not rank within the Top 10. To remain globally competitive, Japanese players need to boldly commit tomoving up the autonomous scale, overcoming barriers and enabling autonomous fleets.

Deep learning models for autonomous driving

Impact: more accurate autonomous driving capabilities, improved autonomous safety
The technology for autonomous driving is widely available today: camera sensors that are placed in the
car and take hundreds of pictures per second; deep learning algorithms and models such as YOLO (You
only look once, freely available on GitHub) that do object recognition, location, localization, and edge
processing that happens in the car, to predict what an object is (e.g. a stop sign) and take avoiding action(e.g. stopping the car). These models require labeled datasets which train them to identify images sothey can distinguish between common objects such as traffic signals, road signs, other vehicles andpedestrians; as well as continued training that comes from driving millions of miles on a given road with
an operator behind the wheel to train the model on what to do in a specific situation. Companies withdatasets and driven miles have a head start. Tesla for example has nearly 50 deep learning models,trained from millions of images, running at once on the car’s onboard computer to predict what theauto-pilot should do in reaction to traffic signals, pedestrians, or other objects. In addition to suchdeep learning models are high-performance, low-power consumption system on a chip that offer highreliability and scalability to allow for over-the-air updates. Such Application-specific integrated circuit(ASIC) or Graphical Processing Unit (GPU) chips are embedded into autonomous vehicles to allow foron-board edge processing, reducing the volume of data that needs to be transmitted outside the vehicle.

Autonomous vehicle safety

Impact: improved autonomous safety, fewer accidents, injuries and deaths
There are various technologies that can be deployed in conjunction to ensure the safety of autonomousvehicles: cybersecurity to protect connected car software from attacks; geofencing to improve roadsafety, efficiency, and reduce climate impact; and finally, the safety of the autonomous driving model
itself in how accurately it mimics safe human driver behavior in responding to road conditions, traffic
signals and other external elements. This last point, the testing and proving the safety of autonomous
driving, is critical for automotive developers to receive regulatory approval, and to garner consumer
confidence in the product.
Companies such as Intel’s subsidiary Mobileye are contributing to space of autonomous car safety
standards. Mobileye has developed a Responsibility-Sensitive Safety (RSS) model, that can measureand prove the safety of autonomous vehicles, using a tested mathematical formula to mimic human driver
behavior. RSS provides autonomous vehicle companies with a transparent safety model to test andprove safety of their vehicles, and defines a ‘safe state’ for human responsibility and caution needed toprevent accidents.

84

48“Active Driving Assistance Systems: Test Results and Design Recommendations”, November 2020, consumerreports.org.

Japan Digital Agenda 2030

Connected cars and services at scale

Impact: subscription models, increased volume of collected car data for monetization
Embedded connectivity for end-to-end software platforms, that links together all the major
systems in a car, becomes crucial as an enabling functionality. Moreover, with the advent ofautonomous eliminating the need for a human operator constantly in control of the steering
wheel, car passengers are freed up to focus on other tasks, such as working remotely while
travelling. Affordable, secure and reliable connectivity is becoming an increasingly importantfeature that consumers look for in their vehicles.
Companies such as AT&T, in partnership with KDDI, already provide connected car hardware,through connected car Wi-Fi hotspots which are embedded in vehicles, enabling travelers to
stream entertainment or work on-the-go for Mazda vehicles. Activating one hotspot can get
multiple connections, eliminating the need for individual data plans or routing devices. The car
Wi-Fi can also be connected to from outside vehicles, making it a viable connectivity solution
when working from home. Beyond in-vehicle infotainment, automotive players are starting tooffer other connected services such as, predictive maintenance, real-time emergency response,
concierge services, and even in-vehicle e-commerce services.

Japan Digital Agenda 2030

49

Barriers to digital transformation
For this big move to come to realization, addressing mindsets, talent constraints, legacy technology
issues or regulatory changes may be need. A few examples are:

Software talent and artificial intelligence expertise are scarce and not in the core: Many staff in
traditional manufacturing companies come from mechanical or industrial engineering backgrounds, withfewer from software or computer science related backgrounds. For example, R&D employees are today
disproportionately focused on improving the various steel or electronic components of a car, versus
creating new software or deep learning models. These teams may need to build an understanding ofdata labeling, model development and training, and deployment. Similarly, those on the manufacturing
floor may need to learn how to use and deploy tools that leverage deep learning computer vision, while
those in aftermarket may need a firm grasp on e-commerce, digital marketing, and AI. Talent is scarceinternally today, and most digital initiatives rely on IT vendors. Talent may need to come back into thecore given the strategic importance of digital now and going forward.

Limited availability of labeled datasets hinders development of machine learning models: The
predictive accuracy of machine learning starts with the quality and availability of labeled data that is used
to train machine learning models. Currently, most traditional manufacturers shun unstructured image
data banks in favor of traditional transaction tabular data. Practices to collect and label images - e.g.
image data from car camera sensors - is often not being collected and stored in a format that is usable
in the future. Multiple issues need to be addressed early to enable an AI future: either data is not being
collected at all; or collected data exists in siloes and is not being integrated in any interoperable format;
and finally, data is not being labeled.

Legacy IT policies and fragmented infrastructure impede data-driven use cases: One common but
significant barrier for industrial players is the continued use of legacy systems or outdated software. For
example, some automobile companies still engage in legacy 2D product design, which requires process
rework to move to 3D. Similarly, fragmented legacy systems for data collection - spread across bills ofmaterials in different divisions, with different data standards, formats and naming conventions - have
led to a data disconnect, where there is no single source of truth or integrated database that can beleveraged for digital use case implementation.

Autonomous vehicle regulations are at L3 and have yet to evolve to encourage L5: In April 2020,
the Ministry of Land, Infrastructure and Transport (MLIT) amended the Road Vehicle Act, to include
equipment for level 3 automated driving in the list of motor vehicle equipment subject to safety
standards; and in November 2020, the MLIT approved Honda’s new L3 self-driving vehicle, allowing
for it to be driven by the automated driving system rather than the driver in certain conditions85 . And
while these steps are a sign of progress, they come at a time when companies such as Tesla, Waymo,
and European OEMs such as Mercedes are working towards level 4. Given the importance of Japan’s
auto sector, bolder action is needed to encourage levels 4 and 5 development. Moreover, beyond theL5 regulations, the legal liability – for example, in the case of an accident caused in part by a machinelearning algorithm – remain ambiguous in the autonomous space, and the potential for unlimited liability
attributed to autonomous vehicle manufacturers is a deterrent for development.

85

50“Honda to launch world’s first level 3 autonomous vehicle by March”, 2020.

Japan Digital Agenda 2030

Top management reluctant to invest in bold digital transformations: Many executive offices
at traditional industrial manufacturing companies have agendas that focus on extending company
longevity, capturing low-hanging fruit operational gains, or protecting market share. Sometimes theseobjectives are counter to launching digital at scale. Small pilot digital investments are common, but large
investments in hardware or tooling tend to get higher priority. While there may be an understandingaround the high-level value proposition of digital, it is more challenging to set a bold agenda to drive
digital throughout.

Perception that automation threatens workforce stability: Software and automation are often
portrayed as a means to rationalize the workforce. Yet, for the development of new technologies,
new roles are needed, and humans are capable of learning new things in ways that computers aren’t.
Japanese companies are often hesitant to lay off workers compared to their global counterparts, andhence there may be a reluctance to drive new technology development if it puts existing workers’ jobs atrisk. Given the need for software and the demographic trends, the re-skilling and repurposing of parts ofthe existing workforce will be crucial for digital transformation.

Japan Digital Agenda 2030

51

Enablers for digital transformation
Enablers are strategies, mindsets, talent, technology, or regulation that need to evolve to acceleratetransformation. For this move, some potential areas to address include:

C-level to drive resource reallocation into
software, analytics, AI to achieve future digitalstate: Japanese companies are leaders inmanufacturing, and Japan does have seedlingsof machine and deep learning startups – a
combination that is capable of boosting Japan tothe premier league of digital industrial globally.
Japan could benefit from a shared industry
aspiration to reclaim its global leadership in digitalmanufacturing over the next decade. In concreteterms, the vision for reclaiming leadership could
focus on heavy machinery and deep learning
implementation to drive innovation, whilst relying
on traditional technologies (IoT, robotics) tomaintain and improve productivity. But in order tomake this vision a reality, top private and public
sector decision-makers need to develop digitalstrategies and drive company efforts – in terms ofhiring talent and allocating budget and resources– along the path of digital transformation.

Upskill industrial workforce in areas of softwaredevelopment and machine learning: There
are two requirements here; the first is improving
digital literacy of current employees, equippingthem to handle new digital technologies andunderstand machine learning builds, which canbe done through training and capability building.
The second is re-skilling employees who perform
narrow tasks that can be automated. These
employees have valuable expertise which can beused in labeling data to train machine learningmodels, or identifying and analyzing outliers indatasets. Similarly, employees with deep sector
knowledge could play a role as domain experts
working in conjunction with machine learning
teams.

Create practices to gather and label
unstructured data for machine learning
purposes: Companies may need to revamp theirinternal policies, processes and systems related
to data, to create an environment more conducive

52

Japan Digital Agenda 2030

to digital transformation. This includes creatingprocesses and cultures focused on managing
data. This goes hand-in-hand with re-skilling theworkforce, since one of the key tasks here could
be manually labeling images for deep learningmodel training, or helping integrate siloed data
into data warehouses.

Launch agile digital divisions to operate
unencumbered in a ‘test and learn’ environment
with latitude from legacy organization: Setting
up new entities that can develop their own
processes, structures, incentives, and culture is a
way to encourage new entity development in a waythat is not encumbered by previous processes,
mindsets and legacy systems. While there will be achallenge with respect to integration, there is more
freedom to create a new culture and new ways ofworking in a different organization, as opposedto the subsidiary of a larger organization that has
been around for decades, or even centuries in thecase of Japan.

Accelerate development of L5 autonomousvehicles to maintain global leadership, andenable with regulatory change: This is a ‘chicken
and egg’ case with the private sector awaiting
government regulations, and the government
not feeling any pressure from the private sector
to move. A dual approach is needed, where thegovernment progressively allows higher levels of
autonomous driving, thus incentivizing the private
sector; and the private sector simultaneously
invests in and works with L4 and L5 technologies
to push the government. With companies such as
Tesla working towards L4 and L5, movement byboth public and private sectors is vital. If Japaneseplayers are to not only match other players, but
potentially lead on autonomous driving, it would be
best to start now.

Develop legal and insurance frameworks forautonomous driving to reduce development
reluctance: This holds true for several
applications of artificial intelligence, but
especially for autonomous driving where
there is a higher risk associated with AI-based
decision-making. In order for Japanese OEMs
to sell to the domestic market, it is important
to clarify legal responsibility and, in order toincentivize autonomous vehicle development,
create a mechanism for sharing the risk
between users, government and the industry.
Insurance policies need to cover the relatedrisks, while accounting for the intrinsic moral
hazard that comes with reduced user attention
to the road in front of them.

Foster partnerships between automotive
players and leading tech companies:
Japan’s automotive players are startingto make progress on autonomous vehicle
development through partnerships withtech and other companies. For example, in
2020, Toyota announced a partnership with
AWS, to collaborate on Toyota’s Mobility
Services Platform; a collaboration thatwould enable Toyota to develop and deploy
the next generation of data-driven mobility
services across their cloud-connected fleet86 .
Mobileye, a subsidiary of Intel Corporation,
announced in 2020 a partnership withJapanese bus company Willer, to develop
robo-taxi solutions leveraging Mobileye’sautonomous driving technology to bring newtransportation services to Japan and improve
mobility87. Such partnerships, that combine

the automotive expertise of JapaneseOEMs with the AI expertise of leading techcompanies, will be key to putting JapaneseOEMs back in the race when it comes toautonomous driving.

Create initiatives to incentivize industrial
manufacturing companies to adopt digital
through public-private collaboration:
A successful case of a government initiativethat enabled digital transformation was
the MLIT i-construction policy aimed at
improving manufacturing productivity andsupporting small- and mid-sized companies
in digitization efforts88 . MLIT worked together
with companies and industry associations
to help shape the initiative, which provides
subsidies, tax deductions and low-interest
loans to companies that implement digital
hardware and software, and develop
human resources able to work with the newtechnology. There are two aspects that makethe MLIT’s i-construction initiative a success:the collaborative model; and the support
provided for longer term initiatives such as
talent development to build sustainability.

“Toyota and Amazon Web Services collaborate on Toyota’s Mobility Services Platform”, August 17, 2020, global.toyota.
“WILLERとモービルアイが日本・台湾・ASEANにおける 自動運転ソリューションの提供に向け協業” [WILLER and Mobileye
collaborate to provide autonomous driving solutions in Japan, Taiwan and ASEAN], Intel, July 8, 2020, newsroom.intel.co.jp.
88“i-Construction（ICT施工）の導入に関する補助金”, [Subsidy for the introduction of i-Construction (ICT construction)], MLIT,
October 2020, ktr.mlit.go.jp.
8687Japan Digital Agenda 2030

53

54

Japan Digital Agenda 2030

Big move 5: Retail to capitalize on
shifting customer trends by delivering
digital omnichannel experiences
In 2018, Japan’s retail sector – encompassing sub-sectors such as general merchandise, apparel,food and beverages, and other consumer goods – had collective revenues of ¥75 trillion. E-commerce
represented ¥19.4 trillion of retail revenues89 , with a robust 7.65% year-over-year growth90, and thesub-segment mobile e-commerce - dubbed m-commerce - accounted for over half of e-commerce
traffic, with a compound annual growth rate (CAGR) of 34% between 2011 and 2018 91 .
Even with the high growth of e-commerce, Japan’s e-commerce penetration - the proportion of total
retail sales driven by e-commerce - is an estimated 9%, lower than neighboring economies such as
China and South Korea, where e-commerce penetration stands at 24% for both countries92. However,
the COVID-19 pandemic has led to an acceleration in e-commerce adoption, the effects of which are
likely to continue even after the pandemic: according to a McKinsey Japanese Consumer Pulse Survey
carried out in November 2020, Japanese consumers expressed an intent to purchase up to 20% more
online even after the pandemic ended93 . Going forward, it will be critical to improve the consumer
experience both online and in traditional retail stores.
Traditional retail stores in Japan have a compelling value proposition: they are in easily accessible
urban locations; and they offer good service, customer experience, product assortment, and long
opening hours. Stores also have headroom to grow in creating the ‘store of the future’ where customer
experiences go digital introducing tactile and sensory elements of taste, smell and touch, whichcannot be delivered through a digital medium. However, with the advantages of e-commerce inconvenience, assortment, and price, consumers are increasingly turning to this option as well. The goalof digitization in retail is not about solely driving e-commerce penetration at the expense of traditional
retail, but rather about enabling the coexistence of the two through digital omnichannel, while
improving overall retail performance and customer experience.
Omnichannel is the seamless coordination of channels so that customers can discover, evaluate,purchase, and experience products using a combination of offline and online channels. It may require
coordinating various combinations such as online discovery but offline purchase, or offline evaluation,but online purchase and experience. Companies that can coordinate their digital and physical assets
through the purchase decision journey stand to gain customer loyalty.
More than 90% of omnichannel journeys start online. With the availability of information online
regarding various competitor products and prices, customers have greater knowledge and decisionmaking power in the purchasing process. Customers often walk into shops with an idea of what it isthey want to buy, and in many cases have various delivery channels available to them. To accommodate
for this, the role of the retailer is shifting from trying to sell products to customers then and there, to
one that showcases products online in order to inform the upfront part of the customer journey. Digitalsolutions that improve the customer journey - such as reducing wait times for trials and checkouts –while protecting customer data, will thus be key to deliver unique customer experiences and improve
both customer satisfaction and loyalty.
Retail in Japan can be fragmented for some sectors, such as supermarkets, where, as of 2018, thetop player Aeon had a market share of 16% but other top players had only amassed 3-4% each94;
or consolidated in other sub-sectors, such as convenience stores, where the top three players –7-Eleven, FamilyMart and Lawson – each have 42%, 25% and 23% market share respectively in

89

National Accounts of Japan, Cabinet Office, December 7, 2020, esri.cao.go.jp.
“電子商取引に関する市場調査の結果を取りまとめました” [Summary of market research on e-commerce], METI, July 22, 2020,
meti.go.jp.
91
Euromonitor, December 12, 2019, euromonitor.com.
92
Ibid.
93
“Survey: Japanese consumer sentiment during the coronavirus crisis”, December 10, 2020, mckinsey.com.
94
Chain Store Age, December 12, 2019, chainstoreage.com; Euromonitor, December 12, 2019, euromonitor.com; SPEEDA, December
12, 2019, ub-speeda.com.
90

Japan Digital Agenda 2030

55

2018 95 . There is relatively little cross-sector overlap, with different market leaders across sub-sectors,
such as drugstores (Welcia, Tsuruha), electronics stores (Yamada Denki, Bic Camera), department stores(Isetan, Mitsukoshi) and discount stores (Don Quijote). However, chains such as Bic Camera, although
primarily known for electronics, do sell other product categories such as apparel and cosmetics.
Overall, as of 2018, the top five retailers by sales in Japan are Aeon, Seven & i (7-Eleven), Fast Retailing(Uniqlo), Yamada Denki and Pan Pacific International Holdings (Don Quijote). The top players in
e-commerce are Amazon, Rakuten and Yahoo Shopping. Due to the differing levels of fragmentation
across retail sub-sectors in Japan, it is expected that digital adoption could evolve quite differently
across retailers, starting with giants such as Aeon and Don Quijote, who have the necessary resources
and access to vast networks of data to act as first adopters, followed later by smaller grocery chains anddrugstores.

Potential for digitization across the value chain
The digital use case transformation roadmap below illustrates digital use cases across the retail value
chain, from product conceptualization and ordering to final customer delivery and after-service(Exhibit 12).
Exhibit 12:

Digital use case roadmap across the retail value chain
Use case deep dive follows

Sourcing andprocurement

Inventory andwarehousing

Distribution
and delivery

Deep learning
driven demandprediction

Robots forautomated shelf
stocking

Robots for last
mile delivery

Machinelearning forcustomersegmentation
and assortment
optimization

Robots forlocating, sortingand packing

Fleetmanagementfor delivery
optimization

Machinelearning
optimized
inventory
management

Key
technology
enablers

Marketing(incl. pricing,promotions)

Sales and store
operations

Online stores

After-sales(incl. returns)

Machinelearning forstore pricing

Connected
stores for
streamlined
shopping

Deployment ofturnkey online
store
experiences

Full producttraceability
through storeddigital data

Machinelearning
poweredpersonalized
customerpromotions

Augmented andvirtual reality foromnichannel
product
experience

Machinelearning for
dynamic
pricing online

Machinelearning &geospatial
analytics forstore network
optimization

Chatbots forcustomer
supportCloud platform that links datasets, cybersecurity
to protect customer data, 5G network to drive connectivity

Source: McKinsey

There are two key areas where Japanese retailers can begin scaling up digital use cases to deliver worldclass omnichannel experiences, leveraging digital stores of the future in combination with e-commerce:— Improving in-store and online customer experience— Improving operations

95

56

Ibid.

Japan Digital Agenda 2030

Improving in-store and online customer experience
Connected stores for streamlined shopping experience

Impact: streamlined shopping journey with no waiting times, reduced labor costs, data collection
on customer behavior and preferences
While digital check-out kiosks reduce waiting times, Amazon Go Grocery’s offering of Just Walk Out
Shopping takes this a step further by eliminating the need for check-out altogether. This is done throughspatial analytics using cameras and on-shelf sensors, to automatically detect which customer takes(or replaces) what product; combined with a mobile app for customer interfacing and updates thecustomer’s virtual shopping cart accordingly. Customers who finish shopping and leave the store arecharged for what remains on their virtual shopping cart. By eliminating time spent waiting in line andpaying, Amazon Go has streamlined the customer journey and enhanced the customer experience, while
reducing human error at checkout. Another hidden benefit of Amazon Go Grocery is the ability to collectvaluable data on customer behavior and preferences. Physical grocery stores have no way of tracking
anything beyond final purchases. Amazon Go Grocery, by contrast, uses customer scrolls, views andclicks to obtain additional insights, e.g. the number of times a product was picked up but replaced on
shelves without a final purchase. This trove of data can inform assortment decisions and store layout.

Augmented reality (AR) and virtual reality (VR) for omnichannel
product experience
Impact: reduced waiting times for trial, increased customer satisfaction with final product,translating to reduced returns and increased customer loyalty

Gone are the days of long lines for trial cubicles or the discovery that a certain shade of lipstick doesn’tquite match one’s skin tone as expected. AR is being combined with technologies such as 3D scanningand mobile apps to offer customers a virtual trial experience before they buy products. Companies such
as Zurich-based Fision – acquired in 2020 by European e-commerce player Zalando – is expanding on
the concept of virtual fitting rooms with 3D body scanning cameras so customers can see how clothing
would fit on their body frames without actually having to go through the hassle of changing96 . Ikea’s VR
app allows customers to place furniture in a space - be it their actual room, or the storefront - to see
how it would look97. Japanese multinational Shiseido also offers products in this space, with its Makeup
Simulator app that eliminates the need to test makeup physically. Used by beauty consultants acrossShiseido stores, and also available on mobile, the app allows users to look into the screen as if it were amirror, replicates the user’s face without makeup, and allows users to test out various Shiseido productson their ‘makeup free’ face 98 .

Deployment of turnkey online store experiences

Impact: improved customer experience, increased sales through omnichannel approach,availability of data for customer insights
Adobe Magento is an example of an e-commerce platform that can be used to build a homepage foronline sales channels. The platform features a ‘drag and drop’ interface for page design, as well as
specific functionalities such as fulfillment options for buying online and store pick-up, live chat forcustomer support, and a built-in business intelligence tool for data analysis and insights. The platformmakes it possible for companies, including Japanese eyewear company, Jins, to set up fully functioning
online stores even without advanced coding knowledge.

96“Zalando invests in customer experience with acquisition of Swiss mobile body scanning developer Fision”, October 16, 2020, corporate.
zalando.com.
97
Ayda Ayoubi, “IKEA Launches Augmented Reality Application”, Architect, September 21, 2017, architectmagazine.com.
98
Yukari Mitsuhashi, “Reaching out to women: Shiseido does it well”, Bridge, July 29, 2013, thebridge.jp.

Japan Digital Agenda 2030

57

Another example is that of Japanese multinational footwear and apparel company ASICS. As a part of its
new digital strategy to accelerate e-commerce, ASICS needed to build and migrate to a new universal
e-commerce platform that could manage its entire portfolio of brands across geographies; this effort
also involved developing application programming interfaces (APIs) to integrate with various order andproduct management systems, payment providers, and legacy systems to access backend data. ASICS
leveraged Salesforce Integration Cloud’s MuleSoft Anypoint Platform – a unified platform for enterprise
iPaaS (integrated platform as a service) and full lifecycle API management – to connect between the
disparate systems, and integrate previously siloed data including customer information, order status,
real-time inventory and pricing. By eliminating the need for point-to-point connections, MuleSoft
allowed ASICS more agility and flexibility with their e-commerce platform, enabling them to build a better
customer experience.

Improving operations
Deep learning driven demand prediction

Impact: improved sales prediction accuracy, shortened times between design and production
Traditionally, demand prediction involved old-school statistics to analyze datasets such as historicalsales reports and competitor product catalogues. There is, however, a wealth of information available
that traditional techniques cannot easily capture, such as, for apparel: comments on fashion blogs;
popular styles and colors as seen on social media posts; customer style and color searches on online
stores. Machine learning, and deep learning – including image and text recognition – can unlock new
realms of customer data that can provide insight into what is popular and selling now, and in the future.
Such insights can be valuable for retailers during the process of designing and predicting demand for
products.
An example of a company playing in this space is Fast Retailing, the owner of Uniqlo. Fast Retailinglaunched a partnership with Google as a part of Project Ariake in 2018, to use machine learning, anddeep learning for image recognition, to evaluate product trends and predict demand. By analyzing
images and other data, the partnership will enable Uniqlo to predict colors, shapes and styles likely to bein vogue and design products accordingly99 .

Machine learning for customer segmentation
and assortment optimization

Impact: increased customer satisfaction and loyalty, translating to higher sales and fewer
unsold products
For grocery stores selling similar types and brands of products with similar, relatively elastic priceranges, optimizing the exact product assortment based on customer preferences can be a key factor
in improving both revenues and customer satisfaction and loyalty. This is traditionally done at a macrolevel, looking at product sales aggregated across all customers; any sort of customer segmentation
exercise relies on historically observed segments. However, with rapidly evolving customer behaviors,and customers’ desire for a more personalized shopping experience, there is a need for more microlevel, customer data-driven and sophisticated analysis. Here, machine learning can be leveraged toprovide deeper and quicker insights than human analysis.
Two large Japanese retailers (which requested anonymity) have already begun the process ofembedding machine-learning in their assortment decision-making. The process involves using featureengineering to identify variables shown to strongly influence purchase decisions by different customer
segments (e.g., purchase amount, more popular categories) and to develop new customer segments
using data clustering (e.g., heavy cookers, bargain hunters). This enables an understanding of customer
99

58

Barbara Santamaria, “Fast Retailing teams up with Google to power Ariake project”, Fashion Network, September 19, 2018,
fashionnetwork.com.

Japan Digital Agenda 2030

profiles and creation of a tool that continuously segments new customers in real time. Mapping products
and buying preferences to customer segments, calibrated by size and behaviors, allows companies totailor their product offering to the specific composition of their customer base.

Robots for automated shelf stocking

Impact: reduction in lost sales opportunities due to stock-outs, reduction in inventory levels, more
employee time focused on customer experience rather than repetitive tasks (e.g. stock checking
and shelving)
Stocking merchandise on shelves where the customers can see and buy it is crucial to driving bothcustomer experience and sales. On average, retailers lose 4% of revenue annually due to stock-outsof merchandise. The situation is especially complex in grocery inventory tracking where a portion ofgroceries are not stocked on shelves but in store-rooms, and product expiration dates create a much
shorter sales window. Time spent by store employees on manual shelf checks and stocking diverts themfrom helping customers. An attractive alternative is to use robots to carry out the stocking tasks instead.
For example, Bossa Nova’s robots can scan shelves for out-of-stocks as well as misplaced items100, andare said to have an accuracy of 90% when it comes to identifying on-shelf availability as opposed to the40- 60% accuracy with human agency. Integrating data gathered by a robot with inventory information
can give a holistic view of available stock and enable the building of models to analyze product sales
patterns based on time of day, seasonality and other factors.

Robots for last mile delivery

Impact: 10- 40% reduction in delivery costs, quicker delivery times
Droids, drones, robotic dogs, autonomous delivery vehicles and other forms of driverless delivery
technology are expected to transform last-mile delivery, doing away with old-fashioned human delivery.
A San Francisco startup called Starship Technologies is trialling an autonomously driven six-wheeled
delivery robot to bring meals and groceries to customers’ doorsteps101 . It drives at walking speed
on pavements and can cross streets and navigate obstacles, work at night and in various weather
conditions. The robot comes with an app that can be used by customers to track its location and unlock
it to receive their delivery. Starship has also partnered with Mercedes-Benz to create a ‘mothership’ for
its robots - that is, a van that will ferry and drop them off to make deliveries, embedded with algorithms todetermine efficient routing and drop-off points102.

Machine learning for in-store pricing

Impact: increased customer traffic by competitively pricing price-elastic products, higher margins
on products with lower price-elasticities
Large Japanese retailers (who asked to keep their names confidential) are embarking on machinelearning-driven pricing optimization. This is done for both known value items (KVIs) and non-KVIs: in thecase of the former, price optimization disproportionately drives value perceptions as the price of theseproducts (e.g., eggs, milk) is well known.
The first step is analyzing product, sales and competitor data, to identify pricing improvement areas
in both KVIs and non-KVIs. KVI scores are calculated and assigned to these products, based on theirimportance to price sensitive customers. Price setting rules are defined based on KVI scores so that
products with high price-elasticities and high importance for overall pricing perceptions are priced
competitively to drive higher demand, and those with lower price-elasticities and lesser importanceto overall pricing perception are priced to drive higher margins. In addition, a revenue and gross profit
financial estimation model can be developed to test the proposed price setting rules and predict its
impact on key financials.
100

Glynn Davis, “Taking stock of the inventory management battleground”, Essential Retail, January 29, 2020, essentialretail.com.
James Vincent, “Mercedes-Benz has made a ‘mothership’ van for six-wheeled delivery robots”, Verge, September 7, 2016, theverge.com.
102
Ibid.
101

Japan Digital Agenda 2030

59

Cybersecurity to enable operations across multiple public clouds

Impact: more robust cybersecurity protection and operational efficiencies

As more businesses move to the cloud, security concerns such as integration issues, misconfigurations,advanced threats, and access control become more critical to address through deployment ofappropriate cybersecurity.
For example, a Japanese company operating stores for CD, DVD, game and book purchase andrental nationwide, needed to move its existing IT systems to the cloud to achieve business agility andcompetitiveness. The company wanted to leverage different public clouds depending on the application.
However, doing this would add an additional layer of complexity to its operations and would challenge its
existing IT team to fully understand security risks and respond to incidents. The company thus leveraged
Palo Alto Networks Prisma Cloud, a cybersecurity platform designed to automatically monitor public
clouds, providing visibility of security risks, and automating monitoring and compliance checks with
global security guidelines and compliance standards. By deploying Prisma Cloud’s workload-based
licensing – dependent on the number of public cloud objects to monitor and protect – the corporation
was able to optimize operations for cybersecurity coverage and cost.

60

Japan Digital Agenda 2030

Barriers to digital transformation
For this big move to come to realization, addressing mindsets, talent constraints, legacy
technology issues or regulatory changes may be need. A few examples are:Prevalence of legacy systems increases modernization costs: Of all industries in Japan,
retail and distribution have the greatest reliance on legacy systems. One third of companies inthe space rely almost entirely on legacy systems - as opposed to 29% in finance and 20% inmanufacturing; and 44% of companies have at least half their data architecture tied to legacy
systems - as opposed to 29% in finance and 26% in manufacturing103 . This poses a challenge todigitization, and potentially limits the scope of data-driven use cases that can be implemented,
since these legacy systems are often incompatible with newer technologies such as cloudbased data visualization tools. Moreover, many retailers stumble when they contract systems
integrators to implement end-to-end transformations through enterprise resource management(ERP) systems that take several years and require significant capital expenditure.

Capability gaps and limited data availability hinder rollout of turnkey e-commerce solutions
for small stores: Digitizing services and offering online options and delivery requires certain
aptitudes (e.g. website design and testing) and manpower (e.g. for delivery, if delivery partners
are not utilized) that are not available to all stores equally. Additionally, smaller stores wanting togrow their e-commerce sales do not have sufficient customer data to form strategies and sales
projections.

Size of workforce poses challenges for staff retraining and change management: As of
2019, approximately 1.65 million people were employed as sales workers in food and beverageretail alone. The number of employees means that any sort of digital rollout - whether stocking
robots or virtual product trials - requires large-scale training and change management to ensure
adoption. Even in non-storefront functions such as warehousing and inbound / outbound supply,
distributors, merchants and vendors may have to buy into the digital use case and, in somecases, receive the same training and change management as retail staff. The automation will notcover 100% of all processes, and an element of human decision-making will persist alongside
the digital component, which is why human understanding and acceptance is crucial for success.

Store-based incentive structure discourages shifting to e-commerce and omnichannel:
A barrier specific to e-commerce is the limited incentive for retail employees to pursue
omnichannel retail. Retail employees often receive bonuses based on in-store sales, andbecause of this, they are less motivated to shift their customers to an online platform.

Non-standardized product and customer IDs hinder supply / demand, and customer
analytics: Even within one retail company, product and customer IDs can differ from one sales
branch to another. This makes supply-demand analysis and personalized customer service
difficult.

103

DXレポート ～ITシステム「2025年の崖」克服とDXの本格的な展開 [DX Report-Overcoming the IT System “Cliff in 2025”
and Full-scale Deployment of DX], METI, March 5, 2019, meti.go.jp.

Japan Digital Agenda 2030

61

Enablers for digital transformation
Enablers are strategies, mindsets, talent, technology, or regulation that need to evolve to acceleratetransformation. For this move, some potential areas to address include:
Leverage secure cloud data platforms toprocess high frequency and volume of retailcustomer data to enhance operations andcustomer centricity: Retail is one major industry
that frequently connects with the large populationgroups. The availability of rich, granular and highfrequency customer datasets, with oftentimes
fewer sensitivities around data collection andusage, than, say, patient health records in thehealthcare sector, allows players to perform fully
functional advanced analytics. However, in orderto fully leverage this data, enterprises need tomove away from legacy systems to cloud-based
digital platforms that support data integration
and building of scalable digital applications. In
order to do this, enterprises can leverage a rangeof readily available cloud products – available
from cloud-native providers such as Amazon Web
Services and Microsoft Azure. As enterprises
move to the cloud, they realize that cloud security
is a shared responsibility; while cloud providers are
responsible for security ‘of the cloud’ – protecting
the infrastructure that runs the services offeredin the cloud – enterprises are responsible forthe security of their data and information ‘in thecloud’. Companies such as Palo Alto Networks
provide cybersecurity solutions for Japanese andother companies to secure their data seamlessly,
whether on premises or in the cloud, and as data
moves among multiple cloud infrastructures. For
example, a Japanese department store in 2017
wanted to change its systems to be 100% cloud,and move its core business applications such as
e-commerce, point-of-sales and merchandisingsystems to the cloud. To enable and protect thiseffort, it selected Palo Alto Networks VM-Series
Virtualized Next-Generation Firewall as the
security platform to detect, analyze and deal withunknown malware and targeted attacks.

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Japan Digital Agenda 2030

Leverage turnkey online marketplaces, andtwo- and three- sided platforms, and othertechnologies to drive e-commerce penetration:
Online marketplaces such as Amazon, two-, andthree-sided marketplaces such as Uber Eats,
provide the online interface and infrastructure,
as well as the connection to auxiliary services
such as delivery, enabling companies that might
not otherwise do so to transition to digital ande-commerce. Moreover, some online marketplaces
provide sales data as well as integrated businessintelligence tools to support sellers with strategies
and sales projections.

Create in-house digital teams with technology
and retail domain expertise to build capabilities
and deploy digital products: Many retailers do
not have enough in-house data engineers anddata scientists; nor talent in business-side roles
that possesses the digital understanding towork with them. Retailers often outsource work
related to digital to systems integrators, insteadof building capability in-house. An in-house team
combining both the depth of industry knowledge
that comes from working within retail, with thecapability needed to implement digital solutions,would enable retailers to make more independentand informed decisions regarding digital strategy
and implementation. The approach here could
involve targeted hiring for digitally-native roles(e.g., data scientists, designers); as well as training
to build capabilities among existing employees(e.g., basics of machine and deep learning).

Leverage user-friendly analytics and machinelearning tools to enable retail employees todevelop ongoing customer insights: Withuser-friendly visualization tools, interfaces andno-coding platforms connected to machinelearning models, it is becoming possible foreven those without data science or engineering

backgrounds to run simple models and simulations
when given basic training. With automatedmodels taking care of the core analysis, there isa lower barrier on the skills needed to adopt andimplement these technologies, and it becomes
possible for store employees - if given therequisite training - to use them.

Standardize product codes, customer IDs andother data to enable smoother operations andsupply / demand analytics: Every single productand customer should have a unique identifier –consistent across sales locations and channels –that can be used to track sales.

Enhance incentive systems to reward
employees for driving omnichannel (physicaland online) purchases: Structural changes tothe employee incentive system could help shift
attitudes of in-store employees; for example,
performance indicators based on number ofin-store customers that signed up to an e-maildistribution list, could motivate employees into
having their customers sign to online channels
rather than focusing on trying to drive only in-store
sales.

Japan Digital Agenda 2030

63

64

Japan Digital Agenda 2030

Big move 6: Healthcare to lead globallyon next-generation personalized, remotesolutions targeting elderly care
In 2018, Japan’s healthcare related GDP amounted to ¥39 trillion, accounting for approximately 8%of the nation’s GDP104 . Digital transformation is a focus point, thanks in part to prioritization from thegovernment: digital in healthcare was mentioned as a key principle in the 2020 report entitled Honebuto
Houshin (Basic Policies for Economic and Fiscal Management and Reform). In addition, the 2020
COVID-19 pandemic has accelerated the shift to remote patient care. As a result, the industry is on thebrink of an impending digital transformation that could yield significant socioeconomic benefits.
However, the existing healthcare system faces pressure from Japan’s aging population. In effect it isa victim of its own success in delivering excellent universal healthcare and improving life expectancy.
In 2018, Japan had the top life expectancy globally105 and the elderly population is estimated to reach
38% of the total population by 2050106 . The World Economic Forum ranked Japan as the world’s
fourth healthiest nation107; however, the aging population places increasing demands on the hospitalsystem and intensive care. When it comes to using digital technology in managing health, only 5% of
the Japanese population used telemedicine services in 2018 108 . If disease management for certain
therapeutic areas (e.g. diabetes) could further leverage digital methods, it could help reduce the burden
on Japan’s healthcare system and potentially improve health outcomes.
To help create a more resilient system to handle these needs, Japan’s government is focused on
digitization and data. The Ministry of Health, Labor and Welfare (MHLW) is creating a holistic databaseof claims and long-term care data; and the Cabinet Office is advancing the use of medical data backed
by the Next Generation Medical Infrastructure Act, which grants access to aggregated, anonymized
electronic medical record (EMR) data109 . The government is also aiming to make personal health records
accessible through the MYNA Portal, using My Number110; while opening the national database to private
enterprise.
Indeed, if there were a time for Japan to radically transform its healthcare industry, it is now, and digital is
the key to unlocking Japan’s full potential. Both industry players and the government can work in tandem
to push digital initiatives across the healthcare value chain.

Potential for digitization across the value chain
The healthcare industry consists of three sub-sectors:— Biotechnology and Pharmaceuticals: including active ingredients, OTC drugs, generic drugs;— Medical devices: including medical instruments, medical electronic devices, wearables,and related software;— Healthcare services and treatments: including medical labs, hospitals and clinics.
It can be broken down into two distinct value chains:— Creating products: the value chain for the biotechnology, pharmaceuticals and medical
devices sub-sectors;— Providing services: the value chain for the healthcare services and treatments sub-sector.
104

Statistical data - Social Security, Statistics Bureau, accessed November 2020, stat.go.jp.
Sean Fleming, “Spain will soon overtake Japan in life expectancy rankings. Here’s why”, World Economic Forum, October 23, 2018,
weforum.org.
1062019 Revision of World Population Prospects, UN Department of Economic and Social Affairs, June 2019, population.un.org.
107
Alex Thornton, “These are the world’s healthiest nations”, World Economic Forum, February 25, 2019, weforum.org.
108
Global Views On Healthcare – 2018, IPSOS Global Advisor, 2018, ipsos.com.
109
Raymond Chan, Yusuke Nishikawa, Jan van Overbeeke, and Michele Raviscioni, The digital imperative for pharma companies in Japan,
March 2018, McKinsey.com.
110
My Number is the ID number issued to all citizens and residents of Japan, and is used for social security and tax purposes.
105Japan Digital Agenda 2030

65

The digital use case transformation roadmap below takes various digital technologies and identifies how
to apply them to the different steps in the healthcare value chain (Exhibit 13). The exhibit represents an
end-state; but getting started is key and this can be done by scaling up successes or looking to specific
up-and-coming applications relevant to Japanese healthcare.
Exhibit 13:

Digital use case roadmap across the healthcare value chain
Creating products

Providing services

Research &early development

Development& regulatory

Manufacturing& supply chain

Commercial& market access

Machine learning
enabled drug
discovery
optimization

Machine learning
enabled clinical trial
optimization

Robotic automationof drug / medical
device manufacturing& delivery

Apps to improvesalesforce
productivity

Well-beingApps, wearables &connected devices
for healthmanagement

Digital marketing
Biofabrication forresearch and testing

Machine learning
enabled regulatory
process optimization

Biofabrication for
medical devices
Digitally connected
systems to optimize
E2E workflows
on factory site

Use case deep dive follows
Screening& diagnosis

Treatment

Monitoring

Chatbots as firstpoint of contact

Robots for surgicalassistance

Deep learning for
disease detection

Digital prescriptions &online pharmacies

Apps, wearables &connected
devices for disease
therapy,
management &adherence

Digital workflow tools
for clinical decision
making support

Tagging & location
systems for patientsand assets

Robots for delivery &dispensing

Robotics andprosthetic limbs

Connected point ofcare diagnostics(telemedicine)

Augmented reality forsurgery support
Augmented reality forsurgeon training

Apps, wearables &connected devices
for event response& disease tracking
Robots for physicaltherapy,
rehabilitation &lifestyle needs

Enabling functions (e.g. human resources, finance, legal)
Machine learning for back office & support function optimization
Key technology
enablers

Cloud platform that integrates datasets, cybersecurity to protect
patient data, 5G network to drive connectivity

Source: McKinsey

There are four key areas where Japan can begin scaling up digital use cases in healthcare and build
competitive advantages in delivering high quality, personalized outcomes catering to the needs of anaging population:— Machine and deep learning to facilitate drug development— Robotics and deep learning to support doctors in diagnosis and surgery— Telehealth and online pharmacy— Connected devices for disease management and tracking

Machine and deep learning to facilitate drug development
Machine learning enabled drug discovery optimization

Impact: reduced timeline of exploratory research phase, increased pipeline probability of successTraditional approaches to drug discovery are costly and time-consuming, with the pre-clinical phaseaccounting for approximately a third of total R&D costs and taking 3-4 years to reach Phase I trials111 .
Leveraging machine learning on multiple data sources can help more quickly and accurately predict
biomarkers of therapeutic response and inform target selection.
In 2020, artificial intelligence raised a hypothesis that baricitinib, Eli Lilly’s existing medicine to treat
rheumatoid arthritis, could be used to treat COVID-19. Eli Lilly mobilized teams to research the possibilityof using baricitinib for this purpose, and commenced phase three clinical trials in June 2020. The US
Food and Drug Administrative issued an Emergency Use Authorization to allow use of baricitinib asa part of combination therapy to treat hospitalized COVID-19 patients, marking an example of where
artificial intelligence supported identification of an alternative indication for an existing drug112.

111

Arnaub Chatterjee, Sastry Chilukuri, Edd Fleming, Adam Knepp, Saif Rathore, and Joe Zabinski, Real-world evidence: Driving a new
drug-development paradigm in oncology, July 2018, McKinsey.com.
112“Lilly’s COVID-19 Science Leads to a Second FDA Emergency Use Authorization”, Eli Lilly, November 19, 2020, lilly.com.

66

Japan Digital Agenda 2030

An example of recent success in Japan in this area is the collaboration between Sumitomo Dainippon
and Exscientia to create the drug DSP-1181, for treatment of obsessive compulsive disorder. The
discovery process leveraged machine learning, which expedited the exploratory research phase tounder one year113 .

Machine learning enabled clinical trial optimization

Impact: faster patient enrollment, reduced trial costs, increased trial probability of success
The clinical trial cycle is critical in bringing drugs to market, but is fraught with complications at eachstep of the way - from protocol design, to site selection, to patient recruitment - which cause delays
running up to months and wasted costs running into billions of yen. Machine learning can streamline
the end-to-end clinical trial cycle114 . By integrating a wide range of both internal and external data
sources - including medical claims data and past trial data from databases such as jRCT - onto a
scalable cloud infrastructure, predictive and optimization algorithms can be leveraged to capture
opportunities at every step: from protocol design, including endpoint and inclusion / exclusion criteria
selection, to site optimization, patient recruitment and predictive quality management. Automateddashboards can provide simple visualization to allow transparent monitoring throughout the process,and enable early intervention where required. Applying machine learning to even a single step of thecycle, such as protocol optimization, can drastically reduce protocol amendments and cut time-tomarket by five weeks. It should be noted that a prerequisite for applying machine learning is simple
automation of the clinical trial process; the current process is paper-based and involves physicalsignatures on documents, and basic automation is the first step to cost savings and creating a digitalfoundation on which machine learning can be applied to yield further benefits.

Robotics and deep learning to support doctors
in diagnosis and surgery
Deep learning for disease detection

Impact: quicker and more accurate disease identification leading to quicker intervention andhigher patient survival rate
Cancer is one of the leading causes of death in Japan, and early identification is crucial to improving
patient survival rate. However, interpretation of medical scans such as X-rays to find indicators ofcancer requires time, expertise and extensive training of doctors, and is a space where technology canprovide support. For example, during cancer research identification at the University of Tokyo in 2016,
IBM’s AI Watson was able to diagnose leukemia in ten minutes - a process which would have takenradiologists weeks115 .
Deep learning can support doctors in disease diagnosis across therapeutic areas. In 2016, Google
developed deep learning algorithms capable of detecting diabetic retinopathy based on retinal
photographs, to support doctors in screening patients116 . In 2018, Google further developed deeplearning algorithms which could predict cardiovascular risk factors from retinal photographs, alongwith the risk of a cardiovascular event occurring117.

Robots for surgical assistance

Impact: better patient outcomes, more precise and less invasive procedures, reduced doctor
burdenJapanese doctors face some of the longest working hours amongst developed countries. With
the heightened risk of infection during the 2020 COVID-19 pandemic coupled with a dwindling
113“Sumitomo Dainippon Pharma and Exscientia Joint Development: New Drug Candidate Created Using Artificial Intelligence (AI)
Begins Clinical Study”, Sumitomo Dainippon Pharma, January 30, 2020, ds-pharma.com.
114
Real-world evidence, 2018.
115“IBM’s Watson Detected Rare Leukemia In Just 10 Minutes”, Asian Scientist, August 15, 2016, asianscientist.com.
116
Google AI Blog, “Deep Learning for Detection of Diabetic Eye Disease”, blog entry by Lily Peng and Varun Gulshan, November 29,
2016, ai.googleblog.com.
117
Ibid, “Assessing Cardiovascular Risk Factors with Computer Vision”, blog entry by Lily Peng, February 19, 2018.
Japan Digital Agenda 2030

67

workforce, there is a growing need to augment hospital staff. By facilitating precise outcomes that reducecomplications and the need for additional care, technology can improve patient quality of life while helping to
reduce hospital visits and infection risk, and freeing hospital staff and other healthcare resources. Surgicalrobots present a potential solution - they can assist and enhance human power for certain treatments andtasks, without risk of carrying infectious diseases. Robots have successfully completed operations suchas coronary artery bypass and gastrectomy. Their potential in orthopedics is an important development inJapan, where demand for hip and knee surgery is expected to grow as the next generation of seniors willseek increased mobility and independence, as lifestyles and workstyle adjust to the aging of society.
In August 2020, Japanese company Medicaroid, a joint investment between Kawasaki Heavy Industries
and Sysmex, received regulatory approval for Hinotori - the first made-in-Japan robotic assisted surgery
system118 . Participation in the growing robotic-assisted surgery market by both Japanese and global players
will drive increased innovation that could position Japan as leader in this critical digitally-driven technology.

Telehealth and online pharmacy
Connected point of care diagnostics

Impact: more frequent monitoring of data, reduction of medical costs, reduction in both patient anddoctor time spent gathering data due to real-time transmission
Telemedicine involves remote medical care provided when patients and doctors are not in physical contact
with one another. In 2016, a successful test for telemedicine was undertaken in Nagasaki, where Kripton
Co. Ltd. developed a real-time high resolution image and diagnostic data transmission system. This system
involved high quality imaging devices in the remote island of Kamigoto, which were connected to Nagasaki
University Hospital, and used for real-time transmission of imaging and diagnostic data119 . Tests werecarried out across therapeutic areas including gastroscopy, bronchoscopy, echography and endoscopy. The
application received approval from the PMDA (Pharmaceutical and Medical Devices Agency) for registration
as a medical instrument and represents a successful case of digitally-enabled home care.
Successful telemedicine requires connectivity, and technologies such as Verizon’s 5G Ultra Wideband
which enable smooth interactions and rapid data sharing between patients and doctors120 . Verizon 5G’s
low latency121 allows for near real-time data transfer and syncing, making it possible for treatments such as
physical therapy to be carried out remotely through AR and VR technology.

Digital prescriptions and online pharmacies

Impact: increased prescription sales, increased adherence of customers to prescription regime,
reduced adverse effects due to polypharmacy
Many retailers such as the drugstore chain Tomod’s have opened up online portals where nonprescription
drugs (e.g. antidiarrheal, migraine pain relief) and low-risk medical devices (e.g. hygiene products) areavailable for delivery. However, as of late 2020, the type of products they can provide is limited, since
many drugs, including those for birth control, require paper prescriptions to purchase in Japan. Moving toelectronic prescriptions would greatly augment the scope of this use case, and also enable collection of datathat can be used for functionality such as automated refills.
Digital prescriptions and online pharmacy are especially crucial to Japan due to the high elderly population
using polypharmacy, i.e. multiple drugs - on average 4-6 for patients above 80 years of age122. Adverse
effects due to drug interactions can be reduced through technologies that cross-check and prevent
118“Collaboration of Medicaroid, Kawasaki Heavy Industries and Sysmex for the business of the ‘hinotori Surgical Robot System’, a robotic
assisted surgery system”, Sysmex, August 11, 2020, sysmex.co.jp.
119Development of the system for Telemedicine and Home health care, Japan Agency for Medical Research and Development, May 31, 2017,
amed.go.jp.
120
Chris Ashraf, “5G, five impacts: Healthcare”, Verizon, February 28, 2020, verizon.com.
121
Amount of time taken for a packet of data to reach its destination across a network.
122
Mabuchi et al., Polypharmacy in elderly patients in Japan: Analysis of Japanese real-world databases, Journal of Clinical Pharmacy andTherapeutics, January 27, 2020, pubmed.ncbi.nlm.nih.gov.

68

Japan Digital Agenda 2030

inappropriate prescription combinations. Japan has recently made developments in the digitalprescription space with companies such as Qol providing delivery service upon remote medical
instruction, leveraging online consulting systems such as Pharms by Medley123 .

Connected devices for disease management and trackingApps, wearables and connected devices for disease therapy,
management and adherence

Impact: increased patient adherence, lower morbidity, increased patient satisfaction, lower
cost of care
With a growing elderly population, a large percentage of whom live alone, there is an increasing
mental burden of having to monitor and manage treatment by oneself. Limited adherence - oftencaused by simple forgetfulness - can be deadly; for example, in the case of an elderly diabetic
patient who forgets their insulin dosage and suffers from hypoglycemia. Wearables and otherconnected devices work in tandem with mobile apps to provide reminders, tracking and additional
support, improving patient adherence and wellbeing.
Smart pillboxes – equipped with sensors and connected through the IoMT (Internet of Medical
Things) – are another digital solution targeting medication adherence, with devices such as DEFI
(Don’t Ever Forget it) and Popit Sense being made available in Japan. Solutions such as tad, asecure pill dispenser developed by US-based Intent Solutions that integrates AT&T’s low-power
wide-area secure network, are able to provide near real-time prescription adherence data to
caregivers, without needing to be paired with a smartphone or tablet. Additionally, tad can be locked
and programmed to dispense only through fingerprint recognition of the intended patient at theprescribed time, minimizing accidental overdosing.
Similarly, CureApp Smoking Cessation - a joint effort between CureApp and Keio University aimed
at reducing nicotine dependence - received approval in August 2020, as the first digital therapeuticin Japan, and the first to get reimbursement from the MHLW124, based on the effectiveness of theirclinical trial. The app uses algorithms to provide users with advice on how to deal with withdrawal
symptoms, in response to reported cravings and physical condition.

Apps, wearables and connected devices for event response anddisease tracking

Impact: reduced spread of disease through more targeted contact tracing and quarantining
The 2020 COVID-19 pandemic has seen the deployment of contact tracking apps for infectious
diseases at scale to enable nationally coordinated measures, such as quarantining of individuals who
have come in contact with a disease124 . These apps provide governments and healthcare providers
with the data needed to mitigate and limit escalation of potentially serious contagions in a targetedmanner. As a response to COVID-19 specifically, Japan rolled out a contact tracing app, COCOA,
in June 2020125 . The app uses Bluetooth, and relies on Apple and Google’s co-developed platform
to collect data on users who have been in close contact with one another through encrypted data
flagging. If a user tests positive for COVID-19, the app will notify others who have been in close
contact, and this is done without storing personal information such as location data and phone
numbers. Health event management and pandemic tracing apps and devices are likely to continue in
use even after COVID-19 has subsided, to track and control the spread of infectious diseases.

123

クオール／全店舗でオンライン服薬指導を開始” [Qol started online medication instruction in all stores], Ryutsuu, September 3,
2020, ryutsuu.biz.
124
Molly Bode, Matt Craven, Markus Leopoldseder, Paul Rutten, and Matt Wilson, Contact tracing for COVID-19: New considerations
for its practical application, May 2020, McKinsey.com.
125
Sam Byford, “Japan rolls out Microsoft-developed COVID-19 contact tracing app”, Verge, June 19, 2020, theverge.com.

Japan Digital Agenda 2030

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Barriers to digital transformation
For this big move to come to realization, addressing mindsets, talent constraints, legacy technology
issues or regulatory changes may be need. A few examples are:Regulations limit patient data sharing: Data regulations such as the APPI (Act on the Protection of
Personal Information) have made patient privacy a priority. In addition to the APPI, there are two sets
of guidelines from three different ministries pertaining to safety management of medical data - the
MHLW’s guidelines aimed at healthcare providers; and the Ministry of Economy, Trade and Industry(METI) / Ministry of Internal Affairs and Communication (MIC) guidelines for IT system providers. These
guidelines require patient data to be securely handled, anonymized and aggregated, and there are
specific regulations on how certified vendors may extract and use this data. However, the number ofministries involved adds an additional layer of complexity for healthcare players wishing to aggregate
and leverage this patient data insightfully.

Regulations limit online pharmacy by requiring face to face visits and paper prescriptions: Article
20 of the Medical Practitioner’s Act calls for providing medical care and prescriptions in person as a
general rule, with limited exceptions made for online channels; while Article 9-3 of the Pharmaceuticals
and Medical Devices Act requires medication instruction by pharmacists to be done face-to-face. And
while the COVID-19 pandemic made it possible for pharmacists to provide online medical guidance, asof late 2020, it is still necessary for medical institutions to print prescriptions on paper, stamp them, andthen fax and mail the original stamped document to the pharmacy. It should be noted there has been
progress in this space, with the 2020 Honebuto Houshin noting the start of electronic prescriptions,slated for the summer of 2022126 .

Low competition and monetization opportunities limit incentive to introduce new technologies:
While a single payor universal healthcare system has the benefits of enabling standardization andat-scale adoption, the absence of a competitor dynamic reduces the incentive for early adoption of newtechnology. Japan could actively introduce technologies for monetization, such as utilizing the innovation
technologies of private medical insurance companies. Without further incentives, the monetization
opportunity may be limited within the current system.

Limited opportunities for funding during clinical trial period serve as bottlenecks for medical
startups: Digital solutions such as wearable medical devices must comply with the Pharmaceutical andMedical Devices Act for approval, which contains basic rules for reimbursement of devices with provenbenefits in diagnosing, treating and preventing a disease. While attaining approval is a challenge in
itself, it also involves long clinical trial periods, during which funding is necessary but not always easily
available – a key bottleneck for many medical startups in Japan.

Paper-based processing slows down clinical core and support functions: Various processes - suchas clinical trial contracts, common technical documents (CTDs), doctor records of patient data – arecurrently not yet fully digitized, and can still operate with paper, often requiring copying, physical handoff, seals or signatures.

126

70

Muneaki Hashimoto, “2年後に運用目指す電子処方箋も、課題は「はんこ」” [The issue for electronic prescriptions, which we aim tooperate in two years, is hanko], Nikkei Business, August 19, 2020, business.nikkei.com.

Japan Digital Agenda 2030

Digital literacy is low among doctors and patients: Although there are services that allow doctors tomanage their patient data electronically, certain doctors are resistant to and have limited familiarity withsuch technology. Japan’s electric medical record (EMR) penetration rate in 2017 was just over 40%,
compared to other developed economies such as the United Kingdom, where the EMR penetration rate
was 99% 127. Indeed, certain clinics still rely on binders to store hard copies of patient information, andonly take payment in cash. On the patient front as well, a certain level of digital proficiency is required tooperate connected devices and apps. In 2018, a survey by Ipsos Group found that only 9% of Japanese
respondents had ever used a connected health device before; 31% of respondents stated that thebarrier preventing their usage was that they ‘didn’t know enough about them’128 . Limited knowledge on
the benefits of, and how to use digital technology remains a key barrier that needs to be overcome todrive adoption.

Risk averse mindset amongst doctors and patients hinders adoption of digital tools: Hospitals
and doctors are sometimes reluctant to trust digital solutions, given their sense of responsibility or
fear of a mishap – such as a data breach, or incorrect classification by a machine learning model – that
could result in negative consequences for their patients, and cause a loss in patient trust. Although
medical device manufacturers are partnering with pharmaceutical companies and hospitals, and getting
regulatory approval to mitigate some fears around using technology, changing mindsets remains achallenge; currently, there is a disproportionate focus on risk, as opposed to benefits. On occasion, evenpatients have displayed discomfort in having their personal data made available to government agencies.
In a high-context culture that revolves around trust-based relationships, this presents a key hurdle toovercome.

Hospital infrastructure is insufficient to implement digital use cases: Many hospitals do nothave high-speed, secure networks, such as 5G, to connect to digital technology; nor the appropriate
cybersecurity investments in place to secure patient and other critical healthcare data, such as medical
devices that are increasingly connected online, or remote diagnostics data. Such data can be sensitive
and therefore needs to be set up to function in a secure digital environment.

127

電子カルテシステム等の普及状況の推移 [Changes in the diffusion of electronic medical record systems, etc.], MHLW, 2017, mhlw.
go.jp; Health at a Glance: Europe 2020, OECD, 2020, oecd.org.
128
Global Views On Healthcare – 2018.

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Enablers for digital transformation
Enablers are strategies, mindsets, talent, technology, or regulation that need to evolve to acceleratetransformation. For this move, some potential areas to address include:
Create cloud-based interoperable data
platform to support safe sharing of patientdata, backed by regulations and adequatecybersecurity: Development of a common
healthcare data platform that leverages cloudcomputing could improve interoperability ofdifferent systems and give patients access to theirhealth records irrespective of whichever clinic or
hospital they use. Progress is being made, with
the Cabinet Office’s Law of Next Generation
Medical Infrastructure, that allows certified
vendors access to anonymized Electronic Health
Records (EHR), and permits medical institutions
to provide this data with an opt-out system inplace. Additionally, there is a push from the MHLW
through the Centralized Data Health Reform Plan,
to make non-anonymized public health records(e.g. from Japan’s statutory health checkups)
available to patients, who will be granted easieraccess to their own data. Despite progress on data
access, data standardization and interoperability
still needs further action in order to maximize thevalue from sharing the data. The first step involves
agreeing on a unified platform protected bystrong cybersecurity, with defined data standards
including minimum encryption and data sensitivity
levels. When examining and updating regulations
on cybersecurity for the healthcare sector, one
example of a country that Japan can look to is theUK, which over the past few years has focused on
updating rules and requirements regarding thesecurity of its National Health Service (NHS) to
help NHS organizations manage and improve theircybersecurity.

Create regulations to scale up frictionlessordering and reimbursement of online healthservices: Boosting remote diagnosis andtreatment in a market that is almost exclusively
driven by face to face interactions will be criticalfor scale. COVID-19 has catalyzed the change, witha near 5 times increase in the number of hospitals
reporting online medical consultations between
March to June 2020129 . While the MHLW has not
129

72

made these regulatory changes permanent at thetime of this paper in 2020, the Prime Minister hasemphasized deregulating telemedicine in his newpolicy so that the situation does not revert to thestatus quo after the COVID pandemic.

Create financial incentives for digital solution
development to support pre-clinical andclinical trial period: Financial support – throughsubsidies, tax incentives, low-interest loans, andmechanisms for sharing and monetizing clinical
trial data – to companies, especially startups,
through the lengthy pre-clinical and clinical trial
periods, could help offset bottlenecks to new drug
and product development.

Use digital forms and signatures to eliminate
the need for paper and seals across healthcare
processes: Switching paper-based and hanko
processes to digital submissions is necessary bothto cut costs and establish a framework for further
digitization efforts.

Roll out digital training for doctors, patients,
and government to drive adoption of digitalapplications and overcome risk averse mindset:
A part of the challenge related to adoption
lies in the mistrust and uncertainty that stems
from a limited knowledge of how to use suchtechnologies, and their benefits. This block can
be overcome through training and capability
building, particularly aimed at the aging populationof patients, healthcare providers and government
officials. While the younger generation is likely
to adopt new solutions and innovations more
willingly, the older generation may require
additional support to drive adoption.

Haruna Futaba, “オンライン診療料の届け出、3カ月で3.4倍に” [Online notification of medical fees up 3.4x in 3 months], Nikkei Medical,
August 21, 2020, medical.nikkeibp.co.jp.

Japan Digital Agenda 2030

Roll out pervasive, secure connectivity in
hospitals nationwide to ensure seamlessdata transfer across the network:
A relatively straightforward opportunity is
to ensure hospitals have access to secure,high-speed networks. One company that has
already taken this step is AT&T, collaboratingwith Chicago-based Rush University Medical
Center to create a 5G-enabled hospital thatleverages AT&T’s 5G network to support
various digital use cases that are being
deployed across the hospital system130 . North
York General Hospital redesigned its analytics
architecture around IBM’s PureData System
for Analytics data warehouse, integrating IBM
analytics solutions to enable high quality carethrough daily performance tracking, trend
identification and process improvement131 .

Create partnerships between healthcare
players and cloud / AI companies toleverage combined expertise: Innovation will
require partnerships between incumbents,
disruptors, academia and others. For example,
Japanese pharmaceutical company Otsuka
has joined forces with IBM Japan to create

digital health solutions targeting the CNS
therapeutic area132. Through a joint venture
partnership, Otsuka Digital Health (ODH)
was established as an independent startup
subsidiary to Otsuka Holdings and a peerof Otsuka Pharmaceuticals. Other notablepartnerships include an industry-academia
collaboration between Eisai and Keio
University to create an innovation lab using
the latest technologies for drug discovery anddevelopment related to dementia133 .

Convene new generation of digitally native
doctors to drive digital adoption: There are
doctors who have displayed more progressive
and digital-friendly mindsets when it comesto adopting new technologies. However, there
is no group or coalition amongst such doctors
as of late 2020. Establishing such a group thatprovides pro-digital pressure might inspire
more reluctant doctors to go digital as well. By
setting an example and proving the benefitsof digital technology, these doctors can help
build trust in digital among their peers.

“AT&T and Rush System for Health Ink Agreement to Use 5G in Hospital Setting”, AT&T, January 8, 2019, att.com.
“North York General Hospital”, IBM, accessed December 4, 2020, ibm.com.
“Otsuka Pharmaceutical and IBM Japan to set up joint venture for digital health solutions in central nervous system field”,
Otsuka, June 13, 2016, otsuka.co.jp.
133“Eisai and Keio university to establish a new industry-academia collaboration site”, Eisai, December 22, 2016, eisai.com.
130

131

132

Japan Digital Agenda 2030

73

74

Japan Digital Agenda 2030

Big move 7: Financial services
providers to build mobile and broad
accessibility solutions by leveraging
cloud infrastructure and open network
In 2018, Japan’s financial and insurance service industry revenues totaled an estimated ¥23
trillion, or ~4% of national GDP. While the financial industries in other developed Asian countries
grew between 4 to 9% annually from 2014 until then, Japan’s financial sector growth stagnatedin the same period, given near zero GDP growth combined with the low, or even negative, interest
rate environment. Coupled with high costs, Japanese banks’ profitability also decreased by 4.4%
annually between 2014 and 2018134 .
Digital technologies can be applied in various efforts of cost reduction: for example, Natural
Language Processing (NLP) and Optical Character Recognition (OCR) to reduce or digitize
paperwork, Robotic Process Automation (RPA) to lower the human effort involved in various
processes, and even Machine Learning for trade surveillance to ensure regulatory compliance.
However, digital presents opportunities for Japanese financial players to go beyond reducing
costs, and develop new revenue streams to establish global competitiveness. From a regulatory
perspective, Japan is favorably positioned to digitize its financial services: with the Financial
Services Agency (FSA) as the sole regulator with full regulatory control since government approval
is not needed in order to authorize cloud and other technology usage, compared to other major
jurisdictions where authority can be distributed across multiple agencies.
Globally, major shifts are taking place in the financial sector. For instance, in 2010 traditional banks
made up 96% of the global banking and payment market, but their share has eroded to 72% in2020 as financial and insurance tech companies (respectively, “fintech” and “insurtech”) and nonbank payment firms enter the market with more innovative offerings135 . Fintech companies aretransforming services across the value chain, from payments to retail banking to insurance, as new
and more convenient value propositions attract the attention of investors and customers alike.
As of May 2020, there were 66 fintech and insurtech “unicorns” (startups valued at over
$1 billion) worldwide, with a total valuation of more than $300 billion. The ecosystem is thriving inmost major financial markets such as the United States, the United Kingdom, and China, with 37, 8,
and 5 unicorns respectively, while Japan is home to one, Liquid, a cryptocurrency trading platform136 .
Across the financial services sector, there are four key forces that incumbents can pursue tomodernize the financial infrastructure for both mobile front-end services as well as digitized backend processes:
Disaggregation. As banking and insurance products become unbundled, consumers can freely
choose the best single service provider, posing challenges to incumbents’ traditional revenue
streams. Targeted value propositions with demonstrated opportunity for monetization creates
incentives for new fintech and tech giant players to enter the financial services space.
Disintermediation. Customers can increasingly access financial services via non-banking channels.
As fintech and insurtech players look to build digital “ecosystems” based on social media or
e-commerce, traditional banks and insurers risk being displaced from many customer interactions.

134

Global Banking Pools, from Panorama by McKinsey.
“How the digital surge will reshape finance”, Economist, October 8, 2020, economist.com.
136
PitchBook, May 2020, pitchbook.com.
135

Japan Digital Agenda 2030

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Commoditization. Increased transparency through online or mobile channels allows for easy productcomparisons, making it necessary for incumbents to differentiate themselves from lower-cost offerings.
Shifting customer expectations. Catalyzed by the COVID-19 pandemic in 2020, customers are
increasingly expecting more personalization, immediacy, and local delivery of key services. Financial
and insurance services are no exception. Delivering on these changing expectations will likely require
scalable technology, digital skills, and readily available, secured data.

Potential for digitization across the value chain
The services provided by the financial industry can be classified into six domains, frompayments to banking, to insurance. The functions that enable each service take placeeither in the “front office”, i.e. as a customer interface, or in the “back office”, wheretransactions are carried out and recorded. The digital use case transformation roadmap
shows applications of digital technologies across these six domains (Exhibit 14).
Exhibit 14:

Digital use case roadmap across the financial services value chain
Use case deep dive follows

Bank-wide
solutionsCustomer acquisitionand engagement

Front office

Products &services

Retailbanking

Payments

Wealth management

Retail payments &digital wallets

Retail lending

B2B and C2B
payments

Account management
and personal finance

Decentralized global
payments withblockchain

Online marketplace
lenders

POS & merchantservices
Back office

BI services(accounting, payroll, etc.)

Card products

Robo-advisors andpersonal financemanagement
Savings-focused
solutions
Investment andbrokerage platforms

Product comparison
solutions
Infomediaries andaggregators

Digital attacker
banks

SME & corporatebanking

Investment banking& capital markets

Insurance

Digital business
lending

Funding/issuanceplatforms

Digital brokers &aggregators
Micro-insurance

Digital cash
management
FX & hedging
solutions

Trade execution andalgorithmic trading

B2B2C financial
services

Trade & supply
chain finance

Payment gateways /PSPs

New risk coverage(cyber, sharing
economy etc.)

Usage-based policies
with IoT

Market data &information services
Post-trade services(incl. compliance)

Digital claims andservicing
Digital underwriting
and analytics
Broker/agent services

Open Banking (APIs, etc.)

Robotic Process Automation

Cybersecurity

Core banking platforms

RegTech (AML & KYC)

Advanced analytics

Data processing and storage

Project mgmt. and product dev.

Key technology
enablers

Source: McKinsey

There are four key areas where Japanese banking and insurance players can begin scaling up digital use
cases to shift away from legacy back-end systems and enable customer-centric services:— Cashless and transparent payments— Data-driven consumer products— Automation of back-office processes— Modernized financial infrastructure76

Japan Digital Agenda 2030

Cashless and transparent payments

Digital wallets for cashless payments

Impact: greater ease of payment, lower operating costs, greater availability of data for customer
insights
Payments have outperformed all other financial services sub-sectors for the past-decade, given several
developments that have changed the payments value chain. The geographic payments center has
shifted to Asia, which now captures almost half of global payments revenues, and has been growing at
an annual rate of 8% between 2013-2018137. In China, digital wallets such as Alipay and WeChat havebeen particularly successful in creating services for a society where use of credit card point of sales andonline payments were historically limited. Alipay, originally a payment method for Alibaba’s e-commerce
platform, is now the largest mobile payment service, and the second largest payment service globally. In
several other Asian countries, innovation in real-time domestic payments has been driven by proactive
regulators. Initiatives such as Immediate Payment Service (IMPS) and Unified Payments Interface (UPI)in India, Real-time Retail Payments Platform (RPP) in Malaysia, PromptPay in Thailand, Fast And Secure
Transfers (FAST) in Singapore and Faster Payment System (FPS) in Hong Kong are some examples of
payment systems that were developed under the supervision of the respective central banks.
In Japan, METI estimates that the cost to maintain the current cash-based infrastructure amounts to¥1.6 trillion annually, and is mostly borne by banks for ATM operations and cash transport138 . Digitalwallets such as PayPay and LINE Pay, as well as card-less online payment systems such as Paidy, havebeen increasing in popularity, thanks to their value proposition of zero-fee peer-to-peer and consumerto-business payments, easy setup for merchants, and seamless payments that do not require PIN codesor shipping addresses. A McKinsey consumer sentiment survey from June 2020 shows that the COVID19 pandemic prompted a further shift in preferences, with nearly one in three respondents reporting
decreased usage of cash139 . However, with no clear winner, the service landscape remains fragmented:
for both business and consumers, this entails the need to configure and operate multiple payment
methods, thus creating overheads which may outweigh the benefits of convenience and cost saving.

Decentralized global payments with cryptocurrencies and fiat
currencies using blockchain technology
Impact: lower transaction cost, automated approval processing, secure transactions

Cryptocurrencies are a type of virtual currency in which transactions are verified by a decentralized
system (“blockchain”) using cryptography, rather than a central authority. Currencies such as Bitcoin
and Ethereum allow for international payments that are fast, secure, confidential, and remove the needto manage multiple currency accounts. Not requiring institutional intermediaries, their use can result in
relatively lower costs than traditional networks, and frees users from approval processes and businesscut-off times. Japan is one of the largest crypto asset markets, with the FSA reporting 3.5 million users
as of 2018140 . On the consumer side, coins can be exchanged for payment to peers and stores using
Japan-based services such as Coincheck, bitFlyer, and Liquid. On the business side, some leadingbanks are establishing blockchain-based digital payment clearing and settlement infrastructure basedon fiat currencies. JP Morgan, for example, has been working on Project Ubin with the support of theMonetary Authority of Singapore, to provide capabilities for multi-currency clearing, foreign exchange
settlement, and delivery versus payment (DVP). The project aims to create a new wholesale payment railon blockchain, leveraging JPMorgan Chase’s JPM Coin offering.
Japan pioneered the crypto space by becoming the first country to legally define “virtual currency”
in 2016, and local regulations on crypto assets have been praised as enabling innovation while
137

Global Payments Map, from Panorama by McKinsey.
我が国におけるFinTech普及に向けた環境整備に関する調査検討 [Survey and examination on environmental improvements for the
spread of FinTech in Japan], Nomura Research Institute, March 2018, meti.go.jp.
139
Eunjo Chon, John Euart, David Hutchinson, and Sameer Kumar, Financial decision-maker sentiment: Japan, July 2020, McKinsey.com.
140
Status report on cryptocurrency trading, Japan Virtual and Crypto assets Exchange Association, April 2018, fsa.go.jp.
138

Japan Digital Agenda 2030

77

protecting users. New regulations were introduced after 2014, when the Mt. Gox exchange, whichhandled 70% of all Bitcoin transactions, announced the theft of about 850,000 bitcoins (equivalent
to approximately $1 billion at the time). As a result, the government approved an amendment Payment
Services Act, introducing a registration system for cryptocurrency exchange businesses, and subjecting
cryptocurrency transactions to money laundering regulations141 .
In October 2020, the Bank of Japan announced its plan to trial a Central Bank-issued Digital Currency(CBDC), following the launch of China’s “digital yuan”142: a CBDC has the potential to provide an official
alternative to fiat currency that can help reduce the cost of cash, provide a means to enforce monetary
policy, and create a standardized digital payment solution based on domestic currency.

Data-driven consumer products
Data-driven investing for broader audiences

Impact: increased investment volume, broader access to investment products, lower fees oninvestment services, lower operating cost through automation
With 17% of global fintechs developing easy-to-use, data-driven investment products, retail banks arefacing increased competition in both the mass customers and niche segments.
Previously, wealth management and investment used to be reserved for individuals with substantial
capital, financial knowledge, or the ability to hire advisors. Robo-advisory services make algorithmic
trading available to a wider set of customers with different experience levels, who can invest in datadriven plans at low fees, aided by intuitive dashboards. In Japan, startups such as WealthNavi and Theouse machine learning to manage customers’ finances, and most major banks have begun introducing
similar services, such as Mizuho’s Smart Folio or MUFG’s PortStar.

Usage-based insurance policies with IoT

Impact: improved accuracy in risk assessment and consumer pricing
Insurers are starting to leverage connected IoT devices, including smartphones, to develop “usagebased insurance”, where premiums are set and discounted according to the customer’s behavior, fromauto to health insurance. In the latter area, examples include Beam Dental, which uses its IoT toothbrushto determine brushing habits and award discounts, and the Japanese startup JustInCase, which
determines health insurance premiums based on clients’ lifestyle, as determined by step counts andother health factors.

Automation of back-office processes
Paperless insurance application and claim processing

Impact: shorter process time for consumers and agents, greater flexibility for consumers, greater
data availability, lower chance of errors
For insurance companies, going paperless means shorter filing times and greater convenience forcustomers, but also faster processing times in the back-office, since the transferring and handling ofdigital documents can be more readily automated.
An example of paperless processes for insurance application in Japan comes from Aflac, the leading
provider of medical and cancer insurance in Japan. In October 2020, it launched a new service thatallows customers to complete contracts for customized life insurance products, from policy proposals to
141
142

78

“Regulation of Cryptocurrency: Japan”, Library of Congress, July 24, 2020, loc.gov.
Koji Okuda, “BOJ to start trials on digital yen next year as China moves ahead”, Nikkei Asia, October 10, 2020, asia.nikkei.com.

Japan Digital Agenda 2030

applications, fully online, helping to ensure that customers can safely meet their insurance needs from
wherever they might be.
When filing claims, paperless processing reduces filing time for customers and processing time foragents, thus allowing customers to receive payments in a shorter time. Ping An, the largest insurancecompany in China, developed the “Ping An Auto Owner App”, which recently exceeded 100 million users.
Through this service, customers report accident claims in under two minutes. A known example of afinancial service player countering disintermediation by creating an ecosystem centered around broader
customer needs, Ping An’s app also enables customers to request car maintenance, refueling, and otherservices143 .
A concerted effort from both government and firms will be necessary to create fully digital operations.
One such initiative could be allowing the digitization of commonly used forms, such as reinstatementrelated forms, questionnaires for data exchanges from trust banks to insurers, or payment slips used bycompanies to pay local taxes via financial institutions.

Instant loans with data-driven underwriting
Impact: quicker loan approval process

Retail lending has been undergoing significant changes, with new models aimed at making loans
transparent and readily available. In the US, companies such as Roostify are reinventing the mortgage
process with an online platform for lenders that streamlines document submission and automates
underwriting, decreasing approval times and reducing operating costs. In e-commerce, micro-lendingis gaining momentum: at nearly $11 billion, Klarna is Europe’s most highly valued fintech144 , with a lending
platform that allows shoppers to pay in installments at any online store.

Modernized financial infrastructure
From plug-n-play Core Banking to Banking-as-a-Service
Impact: faster go-to-market times and lower operating costs“Core banking” encompasses the essential activities that banks perform, such as the processing oftransactions, deposits and loans. This sub-sector is both heavily regulated and capital intensive and,while generating $3 trillion in global revenues, typically provides a lower 5-6% return on equity. Building
on top of these Core Banking Systems (CBS), banks can offer more diversified lines of business withreturns as high as 20%, such as payment services and product distribution145 . “Banking as a Service”(BaaS) is a business model where a banking license, a CBS, and banking products are decoupled fromeach other, and can be offered as services by different players. BaaS can be leveraged by companies
wishing to provide financial services without a banking license, such as online lenders, P2P platforms
and micro-finance institutions. Moreover, it can also help banking incumbents and newcomers deploy
the latest core technologies or launch fully digital banks in months, powered by RPA (Robotic Process
Automation), CRM (Customer Relationship Management), and analytics. The reduced infrastructure andasset costs can give digital banks a cost advantage of up to 70% over traditional banks146 .
Several strong BaaS players are expanding in Asia, such as startup ThoughtMachine and moreestablished Avaloq, with its core banking platform geared towards wealth management. The latter,
after being named the best CBS provider in Asia147, was acquired by NEC in October 2020, in a move to
integrate digital financial services in its vision for smart cities148 .
143

Ping An’s Auto Service App Ranked Top in China with Over 100 Million Users, COVID-19 Spurs Demand for Online Auto Service”, PR
Newswire, April 9, 2020, prnewswire.com.
“Klarna announces $650M funding round to further accelerate global growth”, Klarna, September 15, 2020, klarna.com.
145“How the digital surge will reshape finance”, Economist, October 8, 2020, economist.com.
146
Panorama FinTech, from Panorama by McKinsey.
147“Avaloq named Best Core Banking Platform in Asia”, February 28, 2020, avaloq.com.
148“Avaloq joins NEC for next phase of growth and accelerated innovation”, October 5, 2020, avaloq.com.
144

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Open Banking as the foundation of new services and businessmodels

Impact: faster and simpler integration between financial service providers

Open Banking is the use of Application Programming Interfaces (APIs) to enable integration among
financial and other entities, and is a critical step to enable new use customer-centric services. Many
countries are taking similar steps, including Hong Kong, Singapore, and Australia. In Japan, a recent
positive signal was the Japanese government amendment to the Japan Banking Act in 2018 to promote
the growth of Open Banking: the amendment called for 80 of the 140 largest banks to open APIs by mid2020, a goal that was surpassed more than a year ahead of time. However, legislation in Japan is yet toregulate data standardization or usage fees, potentially complicating negotiations between banks andservice providers: in other markets, such as the EU, the law mandates basic information be accessible
for free, effectively treating APIs as essential infrastructure in order to promote cooperation149 . Recent
examples of GMO Aozora Net Bank and MUFG launching free APIs have set a positive trend in Japan, but
significant headroom continues to exist.

Cybersecurity to enable compliant operations across borders

Impact: adherence to regulatory compliance, lower total cost of ownership, increased trust in how
the business operates
Financial institutions are mandated to respect stringent security regulations in order to guarantee thesafekeeping of valuable assets and information. Firms that operate across multiple jurisdictions mustensure compliance with security guidelines established by the financial supervision authorities in eachcountry of operation. For one such company operating across the Asia Pacific and Japan region, an
audit firm conducted an examination of the company’s network security and determined that, to comply
with the guidelines, it had to make improvements to its endpoint security. Palo Alto Networks’ advanced
endpoint protection allowed the company to leverage Palo Alto Networks WildFire cloud-based threat
analysis service to immediately reflect global threat information on all devices, securing endpoints fromvulnerabilities and known and unknown malware. In addition to replacing disparate “point products’’ thatare designed to only counter one type of threat, this type of unified solution can enable companies tomeet strict security regulations and more confidently conduct business across borders. The company
also successfully built trust among investors from different countries and regions with the cybersecurity
solution.

149

80

Open APIs are essential to Japanese banking innovation, Nomura Research Institute, January 24, 2020, nri.com.

Japan Digital Agenda 2030

Barriers to digital transformation
For this big move to come to realization, addressing mindsets, talent constraints, legacy
technology issues or regulatory changes may be need. A few examples are:

Digital is underrepresented in strategic decision-making: In traditional financial companies,
top management can often view long-term digital transformations as a lower strategic priority.
Consequently, technology and cybersecurity experts might be tangential to strategic planning,
and are rather instructed to focus on cutting costs and decreasing risk. In order to comply withsuch directives, software projects are usually carried out in a “waterfall” style, which focuses
on delivering software according to strict specifications, with less room to test, learn, andadjust course. Such methods can regularly lead to delays, cost overruns, or inconsistent results
due to time and budget constraints. When this happens, management can be quick to pause
investment, creating new legacy software in the process. The final product will likely not be a
cutting-edge solution, and players can miss the chance for competitive differentiation.

Legacy core banking engines under vendor lock inhibit innovation: The criticality of banking
infrastructure and strict regulations have led to the creation of systems that are built for stability,
rather than flexibility. Legacy software is often more expensive and time-consuming to maintainthan software based on modern practices and tools: making innovation difficult as resources arediverted away from new development initiatives. A heavy reliance on systems integrators and aprevalence of highly customized, on-premise infrastructure make provisioning IT infrastructureand developing applications a lengthy and expensive process, which may create delays andcomplexities when integrating with external services.

Internal compliance regulations constrain scope of innovation: In order to guarantee
compliance, financial institutions have established rigorous procedures and manuals which,while providing assurance on critical operations, often limit new applications, or involve longer
development and approval processes for updating systems and creating new features. To
facilitate innovation, other countries such as Singapore have introduced “regulatory sandboxes”,
which grant relaxed legal requirements to financial institutions and fintech startups for welldefined use cases and durations150: in such a system, it is possible for players to experiment withnew services and models with less concern and burden of compliance in the initial phases ofinnovation.

Transaction networks present high costs and outdated infrastructure: Banking networks
enable transactions between consumers, commercial banks, and central banks. In Japan, themajor networks are BOJ-Net for central bank settlements, Zengin for inter-bank payments,
and CAFIS for credit card transactions, developed and operated by a single company. Accessto such infrastructure is vital, but fees and integration costs with legacy architectures canbe prohibitively high for prospective newcomers, including remote access by non-residents.
Moreover, the IT infrastructure supporting these networks is optimized for stability and security,
but does not capture the possibilities offered by the cloud in terms of cost efficiency, operational
continuity, and scalability: Zengin, for example, was only equipped for 24/7 processing in
2018, and still operates as a centralized on-premise infrastructure151 . In 2018, a Japan Bank
Consortium initiative led by SBI Ripple Asia saw the launch of MoneyTap, a new payment service
based on Ripple’s blockchain technology. While still relatively small as of 2020, the application isan example of innovation in banking networks, and it allows users of domestic banks to transact
instantly, at any time, and with no customer fees.

150
151

“Overview of Regulatory Sandbox”, Monetary Authority of Singapore, August 2020, mas.gov.sg.
“The Zengin Data Telecommunication System”, Zengin, December 2019, zengin-net.jp.

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Customer and product data silos hinder new development: In traditional financial andinsurance companies, data can frequently be “siloed”, that is, kept separate across business
units and often in incompatible formats. This separation can be the result of legacy systemdesign but, in many instances, is actually imposed by internal company regulations. As a result,many players struggle to establish a comprehensive picture of their customers, which hinders
their ability to deliver higher value services such as customized offerings and risk assessments.
While cloud technology in 2020 makes it possible to create integration layers across siloed data
sources to facilitate communication, it is also important that companies review their internal rules
to secure sensitive customer data. For example, digital teams may need to ensure that, for every
step they take to integrate data sources, they also implement security controls that limit accessto that data only to certain users or devices based on sensitivity and criticality; and also continue
to segregate data and networks based on level of risk or function, to minimize potential for data
breaches.

Structural unprofitability and complacent competition reduce pressure to develop new
digital services: With sovereign interest rates below 0% at the time of writing, and average
returns on equity (ROE) for financial players under 6% in 2017, a wave of consolidation has
resulted in the three mega-bank groups accounting for 90% of the industry’s revenues152. Withsimilar revenue streams and cost structures, and fewer competitors in the market, the current
strategy has been more focused on cost reduction than innovation. However, as company profits
and ROEs continue to fall, and investment in local fintech startups trends upwards, incumbents
are increasingly realizing the need to innovate, with early-movers well-positioned to capture alarger customer base and market share before new digital players reach critical mass.

152

82

Global Banking Pools, from Panorama by McKinsey.

Japan Digital Agenda 2030

Enablers for digital transformation
Enablers are strategies, mindsets, talent, technology, or regulation that need to evolve toaccelerate transformation. For this move, some potential areas to address include:
Accelerate legacy banking and finance systems
migration to the cloud in order to increase resilience,
operational efficiency, and flexibility of productdevelopment: By adopting cloud solutions, banks can
not only reduce their operating costs, but also create afoundation for future development, by leveraging shorter
delivery times and greater data availability. For example,
Sony Bank has migrated part of its IT systems to the
Amazon Web Services (AWS) cloud, achieving 50%
shorter deployment times and 40-60% lower operating
costs compared to on-premise solutions, and intend to
migrate even the core banking systems153. Along withefficiency gains, cloud offers the possibility to easily
implement significantly more robust fault tolerance,
disaster recovery options and cutting-edge cybersecurity
technology, which financial players need in order toguarantee the continuity of operations and safety ofcritical data. Beyond banks, banking networks could also
benefit from the scalability and cost savings of modern
cloud infrastructure and protocols, in order to deliver
even higher performance and enable parties to integrate
easily.
Reorganize divisions around products to achieve
greater agility and data sharing to benefit customers:
Starting from data sharing, business units can aim tocoordinate their policies and technology infrastructure
to create product-oriented organizations, so that crossfunctional teams with shared goals can minimize external
dependencies and maximize internal agility. Doing so canmake it easier to automate each decision process end-toend, rather than just portions of it: the result is optimized
customer journeys with fewer development bottlenecks.
As disaggregation and commoditization cause an
explosion of options, customers’ expectations of service
quality increase. Human-centered design, supported bydata analytics, could be key for players to understandtheir customers and create solutions that meets their
specific individual needs: for example, more senior users
might prefer simpler guided digital experiences, whileother customers might prefer solutions that integrate in“ecosystems” familiar to them, such as wallets embeddedin e-commerce platforms, or social media-based
payments.
Attract domestic and international digital talent toraise the strategic importance of digital initiatives:
153

Cultivating in-house technology talent at all levels will
likely provide players with a significant advantage inbeing able to migrate from legacy software, develop
cutting edge solutions, and create a culture ofdigital-driven innovation. Having internal technology
experts can also improve the software procurement
process, enabling business units to define appropriatearchitecture requirements and control development withgreater confidence. Even top management can benefit
from digital education through showcases or training
programs, helping them experience the real impact ofdigital transformations and gaining their commitment toambitious initiatives. Given the increasing demand forhighly skilled professionals, attracting international talent
could be key, not only through tax and visa incentives, butalso by lowering language barriers and fostering multicultural environments.
Foster extensive Open Banking and data flows tofacilitate the implementation of broader use cases:
While the reform to the Japan Banking Act was a decisive
stimulus in fostering Open Banking, issues with API
standardization and usage fees still remain. Buildingon the progress made, Open Banking can become anovel common ground on which companies can build
new and richer products, rather than a series of revenuelines for individual players. Such progress could beachieved either through further regulatory impetus thatallows seamless non-resident access, or organically byincumbents adopting new business models, for example
by establishing consortia for standardization andcooperation.
Explore partnerships with fintechs as well as nonfinancial industry players to launch innovative services
and revenue streams: While startups are natural
disruptors of existing value chains, their new technology
or business models often bring solutions to and freedom
from cumbersome legacy systems. An example inJapan, startup Moneytree has built partnerships withnumerous financial institutions to provide customers witha consolidated platform to monitor their finances, which
partly helped incumbents from having to build similarly
advanced features in-house. Moreover, collaborations
with non-financial players could represent interesting
avenues to create a larger ecosystem, such as in
e-commerce, healthcare, etc.

“ソニー銀行、勘定系を含む全てのシステムに AWS の利用可能範囲を拡大” [Sony Bank extending the availability of AWS to all systems, including corebanking], Amazon Web Services, January 20, 2020, aws.amazon.com.

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84

Japan Digital Agenda 2030

Big move 8: Government to define
a vision and bold goals to provide
digital citizen and business services
The government of Japan provides services to both citizens and businesses, and as of 2020, only
7.5% of Japan’s administrative procedures could be performed online154 . The overwhelming majority ofprocedures require manual processes, physical visits to government offices, paperwork, fax machines,
and hanko stamps. Some of these analog practices are pervasive. For example, according to the
Information Technology Cooperative, over 95% of businesses still relied on fax machines in 2020155 ,some of that activity related to submitting government related paperwork. At the end of 2020, Japanannounced the formation of a new digital agency to take on the challenge of digital transformation.
A number of governments around the world have been succeeding at digital transformation. In both the
IMD digital competitiveness index and the United Nations e-government development index several
countries rise to the top156 . Singapore, Denmark, Estonia, and Sweden are marquee examples ofsmaller population countries that have pervasively driven digital. South Korea, the UK, Germany, andthe US are examples of countries in the Top 10 e-government ranking that have also made significant
strides in digital government. McKinsey performed a bottom-up analysis of the digital agendas of thesegovernments, revealing some commonality inthe building blocks of their success. (Exhibit 15).
Exhibit 15:

Best Practice Digital Government Agenda

Vision

Bold
Goals

Leadership

Digital citizen and business journey portal/apps

Procurement of underlying
digital and technologies
and services

Data sharing across public
and private sector

Interoperability of systems
across government
agencies

Digital Talent and Literacy –Ways of working
Tech – Open Source

Electronic ID
authentication

Data Privacy and Responsible AI

Financial commitment

Partnerships

154

Jonathan Soble, “It’s time to reset Japan’s digital infrastructure”, Japan Times, August 2, 2020, japantimes.co.jp
Tomohiro Osaki, “As the new administrative reform minister, Taro Kono declares war on fax machines”, Japan Times, September 27,
2020, japantimes.co.jp.
156
United Nations E-Government Development Index - https://publicadministration.un.org/egovkb/en-us/About/Overview/-EGovernment-Development-Index
155

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Vision and Bold Goals
Across leading countries, the digital transformation journey began with a vision and some bold[numerical] goals. Having a clear vision generates buy-in and helps resolve difficult trade-offs. Thisvision can be oriented around either customer experience or cost efficiencies: achieving one delivers
benefits for the other. The goals lay out an aspirational targets. Singapore for example, set goals toprovide 100% of services offering e-payment and forms pre-filled with government verified data, andto achieve 75% of customers and businesses declaring themselves ‘very satisfied’ with e-services.
Germany has gone as far as legislating the goal of moving all 575 public services online by 2022, toensure easy access for all customers.157

Leadership
Structural and visible leadership is required for success. The structural component refers to the type oforganization – such as an agency – and where it sits in government. In Singapore for example, GovTech,
the agency responsible for the delivery of the government’s digital services to the public, sits within
the Prime Minister’s Office and is part of the Prime Minister’s personal KPIs. Leadership visibility andcommunication of the end-state is equally important; Sweden’s minister leading the effort spent over
250 days on the road building grassroots support.

Digital citizen and business journey portal/apps
The core thrust of government digital transformation is building applications to serve citizens andbusinesses. This usually comes in the form of central .GOV portals or purpose-specific apps forcustomers and businesses. No matter the underlying initiatives, the ultimate goal should be to digitize
the citizen and business journeys, saving time and improving quality for the key stakeholders. There arenotable examples of this. The UK’s Government Digital Service (GDS) developed ‘Gov.UK’ in 2012, a onestop-shop to access e-services, which replaced ~1,700 different government websites and provides
access to ~300 agencies. This has been estimated to save taxpayers £70m per year in service delivery
costs.
In terms of purpose-specific apps, the Singapore government created an app called ‘Moments ofLife (Families)’, to proactively support families of children aged 6 and below: it provides necessary
information to parents and caregivers (including birth registration, preschools, immunization records)
and is designed to improve with feedback.
The build out of these services is often done in waves. Denmark carefully prioritized initiatives that would
have very visible customer impact, and services were digitized in 4 sequential waves to eventually coversome 85 services in total. These waves progress over time, launching new services in a way designed
to erode skepticism and publicize quick wins. Estonia, often touted as the top eGovernment, is a good
example of executing a plan to consistently roll out new digital products. In 2000 it rolled out e-Taxes, in2002 ID-card to access e-services, in 2005 i-voting, in 2007 Mobile-ID; a mobile version of the original
ID card. Later in 2011 it launched Reporting 3.0 to help entrepreneurs accelerate the submission of data,and in 2014 it launched e-Residency. Estonia has further identified 10 focus areas to keep pace withdigital revolutions and emerging technologies by moving basic services to a full digital model, with thegoal of having at least 7 new services functioning in 2020.
The Japanese government has already posted some quick wins but has potential to scale further. For
example, in 2017, the Cabinet Secretariat of Japan adopted Salesforce Community Cloud, Salesforce
Service Cloud and Salesforce Platform to build a secure and flexible data architecture for the Myna
Portal.158 The Myna Portal is the government’s platform to apply for administrative services using the My
Number card. This platform made it possible to improve productivity of online services while securely
managing and standardizing operations across over 1,700 municipal governments nationally.
157
158

86

Shaping Digitization, Federal Government of Germany, July 2018, bundesregierung.de.
Naoki Kiyoshima, “マイナポータル「ぴったりサービス」をSalesforceで構築、アジャイル開発手法で” [Building the Myna Portal service
with Salesforce], Nikkei XTech, September 21, 2017, xtech.nikkei.com.

Japan Digital Agenda 2030

Exhibit 16:

Digital citizen journey and time spent annually on key citizen processes
Youth

Old age / retirement

Biometric national ID

Electronic pension applications

E-school platforms with online grades
and transcripts

Online personal health portal

Fully electronic scholarship
applications

Working age
Remote voting for expats
Digital residence certification (juminhyou)
Online driver’s license renewal

BirthElectronic birth certificates
Online account for childcare support

Online vehicle registration
Online ordering of marriage certificate
Online complaint filing and paperless court proceduresTime spent annually on key processes
Renewing driver’s license

Certification to register residency

Receiving medical certificate

Marriage & divorce~50 million hours~6 million hours~1.3 million hours~1.1 million hours

Source: McKinsey

Below we explore some examples of use cases that Japan’s Government can build-out and scale forcitizens (Exhibit 16) and for businesses (Exhibit 17). These include high-frequency time-consuming
processes that if digitized can simplify, streamline and expedite operations for those involved.

Online account for childcare support payments

Impact: reduced administrative burden on new parents wishing to obtain childcare support
The Japanese government provides various forms of financial support for families with children,
including lump-sum payments at childbirth for those enrolled under national health insurance, medical
subsidies for children, and monthly child allowance payments. However, receiving each of these formsof support requires families to submit applications at municipal offices, sometimes requiring physicalcopies of their child’s medical certificates; as well as, in the case of medical subsidies, original receipts
for costs incurred for treatments. The UK, as a part of its consolidated government e-services website,allows citizens to create online childcare accounts which can then be used to obtain childcare support
programs, such as yearly free childcare with approved childcare providers.

Digital residence certification (juminhyou)

Impact: reduced waiting and travel time for citizens, reduced processing hours for government
workers, reduced paperwork
Obtaining residence certification (known as juminhyou) is an essential prerequisite for various otheractivities such as opening a bank account or starting a new job; and it often needs to be issued 30
days before a given errand, making it necessary for citizens to repeat the process several times. The
process used to involve physically visiting municipal offices to fill out various paper forms, or applying
for and receiving a juminhyou via post – typically taking between seven to ten days – but the Japanese
government recently rolled a far more convenient and expedited method. It is now possible to use
one’s My Number card to issue and print a juminhyou at any of approximately 55,000 convenience
stores spread across the country – and serving 740 municipalities that represent over 80% of thenational population – in a process that takes just a few minutes at a self-operated kiosk.159 Moreover,159“6 advantages of the Individual Number Card”, Japan Agency for Local Authority Information Systems, accessed December 3, 2020,
kojinbango-card.go.jp.

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certain municipalities such as Shibuya in Tokyo have rolled out chatbots, that can be used to apply forand electronically pay for juminhyou copies and other documents such as tax certificates through one’s
smartphone, via the popular LINE messaging app. After requesting and paying via LINE, citizens have to
wait to receive physical copies of the documents which are mailed to their registered residential addresses.
Although the kiosks and chatbots mark considerable improvements from aprocess based on physicalvisits, they still involve receiving paper copies of the juminhyou. A step further would involve digitizing not
only the process, but the juminhyou itself, by making it available – and acceptable for submission – in adigital format, such as PDF, that can be instantly downloaded from an online portal.

Electronic pension applications

Impact: reduced waiting and travel time for citizens, reduced processing hours for government
workers, reduced paperwork
In order to obtain pension payments, eligible citizens under the National Pension system in Japan who
count as “Category I insured persons” – including the self-employed, or business operators in industries
such as agriculture – need to first register themselves in person at a municipal office and submit paper
forms. While the current generation of Japanese citizens receiving pensions may be accustomed to,and possibly prefer, the manual process, the next generation will be more digitally savvy, which is why
it is critical for the government to begin digitizing the pension process now. Moreover, citizens currently
contributing towards the National Pension are given pension handbooks and receive monthly slips in the
mail informing them of their contributions, resulting in multiple pension-related documents that could beentirely digitized. An example is Norway, where pension applications can be made entirely online using the
Norwegian Labor and Welfare Administration’s portal, and citizens can apply electronically and receivea response within minutes. Citizens may also use the portal to get an overview of their pension earnings,
calculate future pension amounts, and compare options to see how withdrawal dates and rates can affectthe size of one’s pension – all without having to deal with multiple slips of paper160 .

Online portal to enable one-day company setup

Impact: quicker setup of company, reduction in processing time for government workers
Starting a company usually requires deciding on a business structure, obtaining approval for a company
name, securing the necessary capital, appointing key staff, and establishing a legal address. Streamlining
this process, New Zealand reached the top of the World Bank’s global DB (Doing Business) ranking forease of starting a business.161 On the Companies Office website, registering a business is a one-stepprocedure completed in under a day.
Japan ranks 106th out of 190 countries for ease of starting a business. Registration is an eight-stepprocess taking over 11 days, requiring interaction with seven government agencies, only three of which
accept online submissions.162 Furthermore, any digitized processes have limited availability. For example,
the website to initiate the registration process only operates during business hours on weekdays, combinesseveral distinct workflows for registration, and remains incompatible with more recent computer operating
systems and browsers, reducing accessibility. End-to-end digitization can help reduce the time andcomplexity of the process, by favoring data sharing among the agencies involved, and providing a single
government interface for prospective business owners.

Online filing for corporate taxes

Impact: shorter processing time, lower volumes of physical documents, lower margin of error,
reduced financial burden for small businesses
Digitizing and streamlining taxation can significantly shorten the time spent by companies on filing taxes
and lower costs involved with accounting, while also enabling tax authorities to reduce processing times,
costs, errors, and fraud.
160

Norwegian Labor and Welfare Administration homepage, accessed December 10, 2020, nav.no.
Doing Business – New Zealand, World Bank Group, 2020, doingbusiness.com.
162
Doing Business – Japan, World Bank Group, 2020, doingbusiness.com.
161

88

Japan Digital Agenda 2030

Exhibit 17:

Digital business journey and key business services processed annually
ExpandPermits granted as-you-go

ExploreResponsive tax adjustments

Real-time custom market insights
Guided business case editor
Business grant directory

OperateStart upOne-day company setup
Self-serve business license application
Digital admin from day 1

Zero-effort tax filing

Close

Centralized worker sourcing

Automatedliquidation
processing

One-step visa management
E-learning for upskilling
Paperless import/export

One-click trademarks and paperless patents

Volume of tasks processed annually
Company registration

Business license approval

Corporate tax processing

Working visa review~116,000~5.2 million~2.7 million~245,000

Source: McKinsey

Since 2016, companies in Japan are able to electronically file (or “e-file”) both national and local taxes,
through the e-Tax and eLTAX systems respectively. The only requirements to join are a user accountand an “e-certificate” consisting of an IC card and card reader. The system allows companies to submit
documents at any time, provides auto-calculation for certain procedures, and removes the need to use
hanko stamps and visit government offices. In the 2019 fiscal year, 87% of tax applications were filed
via e-Tax, with 74% of surveyed users reporting satisfaction with the system.163 As of fiscal year 2020,
large companies (i.e., with capital above ¥100 million) arerequired to use online filing, in a strong pushtowards digitization.164 However, as of 2018 only half of large companies used e-filing, possibly due toincompatibility of internal accounting systems, and difficulties with switching over to the e-Tax format.
In order to further increase its impact, fully featured e-filing systems could be made available on the
web rather than via dedicated software, and access could be expanded to foreign companies, which at
the moment are only allowed to file taxes on paper, since a legal residence in Japan is required for ane-certificate.

Online paperless platform for import and exportof goods and services

Impact: increased volume and expedited process of trade, reduced disruptions to production
schedules due to a streamlined and diversified supply chain
A truly interesting innovation is Singapore’s online platform for trade, the NTP (Networked Trade
Platform), which has won several international awards. More than an online marketplace, it allows any
Singaporean business to log in with a single business ID, connect with domestic and international
players across the value chain, set up paperless contracts and customs declarations, organize freightshipments, monitor trade activity and integrate with third-party systems.

163
164

令和元年度における e-Tax の利用状況等について [Usage status of e-Tax in 2019], National Tax Agency, August 2020, nta.go.jp.
法人についてe-Taxが義務化されます [e-Tax becomes compulsory for corporations], National Tax Agency, June 2018, nta.go.jp.

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In 2020, Japan’s Ministry of Economy, Trade, and Industry (METI) announced its support of an ASEANwide trade digitization platform165 . Like the NTP, this platform, under development by NTT Data, isexpected to eliminate paperwork between trading counterparties, and reduce costs associated withcustoms documentation, credit letter issuance, and trade insurance contracts. Businesses will also beable to avoid supply chain disruptions by searching for alternative suppliers on the platform.

Procurement of digital technologies and services
Building out citizen and business journey use cases will require procuring technology throughout thesoftware stack, including cloud infrastructure, data warehouses, analytics or rules engines, containers,
and others. There are hundreds of cloud tools available today to build applications quickly. More
importantly, many of these technologies can be procured ‘on demand’ and throttled up or down to matchthe required computing power, storage capacity, or amount of users. Procurement processes that used
to be about large multi-year CapEx buys have had to change to on-going OpEx buys that are flexible andadaptive. In this regard, Government may need to change, by enabling procurement through common
platforms, pre-selecting cloud technology vendors to limit the broad range of technologies, and creating
different structures that accommodate the new OpEx buys.
Some countries have succeeded at solving the centralized procurement challenge. Korea ON-line
Eo-Procurement System (KONEPS) was created as a central portal for public procurement, The launch of
KONEPS reduced bid processing time from 30 hours to <2 hours, and is one of the largest e-commercemarketplaces in the world with a total transaction volume of around U$60B. Sweden is another example,
with a common eProcurement platform that was launched as long ago as 2007.
Japan has key challenges to overcome in this domain. There are over 700+ disparate information systems
across government agencies, each with different procurement and contracting processes. The current
procurement process is often lengthy and complex due to selection of multiple vendors to handle different
aspects of systems (e.g. design, connectivity, migration). Finally, because procurement requires technicalknowledge of what is being bought, some technical know-how gaps need to be addressed to streamline
and evaluate the various digital solutions.
Yet there are several initiatives to build on. For example, Japan could accelerate migration towards the
Seifu Kyotsu Platform to reduce the number of disparate information systems and drive consolidation
among vendors. Adopting a common platform has not yet been driven as a top-down mandate. The
deployment of a one-stop procurement portal for all government needs could serve as a ‘single source of
truth’ to access procurement data and conduct procurement processes. Digital training for procurement
officials on topics such as cloud technologies, pre-selecting vendors, and involving “digital natives” aspart of the procurement process can help in the transition.

Data sharing across public and private sector
In a digital world, making data accessible is critical to development. The digital world is less about data
integration – which requires moving data from one location to another - and more about sharing data
sets or making data accessible through Application Program Interfaces (APIs). Businesses have solved
this problem by creating data-lakes with data sets that can be accessed across an organization, or bydeveloping layers with APIs to enable builder teams to access select data.
Building a data exchange layer can achieve significant benefits for customers without requiring major IT
overhauls. Estonia is a marquee example of deploying a data sharing layer that has improved customer
experience with significant efficiency gains, saving the government 1,407 working years in 2018. The
UK’s Government Digital Service (GDS) shares ~20,000 datasets enabling data scientists and software
specialists to develop new applications.
Many US cities also excel at data sharing. For example the city of Chicago makes thousands of datasets
available, which citizen data scientists and developers have used to build apps, a notable example being
identifying safe areas to run or ride a bike in. The city of Boston similarly shares thousands of data sets; aninnovative example involved an app that used a phone’s accelerometer while driving to detect where there
could be potholes in the road that needed to be repaired. A final example is the city of San Francisco which
also makes many datasets available, for example to track energy usage across buildings.
165

90“NTT Data to offer system to put trade paperwork online”, Nikkei Asia, October 26, 2020, asia.nikkei.com.

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This too is an area where Japan can make progress. Today data standards and requirements varyacross agencies, and data is not always machine-readable or in formats that allows for joint analysisof data from multiple sources. Moreover different legal frameworks between agencies or national
and local governments can create complexities regarding what data can be digitized or shared. These
challenges can be addressed through many of the best practices that other governments have appliedsuch as establishing standards for data format and data quality across data sources, deploying “datadictionaries” documenting data meaning and usage, and implementing APIs to allow for seamless but
controlled access to data.
Other nations have embraced principles that Japan can emulate. An example is establishing “one sourceof truth” by leveraging cloud-based single sources for each data type where agencies retain data
ownership and stewardship while reducing duplication of inputs. Other practices include harmonizing
data protection policies to simplify secure digitization of, and exchange of, various data types; andensuring standard privacy guarantees and appropriate access, usage, and publication rights.

Interoperatibility of systems across government agencies
The cloud today allows for advanced interoperability across various types of databases, middleware,and front-ends. However, there are ways to simplify interoperability by adopting common protocols
or data types, reducing interoperability overhead. Fragmentation of systems and a lack of upfront
agreement on data-types can exacerbate this issue. In Japan for example, disparate agencies store thesame information in different characters, with one agency doing it in Katakana, another in Hiragana,and another in Kanji – requiring conversion or integration. Also differentagencies use different
communications protocols to communicate, making point to point connections impossible. The problem
is exacerbated by strict separation of local networks and security policies, making communication andeven teleconferencing difficult to coordinate.
In a future digital state, Japan eGovernment may need to develop creative solutions to the current
fragmentation of IT systems and networks among agencies.
The most notable best practice example is Estonia’s X-road, an interoperability platform that enables
departments’ systems to communicate and share data with each other, the private sector and external
users, and a compulsory national digital ID. Together X-road and the digital ID make it possible to digitally
sign any contract and access any public service.

Electronic ID authentication
While often touted as the main thrust of digital government, electronic authentication is but one
component of it, and not necessarily a condition for success. Electronic authentication through acommon ID can have user benefits, such as reducing login friction and enabling customer data sharing
across various government applications. These programs have been successful in low population
countries, less so in large population countries.
Singapore’s SingPass is deployed in more than 60 government agencies and hundreds of services. It has
an estimated 3.5 million users, some 60% of the population. The United States has Login.gov which hassome 17 million users, some 5% of the US population. The UK’s Gov Verify has an estimated 5.5M users,
implying that less than 10% of the population are using it.
In Denmark for example, the first digital ID effort failed, necessitating a strong focus on ensuring that thesecond one was a success. Because a digital identity must balance ease of use and security, the Danish
government chose to link the ID to bank account numbers, making it easy for users to remember since
online banking is a common activity. By developing its digital ID and payments system in partnership withbanks, the Danish government succeeded in creating an attractive user experience, but it had to meetbanks halfway on issues such as passwords, for example by requiring smaller 6 digit passwords rather
than the original 12 digit passwords proposed by the government.
While electronic ID authentication can bring user benefits, it should not be a reason to delay digitizing
services, nor be seen as the silver bullet solution to digital government.

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The exhibit below shows a complete picture of the types of services provided by key governments, andtheir approach to these underlying procurement, data, interoperability, and electronic authentication
challenges.
Exhibit 18:

Case examples of government services and how they did it
United Kingdom

Singapore

South Korea

Range of services
provided by egovernment modelServices including those for travel,
work, retirement, vehicles, residence,education, health, family andbusinesses

Services including those for housing,travel, public transit, parking, family,
crowdsourcing, paying bills andbusinesses

Services including those for housing,claims, taxes, civil services, online
petitions and business support

How they did it

Consolidated 1,700 government
websites of over 300 agencies into
single website

Created consolidated website todeliver digital government services

Consolidated ~7,000 government
services onto single website (withmobile applications for over 300
services)

Built government website using open
source technology with no expensive
software licensing costs

Created data portal for open data
access with over 8,000 datasets and
100 applications

Managed electronically over 90% of
public administrative documents

Made available ~20,000 government
datasets online

Created e-procurement system, withannual transactions over $34 billion;
over 90% of all bidding done
electronicallyCreated e-procurement system,
reducing average bid process from30 to <2 hours and saving ~$8 billion
in transaction costs

Used GOV.UK Verify as secure way for
identity authentication to accessonline public services

Introduced SingPass to allow secureand easy access to hundreds ofdigital services provided by over 60
agencies

Launched e-residency program topilot digital identity system

Source: Press search, government websites (gov.uk, tech.gov.sg, gov.kr), McKinsey analysis

Digital talent and literacy – ways of working
Providing citizen and business services, and addressing the underlying procurement, data, interoperability,
and authentication challenges, cannot be done without digital talent at the core. To address this,governments have launched broad programs to build digital literacy and capability within theirorganizations. Singapore is working to create a digital-focused mindset and build digital science literacy
across the whole government, by training 20,000 officers in data science and ensuring all officers havebasic digital literacy by 2023. In New Zealand, digitization efforts are led by the Office of the Government
Chief Digital Officer (OGCDO), and focus has been on building capabilities at all levels, with senior leadersfrom agencies participating in the Digital Leaders program at Harvard Business School.
Building hard skills in areas such as cloud tools and machine learning is required to understand the best
options to deploy services. So is building muscle in new ways of working such as Agile and design thinking.
Germany, for example, has introduced new ways of working to accelerate its digitization efforts, withownership for different strands of service spread across federal ministries and states via ‘tandem’ teams
which use digitization labs, Agile methods and design thinking to develop solutions and share results.

Data privacy and Responsible AI
Before setting out to build applications, it is important for government, citizen, and business constituencies
to determine overall data privacy guidelines, as well as principles for responsible AI. On the data privacy
front, the lead has been taken by the EU in the adoption of GDPR as the set of laws designed to limit
violations of privacy, and enforce accountability of usage of data.
In the field of AI, specifically obtaining predictions through Machine Learning and Deep Learning can havepositive consequences such as efficiency, cost savings, or improved outcomes in specific industry verticals.

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Japan Digital Agenda 2030

There are however some uses of AI-Machine Learning which can lead to injustice, discrimination,and surveillance. Principles of Responsible AI need to be defined for applications that will havemachine learning at the core. These include:— Fairness: Avoiding discrimination across people and communities— Accountability: Reliability, auditability, recourse avenues and procedures for redress— Confidentiality: privacy, security, data protection, intellectual property— Transparency: What matters to whom in terms of data, algorithms, models, and predictions
Determining Responsible AI principles is not purely a technical endeavor. Coalitions of scientists,
engineers, social workers, philosophers, lawyers, regulators, concerned citizens are required todevelop the right outcomes.

Technology choices
There is a broad range of technology choices to make to develop the future applications, that canbe defined as where, what, and who. “Where” refers to where will information and applications belocated, often a hybrid approach between the cloud and select entities. “What” refers to specifictools provided at different layers of the software stack, including databases, security layers,
analytics tools, machine learning frameworks, and front-end code preferences. “Who” refers tovendors of specific pre-packaged technologies such as PaaS, IaaS, or SaaS.
An additional consideration is whether to adopt a proprietary or open-source approach: the lattercan reduce lifetime maintenance cost by an order of magnitude. For example, Gov.UK was built ‘theway Amazon built Amazon’, using open source technology and an agile, iterative approach.

Financial commitment
With a coherent vision, established leadership, and a clear objective on what to build, financial
commitment is of the essence. Governments across the world have committed ample resources
to see digital agendas through. Singapore dedicated S$300m to set up GovTech with further
financing provided on a program-specific basis., Germany’s Ministry of Interior has dedicated€500m over 5 years to moving services online, with additional funding required from states for a
total of ~€2b. This central funding pool is allocated to departments and states in tranches, tied toconditions such as using common digitization methods and monitoring progress.
Ensuring that key use cases within journeys are funded end-to-end, or that many of the underlying
initiatives (e.g., simplifying procurement) are also funded end to end will be necessary to avoid
partial completion, and therefore incomplete rollouts of digitized citizen and business journeys.

Partnerships
Finally, digitizing any government requires a broad set of partnerships with technology providers,
advisors, trainers, and others. Successful governments have not done it alone. For example, theSouth Korea government partnered with companies such as Samsung Electronics, LG Electronics
and others to invest in R&D and develop critical technology domestically and at a lower cost. Thispartnership accelerated the development of e-government programs and also led to an increase injobs in the ICT sector.
Some governments have forged partnerships late in the process, after learning costly lessons. In
2016, the UK government started to build ‘Gov.UK Verify’, an online identity verification service,
but experienced difficulties in putting this together with an identification success rate of only 47%.
After spending £130m on the initiative over 6 years, the Government decided in October 2018 tocease subsidizing the program and instead transition to a private sector-led model.
Whatever the initiative, considering partners that can supplement technical or process needs canhelp accelerate and drive success.

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Barriers to digital transformation
For this big move to come to realization, addressing mindsets, talent constraints, legacy technology
issues or regulatory changes may be need. A few examples are:Risk averse mindsets of both government agencies and citizens discourage changes: Japanranked 27th overall in IMD’s 2020 Digital Competitiveness Ranking; one of the constituent factors of the
ranking, ‘regulatory framework’, was rated 44th, and was a key factor dragging Japan’s ranking down.166
The strict regulation that sometimes impedes digitization may be an outcome of risk aversion among
both government officials and Japanese citizens, along with a disproportionate focus on digital risk overbenefits that shapes the regulatory environment. Citizens may not feel comfortable with the idea of theirinformation being readily accessible to government bodies, and there have been concerns surrounding
an initiative to link personal health data to citizens’ My Number. Data privacy and security concerns wereexacerbated in 2015 when the national pension system was hacked and over one million files of personal
data were leaked. In a nation with a culture that places great value on trust, regaining and maintaining
trust that data will be stored and used securely presents a considerable challenge. It requires relentlessemphasis on the benefits and potential cost savings of digitization, along with a mechanism to build trust
through ongoing investments in cybersecurity solutions and policies that will reduce and mitigate risk.

Agency regulations require paper-based processing: Thousands of procedures – including businessapplications for permits, and citizen applications for residency certificates – require a hanko stamp,
a rule that in many cases is mandated by regulation or national law. This requirement for physicalobjects - whether they be hanko, or paper copies - reduces the potential for digital uptake. Whilesome city governments, such as Fukuoka – where hanko usage was made unnecessary for over 3,000
types of administrative procedure documents167 – have taken steps to digitize, central and prefectural
government rules currently make it extremely difficult to remove hanko from all processes. Under Article
3 of the Electronic Signature Act, a certain electronic signature is presumed to have legal force to thesame effect as putting a seal on the legal documents in the cases of a civil lawsuit. However, it is unclear
whether cloud-based electronic signature services apply to the Article 3 of the Electronic Signature Act
and have the same effect as a physical seal.

Digital literacy is low among government officials: Ranked at 46th globally, talent was the constituent
factor of the IMD’s 2020 Digital Competitiveness Ranking where Japan fared poorest in relation toother factors; this highlights the need for more digital-savvy employees within government ministries
and agencies - people who understand both the processes and the technologies. While many digital
initiatives rely on third parties and vendors for implementation (e.g. outsourcing an application to athird party), there is value in digitally empowered leadership fostering digital understanding at an
earlier stage, when strategies are being conceived and planned, not just when they are being rolled
out. Since so much of the existing infrastructure is based on legacy systems, many established vendors
and systems integrators working with government continue to offer outdated solutions, missing an
opportunity to adopt new and cutting-edge digital technologies that can be leveraged now as well as for
future proposals. This is particularly crucial in cybersecurity, where threats are constantly evolving; asthey become increasingly sophisticated and automated, the technologies to combat them must stay at
the cutting-edge.

166
167

94

IMD World Digital Competitiveness Ranking 2020, International Institute for Management Development, 2020, imd.org.
“Japan Local Govts Advancing “Hanko”-Free Procedures”, Nippon Communications Foundation, October 13, 2020, nippon.com.

Japan Digital Agenda 2030

Digital governance is unclear: Another barrier that will likely be addressed by the 2021 Digital Agency
is the limited authority that current technological agencies (e.g. MEXT) have over other government
ministries. Some governments, such as France, have solved this problem by having an overarchingagency168 that is in charge of coordinating certain digital inter-ministry projects and approving those withhigh value. It is not clear what precise role Japan’s Digital Agency will play in governance: it could turnout to be a further barrier, or a key success factor.

Fragmented regional operations reduce potential impact of digitization: While this is in no way
unique to Japan, insufficient coordination amongst government agencies adds an additional layer ofcomplexity to digital transformation. Different ministries display distinct processes, initiatives and userinterfaces on their websites. Practices differ even between municipal offices within prefectures: forexample, certain offices such as Shibuya and Ichikawa allow juminhyou requests to be made via LINE;
however, most others do not have such a service rolled out. Moreover, open data published or sharedacross different agencies is offered in different file types, and formats such as CSV, making it difficult toingest and integrate across systems. As mentioned by Yoshihide Suga, Japan’s Prime Minister, duringa 2020 ministerial meeting on digital transformation, insufficient links between different systems have
led to inefficiencies in governance. There is hope that the Digital Agency planned for 2021 will alleviate
some of the difficulties around fragmented processes and data. Governments that have successfully
consolidated operations, such as the UK – which offers the services of all government departments on asingle merged website – can serve as examples of how to tackle this challenge.

168

In France’s case, this is the ‘Direction Interministérielle du Numérique (DINUM)

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Enablers for digital transformation
Enablers are strategies, mindsets, talent, technology, or regulation that need to evolve to acceleratetransformation. For this move, some potential areas to address include:
Shift focus from avoiding digital risk to minimizing
risk through improved cybersecurity, in order toovercome risk averse mindset of both government
agencies and citizens: Japan’s culture typicallypromotes a risk-averse environment, where attitudes
towards shared and open data are less trusting
than in other economies such as the Nordic states.
Japanese citizens have already expressed privacy
concerns about linking their My Number card withpersonal health data. While a cultural mindset shift
is also needed, one method to alleviate concerns isthrough strong cybersecurity. Cyber risk must betreated as an inevitable rather than an avoidable risk
- one that must be mitigated through investment incybersecurity. Simply prioritizing data security, andviewing it as a cost center - ignoring all the benefitsof open data - would impede Japan’s digital potential.
Improved cybersecurity and data protection systems,
as well as interfaces allowing customers to securely
access and view their data, will be key to creating amore trusting culture around data. In order to do so, thegovernment could actively seek partnership with global
leaders in cybersecurity, and actively communicate
the established security to citizens. Recent efforts,
through the introduction of the Information System
Security Management and Assessment Program(ISMAP) to certify cloud services based on whether or
not their security measures satisfy the ISMAP criteria,
are helpful; however, many companies have expressedthat ISMAP’s cost of assessment is high and the current
system is proving burdensome. More streamlined, lesscostly cybersecurity verification programs are likely toyield greater adoption and success.
Use electronic forms and signatures to fully
eliminate need for paper-based processes acrossall government administration: An essential step isthe replacement of traditional stamps and physicalsignatures with electronic signatures to legally validate
documents. The next step to this would involve
creating a national identity card that links together
all citizen data, with biometric or digital verification inplace; such mechanisms of ‘identity as a service’ haveemerged in countries such as Estonia. From a businessperspective, e-signatures are a necessary step towards
digital notarization which obviates the need for printed
documents. In the US, for example, authorized cloudservices can provide e-signature functionalities to

169

96

government agencies to securely automate and speed
up contract processing: in 2020, Adobe Sign was usedby a state government to set up a small business relief
application system in under two days, and deliver $2
million in relief in three weeks.169 It should be noted thatany electronic signatures Japan adopts or promotes
should ideally be harmonized and compatible acrossborders with major trading partners.
Augment digital talent and digital capabilities withingovernment agencies to reduce high reliance onvendors: There is a need for ‘translators’ in the space those who understand both government processes andthe digital tools and technologies needed to transformthem. This can be achieved by various means: digitaltraining courses and capability building programs tobuild talent within government ministries and agencies;
targeted hiring of graduates with digital backgrounds ordegrees; and partnerships with digital companies - notjust system implementation vendors, but global digitalleaders - to augment digital talent from the outside.
For digital proposal writing specifically, an easy win canbe created by establishing a new in-house team with
relevant skills. Better-written proposals would in turnpush the third-party vendors and systems integrators
to offer more cutting-edge solutions, through bothinternal capability building as well as partnerships andcollaborations with leading tech companies.
Digitize high-frequency, low-complexity government
citizen and business processes to demonstrate
early impact: Given Japan’s fragmented governmental
landscape, all-encompassing horizontal initiatives (e.g.
creating an exhaustive cloud database) are likely toprove both costly and time-consuming. Better to focus
initial efforts on implementing a single vertical use casein a targeted geography - one that has mass appeal,
is of medium difficulty in implementation, and offers
immediate improvement in citizens’ experience oncelaunched. Once success has been proven in the target
geography, use case implementation can be expanded.
Shibuya’s LINE application is a good example of atargeted roll-out of digital technology that led to a direct
and immediate improvement of the citizen journey.
Establish clear digital governance amongst
government agencies: While the 2021 Digital
Agency could be the enabling factor for this aspect,
its effectiveness was yet to be seen as of late 2020.

Ashley Still, “Adobe announces next milestone on vision for digital modernization in government”, Adobe, August 6, 2020, blog.adobe.com.

Japan Digital Agenda 2030

There is a clear benefit from having clear digitalleadership amongst the various agencies: acentral agency that can coordinate digitization
efforts and take charge of budget approvals
and procurement for digital initiatives, could be
crucial to the overall success of the government’s
digital efforts.
Digitize government processes andservices end-to-end with no paper or analog
exceptions, to fully capture productivity gains:While it is not essential for digital technologies tobe implemented in a horizontal fashion that cuts
across ministries and processes, they will be mostimpactful if applied consistently and coherently.
As an example, some local governments had
to suspend online applications for COVID-19
subsidies due to the manual labor burden involvedin processing the submitted applications170: eventhough the front-end was automated, the backend involved printing and manual input. In order
for a process to be sustainable, both front andback-end and all steps in between need to be
fully digitized. Furthermore, emphasis needs to be
put on not only putting technology wrappers on
steps within existing business processes, but on
rethinking business processes altogether. True
digitization involves revamping and streamlining
processes to eliminate redundancies, which is
why the transformation involves a mindset shift
as well; rather than surface-level automation,changes can be made on a deeper businessprocess level as well.
Define e-government user experience
standards, and user interface designprinciples: While implementing individual use
cases is an effective way to realize quick impact
in the short run, this approach does carry therisk of complicating consolidation efforts in thelong run. Setting standards and design principles
up-front relating to programming languages,
front end interfaces and application development
will enable code-sharing, integration andconsolidation down the line.

government agencies and prefectural offices arehighly fragmented in their websites, but also intheir underlying IT infrastructure. As Japan sets
out to build a new wave of digital applications, itwill be critical to lay out best practices for cloudarchitecture, which all government agencies
nationwide can aspire to, in order to ensure
security, compatibility, scalability and flexibilityof new systems. Additionally, Japan could create
guidelines on how to migrate existing legacy
databases to the newly developed cloud system.
Define data governance, publish selectdatasets, and make secure application
programming interfaces (APIs) available: On
the data front, principles on how data is collected
and stored securely, including standardizationof data specifications, are essential to facilitate
the building of future data-based applications.
To avoid large data migrations and integration
efforts, APIs can play a pivotal role in providing
access to required data that will enableapplications in a secure way. Countries suchas Singapore allow easy access to public
datasets through a single website; Japan could
do the same if it developed the necessary data
standards, APIs, and enabling regulations for safe
data access.
Consolidate and streamline the government
procurement process of digital solutions: The
government of Japan has begun consolidating
the procurement process through the Seifu
Kyotsu Platform in an effort to reduce time,
cost and administrative burden. However, morepressure from the government on agencies tomigrate to the platform could help increase its
adoption. The government has also begun settingout cloud service evaluation criteria that specify
what elements should be considered when
making a judgement on bids171; supplementing thiswith a specialized procurement team of digitally
native experts is likely to speed up and improve
the quality of the procurement process.

Define a secure future state cloudarchitecture, and back-end migration
guidelines: With over 700 information systems
built by different vendors and utilizing different
servers, operating systems, databases,
middleware and security applications,
170

171

“Tokyo 23 ward COVID-19 payment: application and payment schedule by ward”, Real Estate Japan, May 28, 2020, realestate.co.jp.
第二期政府共通プラットフォームにおける クラウドサービス調達とその契約に係る報告書を公開しました” [Report on cloudservice procurement and contracts for the second phase of the government common platform released], Government CIOs’ Portal,
August 5, 2020, cio.go.jp.

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98

Japan Digital Agenda 2030

Big move 9: Government and industry
collaborate to scale smart cities, buildingon Japan’s public infrastructure
endowment
Japan is already endowed with world-class cities and infrastructure, the highlights of which include:
an efficient and well-connected transport system featuring one of the world’s fastest trains – theShinkansen; and the world’s most advanced earthquake resistant infrastructure, and earthquake
warning systems such as the Japan Meteorological Agency’s Kinkyuu Jishin Sokuhou (Earthquake
Early Warning), which have been responsible for saving countless lives and averting potential disasters.
Japanese cities are renowned worldwide for their safety, low crime and cleanliness. In terms of creating
best-in-class cities and infrastructure, Japan has already done a commendable job. This is a solid baseon which to build the next step: using digital technology to upgrade highly-developed cities into smart
cities, that can better serve citizens, while protecting their privacy through enhanced cybersecurity andprotocols around data handling.
Smart cities are an area where governments can work closely with industries to shape the quality oflife for both citizens and businesses. Certain Japanese companies, such as Toyota, are already taking
the lead in developing holistic smart cities that integrate digital across a variety of use cases. Toyota’splanned ‘Woven City’ at the base of Mount Fuji is slated to begin construction in 2021, and house 2,000
people172. The futuristic endeavor will integrate machine and deep learning, robotics and smart homes
into a connected ecosystem for new technologies. Some characteristics of the planned city include
a carbon-neutral environment fully powered by hydrogen fuel cells, solar and geothermal energy; anunderground network for goods delivery, power generation and water filtration; sensors integrated
into buildings to monitor and assist inhabitants’ daily lives; and different roads for pedestrians andself-driving zero-emission vehicles respectively. As stated by Toyota, building a complete city from theground up represents a unique opportunity to test and further develop future technologies in this arena.
Toyota’s endeavor could very well pave the way for smart cities of the future, an area where Japan could
establish best-in-class expertise and emerge a global leader.

Use cases across smart cities
Smart cities such as Toyota’s Woven City, combine traditional infrastructure with an “intelligent” layerof connected objects. They are built on five key pillars - buildings, mobility, infrastructure, energy andpublic services - all of them digitally driven and enhanced. Exhibit 19 illustrates some key examples ofsmart city digital use cases.
An undertaking such as Toyota’s Woven City incorporates multiple digital use cases to create a fullyconnected digital ecosystem. However, single use cases can be introduced to ‘smarten up’ existing city
infrastructure on an incremental basis. Below are some examples of specific use cases of connected
infrastructure, which have been deployed in Japan, and other cities globally.

172

Katie Warren, “Toyota is building a 175-acre smart city in Japan where residents will test out tech like AI, robotics, and smart homes.
Here’s what the ‘city of the future’ will look like.”, Business Insider, January 28, 2020, businessinsider.com.

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Exhibit 19:

Digital use case roadmap for smart cities

Economic development & housing

Mobility

3D printing of homes

Real time public transit information

Peer to peer accommodation platform

Predictive maintenance of transport system

Online re-skilling programsIntelligent traffic signals

Citizen expenditures ~ 1-3%
Formal employment ~ 1-3%

Smart parking
Car sharing
Congestion pricing

Disaster management

Commute time ~ 15 – 20%

Disaster early warning systems

Time spent interacting with health-

Digital wireless system for emergency

care and government ~ 45 -65%

communications
Anti-seismic technology
Emergency response time ~ 20 -35%
Fatalities ~8 -10%

Environmental quality & wastage
Water & energy consumption tracking
Home energy automation systems
Real-time and water quality monitoring

Health and safety
Telemedicine & remote patient monitoring
Lifestyle wearables

Renewable energy usage
Waste collection route optimization

Infectious disease surveillance

Greenhouse gas emissions ~ 10 -15%

Crowd management

Water consumption ~ 20 – 30%

Disease Burden ~ 8-15%

Source: McKinsey

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Japan Digital Agenda 2030

Unrecycled waste ~ 10-20%

Early warning systems for natural disasters

Impact: quicker evacuations, reduced fatalities and damages to property
Early warning systems for earthquakes consist of two phases: detection and dissemination. In thedetection phase, sensors pick up seismic vibrations, and algorithms, including deep learning models,
use the sensor data to predict the magnitude, timing and epicenter location of an earthquake. In thedissemination phase, necessary alerts are issued to smartphones, TVs and radios, warning citizens inadvance so they can evacuate. Early warning systems are crucial for saving lives, as well as reducing
property damage, since some systems will cause elevators and trains to stop, or shut down the flow ofnatural gas in pipelines to reduce the risk of fire173 .
This is a use case where Japan excels: the world-renowned earthquake early warning system that
the Japan Meteorological Agency began operating in 2007 consists of 4,000 stations across its
seismic network, and has the most extensive record for earthquake early warning performance174 .
While Japan’s early warning system has played a vital role in reducing earthquake response timeand increasing the survival rate, there have been instances of false alarms and miscalculations ofmagnitude. Public opinion in Japan remains positive – most people appreciate being notified promptly,
even in the case of a false alarm175 – but there is opportunity to continue developing deep learningmodels in the space to improve prediction accuracy going forth.

Smart signage for tourists

Impact: improved experience for tourists, more effective tourism marketing
In 2019, Cisco installed smart signage in Arashiyama station in Kyoto, a major tourist hub176 . Cisco’s
smart signage involved interactive digital touchscreens displaying nearby tourist spots and maps. The
touchscreens were embedded with multiple language concierge functionality, and were equippedwith sensors. In addition to providing quick information to tourists, the signage system collected data,
which could be leveraged for marketing purposes.

Smart solutions to reduce energy consumption
Impact: reduced energy consumption

In Paris, smart streetlights, equipped with sensors and connected to a central control system, adjust
brightness based on surroundings, including motion and presence of people. Such smart lighting
can drive up to 45% reduction in energy consumption, and include enhanced functionalities such as
gunshot detection sensors to deter crime177. Cisco Systems has also partnered with 120 cities globallyto provide a range of smart city digital solutions. An example is Copenhagen’s connected digitalplatform that supports multiple parking, waste and environmental sensing functions, improving thecitizen experience and enabling the city to achieve carbon neutrality.

173“Smart cities: Digital solutions for a more livable future”, McKinsey Global Institute, June 2018, McKinsey.com.
Fumiko Tajima and Takumi Hayashida, “Earthquake early morning: what does “seconds before a strong hit” mean?”, Progress in Earthand Planetary Sciences, October 10, 2018, progearthplanetsci.springeropen.com.
175
Ryo Yamagashi, “Early earthquake alert system remains flawed but tolerated”, The Asahi Shimbun, July 25, 2020, asahi.com.
176“京福電気鉄道株式会社 - Cisco スマート シティ ソリューション 導入事例” [Keifuku Electric Railroad - Cisco smart city solution
case study], Cisco, accessed December 3, 2020, cisco.com.
177
Mark Halper, “Paris: No LED streetlights, but it still goes for intelligent controls”, Lux Review, April 20, 2015, luxreview.com.
174

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3D printing for construction

Impact: reduced building costs, quicker build times
Modular construction, a process where buildings and structures such as bridges are constructed off-sitein sections, and then shipped to the site to be assembled, is a rising trend in the construction industry.
3D printing is a technology that can be employed in modular construction to rapidly and accurate print
physical structures, using materials such as concrete, metal, resin and plastic. For example, in 2020,
Japanese construction company Taisei Corporation built the country’s first ever pre-stressed concrete
bridge using a 3D printer178 . Taisei plans to further explore applications of 3D printing technology towards
building structures such as pillars and beams.
Countries such as Dubai have also moved into the 3D printing space, constructing the world’s largest
3D printed structure to house a municipality building; the effort required only three workers, saving
considerable manpower179 . The government has stated the city’s ambition to 3D print 25% of all buildings
by 2030. Singapore - where 80% of the population lives in government buildings - is also investing in
3D printing for public housing and has established the Singapore Centre for 3D Printing to explore thefeasibility of this technology180 .
178“Japan’s Taisei Builds Bridge Using 3D Printer”, February 18, 2020, nippon.com.
Mary Meisenzahl, “This building in Dubai is the largest 3D-printed structure in the world — and it took just 3 workers and a printer to buildit”, Business Insider, December 31, 2019, businessinsider.com.
180
Michael Molitch-Hou, “Singapore makes plans to 3D print public housing”, 3D Printing Industry, February 10, 2016,
3dprintingindustry.com.
179

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Enablers for digital transformation
Enablers are strategies, mindsets, talent, technology, or regulation that need to evolve to acceleratetransformation. For this move, some potential areas to address include:
Building successful smart cities at scale
involves putting together a range of digitaluse cases across various industries. The
barriers to this are largely the same as thosefacing each industry. In addition, according toa report by the McKinsey Global Institute181 ,there are some overarching enablers thatwould catalyze smart city development, which
are listed out below.
Ensure cybersecurity to protect smart
city infrastructure, and address citizen
privacy and security risk: Cybersecurity
is a necessity for any digital use case, buteven more so for smart cities, which embed
digital into almost every aspect of human life.
Smart cities present an extensive ‘surfacearea’ from which information could leak,or which hackers could attack; cities needto prioritize assets based on criticality andensure rigorous cybersecurity is in place toprotect them, before digitization is rolled out
on a large scale. Moreover, plans are needed
for how smart cities will respond to andcommunicate about any breaches in security.
In addition to protecting data from external
threats such as hackers, it is also criticalto establish protocols and safety arounddata handling and protection of sensitive
personal data, to ensure that the increased
surveillance does not lead to intrusions into
citizen privacy.
Foster public and private sector
collaborations that combine smart city
planning with asset development: While
investment in physical infrastructure andassets is inevitable, it locks cities into
long, capital-intensive plans with limited
flexibility to meet changing demand. Thiscan be resolved by supplementing such
181

developments with more scalable smart
solutions, e.g., an on-demand smartbus service to meet demand in far-off
neighborhoods until the railway service canbe extended.
Create digital feedback mechanism tocontinuously improve city offerings:
Technology can be used to continuously
collect feedback from citizens, which canin turn be used to continuously improve thefunctionality of public digital offerings tobetter serve citizen interests. By encouraging
smart city residents to give feedback, smart
cities also create a culture that is transparent
and accountable.
Embrace an open approach to investment
to support innovation and private-sector
participation in smart city development:
The government does not have to be theprincipal investor for every component ofsmart city infrastructure. Incentivizing private
sector investment in certain elements that
do not fall under the category of public
goods – e.g., connected devices to monitor
health, autonomous vehicles – can increase
scope for investment and reduce the load on
governments.
Add civic tech talent across city agencies:
Smart cities can function successfully if thecivic talent behind them possesses the digitalknow-how to understand each of the smart
components in place. Teams within municipal
offices that employ specific digitally-nativeroles such as designers and data scientists,
as well as capability building programs toensure that all smart city civic employees
have a minimum level of digital knowledge,
are required to run smart city initiatives tobest effect.

“Smart cities”, June 2018.

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Japan Digital Agenda 2030

Big move 10: Startup ecosystem todevelop a concept-to-exit formula that
produces globally scalable ventures
Startups are a critical element of economic renewal. In 2020, the US had 1,072 companies in the
NASDAQ that did not exist 20 years ago, accounting for 18% of the total market cap182. An “ecosystem”
that helps entrepreneurs create new concepts, fund them, scale them up, and realize their value in themarket can drive significant new value creation.
In the “best of best” ecosystems, a high concentration of entrepreneurship is often the result of dynamic
academic institutions with industry ties to produce highly skilled talent, networks of angel investors
to mentor and support new entrepreneurs, and accelerator and incubator programs to bring together
ideas, founders, investors, and talent.
The Japanese formula to produce startups has seen progress in recent years, but there is room forfine tuning. Tokyo is home to 1,200 startups, equivalent to 1 per 10,000 inhabitants. As a benchmark,Tel Aviv has 61 startups per 10,000 inhabitants, London has 17, and New York 13183 . In order to explainsuch difference in order of magnitude, this chapter will illustrate the key components in the formula for a
thriving startup ecosystem that can produce high-value startups (Exhibit 20).
Exhibit 20:

Best in class entrepreneurship formula relative to Japan
Best of BestJapan current situation

Entrepreneurship based on providing global solutions via
softwareConcept

Entrepreneurship based on providing local solutions via
hardwareFounders have access to system benefits, structural
incentives to attract foreign founders

Founders

Limited incentives to become a founder given risk of
becoming estranged, and limited foreign founders

Streamlined company registration, incorporation, banking,real estate setup in hours

Set up#106 worldwide for ease of starting a business; 7 agencies and10+ days to create a businessBroad angel funding from previous generations of
employees, and favorable angel conditions

Funding

Limited angel investor community given limited equity
assigned to employees, leading to low recycle

Flexible financing options including SAFE, KISS,
convertible notes and others with simple terms

FinancingMultiple flexible options with J-KISS and Angel Zeisei; room
to increase flexibility

High work mobility, entrepreneurship as viable career
option, and international talent attractor

TalentLow work mobility, entrepreneurship stigma, as well as limited
stock option upside for joiners

Accessible VC funding for global scaling , with ability tofund late-stage software

Scaling

Currently limited VC funding ecosystem focused on earlystage, limited networks for expansion globally

Focus on growth and scaling to drive large valuation; IPO todrive maximum value

Exit

Early focus on profitability vs growth, and early sub-scale IPO
leaving money on the table

Source: McKinsey
182
183

S&P Capital IQ, S&P Global Market Intelligence, November 2020, capitaliq.com.
Tracxn, August 2019, tracxn.com.

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Concept:

Entrepreneurship based on providing global solutions via software
As an objective, today’s world-class entrepreneurs look to solve customer problems in a way that has
global market applicability. While establishing a foothold in their local geography serves as a starting
point, many have ambitions to scale globally. Moreover, entrepreneurs often look disproportionately
to software as the underpinning of the offering, given the ability to constantly improve it in cycles andthe lower scaling costs. Venture Capitalists (VC) subscribe to this logic, investing in large markets withcustomer needs, and in software technologies they deem strategic. For example, in 2019 and 2020,
Silicon Valley VCs focused their deals on the life sciences, healthcare-tech and fintech industries, andon ventures that leveraged artificial intelligence, machine learning (AI/ML), and Software as a Service(SaaS)184 .
Japanese entrepreneurs tend to remain locally oriented and have limited focus on software. As of 2020,
no major Japanese software company had emerged on the global scene, and data from the Teikoku
COSMOS2 company database shows that fewer than only 5% of new ventures between 2015 and 2019focused on software185 . While countries with economies as large as Japan naturally provide significant
domestic opportunities, a global outlook is important for long-term growth, not least given theimportance of succeeding in the US market. From a technology perspective, recent VC deals in Japan
share some similarities with Silicon Valley, but there is still a large bias towards hardware, robotics, anddrones186 .
Japanese entrepreneurs can change their mindset to look for big customer problems that have global
market relevance and can be solved with software, not only via bespoke hardware with firmware.
Japanese VCs can also evolve. Locally, they could help entrepreneurs launch SaaS companies,
overcome difficulties in driving enterprise sales and accelerate local customer readiness. Abroad, theyshould be creating broader networks outside Japan to help Japanese startups grow internationally.

Founders:

Encouraging local founders, and attracting foreign founders
Startups need founders. Being a founder is hard: it often requires giving up job security, building a
product over long nights, and digging into personal savings. Many founders choose to pay themselves
small salaries or sometimes forgo salary entirely while they build out their companies. In dynamic startup
countries, being a founder is a prestigious role, and despite the career choice, founders can typically relyon safety nets such as credit or unemployment insurance.

In Japan, becoming a founder can mean cutting oneself off from social benefits such as unemployment
payments, parental leave or even access to credit, which tend to be restricted to permanent employees(正社員, seishain). Getting a home loan or renting an apartment can require three or more years of
employment, almost creating an incentive for founders to stay at a large corporation while working on
starting a company. Also, because some founders may not be paying into the unemployment insurance
system (雇用保険, koyouhoken), they may not be entitled to parental leave. Being a founder can create
the perception of being seen as a tax dodger. Japan may need to find ways to remove these obstacles
and encourage local founders.
Attracting foreign entrepreneurs is also a key ingredient for a diverse and thriving ecosystem. For
example, 51% of Silicon Valley unicorns (startups valued at over $1 billion) were founded by immigrants187:
the US has several visa options for entrepreneurs, from the International Entrepreneur Rule, which
grants a 30-month period of stay, to the O-1 “extraordinary ability individual” visa, which allows
entrepreneurs who have raised significant funding to stay for three years.
184

PitchBook, November 2020, pitchbook.com.
企業概要データベース COSMOS2 [Company profile database COSMOS2], Teikoku Data Bank, December 2020, tdb.co.jp.
186
PitchBook.
187
Yoree Koh, “Study: Immigrants Founded 51% of U.S. Billion-Dollar Startups”, Wall Street Journal, March 17, 2016, wsj.com.
185

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When it comes to attracting foreign entrepreneurial talent, Japan offers a startup visa, which gives
individuals the right to reside in the country for up to 12 months as they start a business. This timeframe
is hardly sufficient since it can take three to five years to get a new business to a meaningful level ofactivity. The visa is also limited to seven “national strategic special zones”, and business managers are
required to meet several conditions, such as registering an office and raising ¥5 million or hiring two fulltime employees, in order to stay beyond the startup visa’s expiry date188 .
Flexible policies that attract talented foreign entrepreneurs can be a way to accelerate the startup
ecosystem.

Setup:

Streamlining startup incorporation and administration
Incorporation and administrative setup are a key milestone in the launch of a company. When
governments simplify the process or—better still—offer support, entrepreneurs are able to complete
registrations swiftly, at low cost and with minimal staff involvement. For example, in Singapore, which
ranks 4th in the OECD Doing Business (DB) index for ease of starting a business, founders can registera name, apply for incorporation, and register for tax through a single website, in less than one hour. They
can also sign up for employee compensation insurance through the same site in just a day189 . Anothergood example is Stripe Atlas: this service allows a founder to form a legal entity in the US, issue stock,and procure startup services online, in a matter of minutes.
In contrast, starting a company is a relatively complex process in Japan, which ranks 106th for ease ofstarting a business in the OECD DB report. The largely paper-based process involves seven different
agencies and can extend over 11 days, incurring additional costs when specialist support is required.
Local entrepreneurs often have to process volumes of paperwork to open a bank account, and to clear
various credit-checks to secure real estate.
Government, banks, real estate companies need to recognize the opportunity to cater to entrepreneurs
and address their processes to enable startup activity.

Funding:

Enabling early-stage Angel funding
Early-stage startups get off the ground with pre-seed and seed rounds funded by Angel investors.
Angel financing is often the tail-end of a recycling mechanism. This mechanism starts with founders andengineers that worked at successful startups before, were given equity, and made enough money from aliquidity event to fund future startups.
For this formula to work, it requires startups to allocate part of their equity to employees, which will
create a multiplier effect later on. In Japan this happens to a lesser extent given little equity is allocatedto employees, and upon going public not enough value is created at the individual level. Going forward,
startups could consider being bolder in employee distribution, which will have a multiplier effect.

Japan does have favorable regulation to incentivize Angel investing. The Angel Zeisei law, which grants
income deductions for the purchase of early-stage startup equity provides an incentive to do earlystage funding190 . This not only happens at the individual level but at the corporate level. In a move topromote such synergies between startups and established corporates, the Ministry of Economy, Trade,and Industry (METI) established a corporate tax reduction scheme for companies investing in startups191 .
Furthermore, addressing the issue of funding concentration, METI established “women, youth, and188“Promoting acceptance of foreign entrepreneurs”, Japan External Trade Organization, accessed December 2020, jetro.go.jp.
Doing Business, World Bank Group, 2020, doingbusiness.com.
190“エンジェル税制のご案内” [Information on angel tax system], Small and Medium Enterprise Agency, accessed December 2020,
chusho.meti.go.jp.
191“オープンイノベーション促進税制” [Open innovation promotion tax system], METI, December 2, 2020, meti.go.jp.
189

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senior entrepreneur support funds”, which allow underrepresented population segments and lessexperienced entrepreneurs to access funding192.

Financing:

Ease and flexibility of financing
Another key component to financing is finance flexibility, allowing the use of a variety of instruments
beyond debt and equity, such as convertible notes or promissory arrangements, in seed rounds. Startup
accelerators such as Y-Combinator and 500 Startups have SAFE (Simple Agreement for Future Equity)and KISS (Keep It Simple Securities) respectively, standard contracts which allow startups to receive
early funding without prolonged negotiations.
In this regard, more can be done to address ease of financing: while both Angel Zeisei and “openinnovation promotion” policies have been applauded for improving incentives, they are restricted tostocks and do not include alternative financing instruments such as convertible notes, or J-KISS (theJapanese version of KISS documents). Moreover, open innovation frameworks are often tailored to thestrategic needs of the investor company and risk limiting the freedom and agility of the funded startups.
Another way to enable simpler and more flexible financing would be to create an approved set ofstandard documents that define how capital is governed, set market norms around board membership,
and in some cases serve as a template for fund creation. Government and higher education institutions
could work on this to generate more frictionless financing for startups.

Talent:Talent attraction, mobility, and entrepreneurial rewards
Talent is required to build the product. Software-driven startups do not necessarily require large teams
to deliver value: Instagram, for example, had just 13 employees when it reached 30 million users and was
acquired by Facebook for $1 billion193 . But it was a high-quality team, in part attracted by the promise ofentrepreneurial rewards.

Convincing future employees to join a startup can be difficult in Japan. According to the 2019 Global
Entrepreneurship Monitor report, only 23% of Japanese respondents agreed that entrepreneurship wasa good career choice, ranking second lowest in prestige among all the countries surveyed194 . Given thelimited pool of digital talent in Japan, the bench of professionals willing to join startups by leaving stableindustry roles is even smaller.
Employee mobility, or the liquidity of the Japanese labor market, is low. Multiple factors contribute tothis including the perception that moving from company to company runs counter to the valued traditionof lifetime employment. Additionally, many employees in large companies often opt to “level-up” inseniority rather than take a risk. Finally, there are structural elements, such as the practice of allocatinga significant portion of employee compensation to annual or biannual bonus payments, which, acting
as “deferred salaries”, constrain mobility. An additional disincentive is the difficulty in porting pension
schemes to a new company, which can require significant paperwork; in the case of corporate defined
contribution programs, funds may even be cancelled if a future entrepreneur leaves before serving three
years with their current employer.
As more examples of successful ventures emerge, the social attractiveness of startup jobs is boundto increase, garnering more interest from new graduates and experienced workers alike. However,structural elements need to be addressed to incentivize workforce mobility.
192“女性、若者／シニア起業家支援資金” [Women, Youth / Senior Entrepreneur Support Funds], METI, May 13, 2014, meti.go.jp.
Adam Putz, “M&A flashback: Instagram joins Facebook in $1B deal”, PitchBook, September 11, 2018, pitchbook.com.
194
GEM 2018/2019 Global Report, GEM Consortium, January 21, 2019, gemconsortium.org.
193

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Entrepreneurial rewards are often the counterweight for risk or the stigma of career choice.
Startups in markets such as the US offer upside in the form of Restricted Stock Units (RSU)
or Stock Options (SO) at early stages. These compensation packages help companies retain
liquidity while holding out the prospect of high returns for employees depending on future
performance.
The Japanese government has been encouraging wider use of stock options, by letting startups
use them as compensation for external experts and employees195 : such solutions often benefit
both parties, allowing companies to retain liquidity and professionals to reduce their taxable
income. One potential barrier regarding options is that in many markets, taxes are due when
options vest, whereas in Japan taxes are due when options are issued or granted, creating an
up-front tax burden for many, or discouraging use of options altogether.
One further enabler for attracting talent will be a more widespread understanding of the highpotential value of equity as a means of compensation: at university, career counselors andstartup clubs can provide such education, while future examples of early employees finding
success will also help improve the public image of startups.

Scaling:

VC funding to scale globally
As startups grow, they often rely on successive rounds of funding for liquidity, rather than the
cashflow they generate themselves. This allows them to focus on achieving higher growth andcapturing larger market share, before needing to optimize costs for long-term profitability.
Access to series A, B, and C funding within a rich VC ecosystem is a critical component insustained growth.
Access to VC capital is key to scaling, and major startup clusters have broad VC ecosystems. Asof 2020, Silicon Valley counted over 2,600 VCs for a total of $552 billion in funds, corresponding
to 68% of the Bay Area’s GDP. In other major clusters such as New York, London and Beijing,available funds correspond to about 30% of the region’s GDP, at $454 billion, $227 billion, and$171 billion respectively. The Tokyo VC landscape is more modest compared to its internationalcounterparts, with 233 funds accounting for $35 billion, corresponding to only 3% of theprefecture’s GDP196 .
In Japan, the availability of funding has been growing steadily, with the total capital invested instartups increasing by 23% per year between 2015 and 2020. However, while funding rounds
B or later have captured the majority of capital invested in this period, over 70% of deals havebeen early-stage funding as opposed to later stage scale-up funding197. With a focus on driving
more software startups in the future, a stronger follow-on funding VC funding ecosystem may beneeded. Software companies have low startup costs but are expensive to scale. Often, they burnlarge amounts of cash as they need to frontload customer support and sales, and revenue comesin later. The current VC landscape in Japan is not yet structured to underwrite big cash burns,
which drives companies to grow organically over a long time without funding, or to go public
early, reducing maximum growth.

195

社外高度人材に対するストックオプション税制の適用拡大” [Expanded application of stock option tax system to highly
skilled personnel outside the company], METI, October 7, 2020, meti.go.jp.
196
PitchBook; Tokyo Metropolitan Government, 2020; US Bureau of Economic Analysis, 2020; Beijing Municipal Bureau of
Statistics, 2020; UK Office for National Statistics, 2020.
197
PitchBook.

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As for international expansion, conversations with investors reveal that Japanese startups are often
not aware of the nuances of operating in international markets, or the need to hire local leadership that
understands the culture and can adapt to different expectations on work style and compensation. In
order to increase the likelihood of success, Japanese companies could secure funding and expertisefrom investors in the target markets to build their foreign presence.
Finally, it also has to be said that the English language is a barrier that many Japanese entrepreneurs will
have to overcome if they are to succeed in global expansion.

Exit:

Maximizing value versus exiting early
Between 2015 and 2020, the US witnessed 706 VC-backed IPOs: in this period, the average amountraised in an IPO was $208 million, and in 2020 the average reached $298 million. VC-backed companies
that have gone public have created an enormous amount of value, totaling an aggregated market
capitalization of nearly $12 trillion, 31% of the total market198 .
In Japan, startups are going public too early. Startups appear to aim for early profitability rather
than driving growth. Between 2015 and 2020, 255 VC-backed companies went public, raising just
$49 million in average199 . For contrast, GitHub’s first round of funding in 2012 was $100 million fora $1 billion valuation, and it was later acquired for $7.5B by Microsoft200 .
There are several reasons why Japanese companies are going public prematurely. First, the relative
scarcity of funding in follow-on rounds can push companies to try to tap into the public market at an
earlier stage to raise funds. Second, Japanese VCs and CVCs may seek a liquidity event for companies intheir portfolio before the funds mature, in order to achieve high performance; this may result in pressure
on startups to IPO. Third, public companies provide prestige and perceived employment stability: by
going public, startups may find themselves in a better position to attract talent, as well as contribute to
the image of the VCs they are supported by.
Japanese startups can establish a global mindset upstream, but they should also evaluate the value left
on the table from going public early as opposed to building up scale, valuation and access to large global
markets.

198

Ibid.
AVCJ Database, AVCJ Research, January 2021, avcj.com.
200
Dana Olsen, “The big winners from the GitHub acquisition”, PitchBook, June 4, 2018, pitchbook.com.

199

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Japan Digital Agenda 2030

In summary, to create a more global, dynamic, and rich startup ecosystem, a few adjustments to the“Japanese Startup formula” could be addressed:
1. Mindset shift for entrepreneurs and advisors to tackle customer problems with global market
relevance and lead with scalable software offerings
2. Support for local founders by providing access to employment system benefits, and attracting
foreign founders
3. A streamlined incorporation process and administrative setup; from registering, to setting up
banking, to securing real estate
4. Expanded incentives for Angel investing
5. Creation of standard mechanisms for frictionless capital raising, and added flexibility in existingmechanisms
6. Higher work mobility with entrepreneurs leading the way, and system enabling portability of benefits
from large employers to startups
7. Broader VC ecosystem with enough firepower to do late-stage financing and underwrite global
software startups
8. Startup focus on growth, share gain, and global relevance; aim at IPOs to capture maximum value
rather than focus on early profitability resulting in early sub-scale IPOs

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Big move 11: Systems integrators andtechnology providers to help theirclients accelerate transformation,by building talent in the core andleveraging global best practices
Japanese systems integrators (SIs) such as Fujitsu, NTT Data, NEC and Hitachi, as well as technology
companies, are a large and integral part of Japan’s services sector. In 2017, Japanese SIs generated$230 billion in revenue, accounting for 44% of B2B ICT spending in 2017201 , and employed 72%
of Japan’s IT talent202. These companies manage some of the major technological infrastructure
nationwide, including the government’s My Number Card System, and various core banking systems
for banks such as Mizuho. Due to their structural position in various industries, many of which rely on
proprietary hardware, SIs will play a critical role in the impending digital transformation of Japan.
The clients that SIs serve will increasingly be looking to enable specific digital outcomes or use casessuch as machine learning enabled defect detection in industrial manufacturing; deep learning to detect
diseases in healthcare; and chatbots facilitating citizen services such as document registration for
digital governance. Client expectations will be to deploy these outcomes across the full stack, from
infrastructure, connectivity, security, analytics, and applications – in cloud environments which allow
provision of all these services with high flexibility and scalability.
Changing B2B client preferences are leading to a fundamental shift in IT spending in Japan. The spend
in traditional Japanese IT Services is expected to decline over the next three years, from 73% of thetotal spend in 2020, to 50% by 2023203 . Taking its place is the growing spend on digital products andservices such as cloud services, which are expected to grow from 27% of total spend to 50% in the same
period204 .
SIs shifting to the cloud and bringing their clients along will be paramount. In 2019, the introduction rate
for cloud computing services amongst Japanese enterprises surpassed 60% for the first time205 . With
multiple competitors offering quick and easy ways for enterprises to move to cloud, SIs could transformto maintain their position as part of the technology backbone of Japan’s industries.
The education system, industry, and government all may need to build a broad range of use cases acrosstheir value chains, and this represents a significant opportunity for SIs to get involved and drive the digital
agenda. To seize this opportunity, SIs may need to: evolve their strategies to deliver digital outcomes
rather than stand-alone technologies; assist their clients’ transition away from legacy systems and intomodern cloud-based applications; select where in the tech stack to build their own proprietary offerings
from scratch as opposed to establishing partnerships or performing acquisitions; and engage in digitaltalent development within their organizations while supporting clients in capability building.
Evolve strategies to deliver digital outcomes for customers versus stand-alone technologies
Enterprises look at digital as a set of use cases with a business outcome. Retailers are looking to drive
omnichannel transformations; manufacturers to establish digital factories; banks to move into mobile
contactless banking; clinics to provide telemedicine services. For enterprises, digital is not a single
technology in the stack, such as a data-center, a security layer, or an analytics engine. While thesetechnologies underpin outcomes, as stand-alone technologies they will not be enough to capture thevalue for enterprises.

201

Gupta et al., Forecast: Enterprise IT Spending by Vertical Industry Market, Worldwide, 2016-2022, 1Q18 Update, Gartner, April 30, 2018,
gartner.com.
Information and Communications in Japan 2017, Ministry of Internal Affairs and Communications (MIC), 2017, soumu.go.jp.
203
国内ITサービス市場予測を発表 [Domestic IT service market forecast], IDC, February 17, 2020, idc.com; 国内プライベートクラウド
市場予測を発表 [Domestic private cloud market forecast], IDC, October 19, 2020, idc.com; 国内エンタープライズIT市場予測を発表[Domestic enterprise IT market forecast], IDC, May 14, 2020, idc.com.
204
国内プライベートクラウド市場予測を発表 [Domestic private cloud market forecast], IDC, October 19, 2020, idc.com.
205
FY2019 Communication Usage Trend Survey, MIC, May 29, 2020, soumu.go.jp.
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There are thousands of cloud technologies available to build, which is why driving outcomes is whatmatters most, and can prove to be a point of differentiation for SIs, if they can pivot their strategies fromselling stand-alone technologies to enabling use cases. Rather than approaching their clients with aproduct mindset, SIs can become technology partners that bring to clients the best of global innovationin the digital space; essentially shifting their role from systems “integrators” to “outcome hyper-scalers”– constantly evolving and helping their clients evolve and scale up their systems to enable more andmore use cases.
In order to achieve this, SIs can consider structuring their offerings around digital outcomes, such as
enabling a host of data-centric use cases that require an integrated data warehouse to function, rather
than selling the idea of specific enabling technologies, such as a stand-alone data warehouse for its own
sake.
Modernize legacy systems and transition to cloud based applications
Legacy systems are often stable and fulfill their job at the expense of flexibility and scalability. Since
they are often written in older programming languages, it is hard to find programming talent, which limits
adding features or makes doing so expensive. These systems are also often difficult to integrate withnewer systems and technologies. Cloud platforms overcome many of the challenges surrounding legacy
systems in that they are agile, scalable, and can be easily integrated with other technologies.
Despite the superior benefits offered by cloud technologies that have been broadly available overthe past 5-10 years, legacy systems are still prevalent in Japan. Including partial use, more than 85%
of Japanese enterprises were still using legacy systems as of 2018206 . Usage is especially high in thefinance sector, with over 95% of enterprises using legacy systems to some extent207. Some of these are
written in 60-year-old programming languages such as COBOL, running to as many as 50 million lines ofcode. There is a palpable need for organizations to modernize, and SIs can support the transition to cloudto create more scalable and flexible applications over the next decade.
Choose where in the tech stack to build versus partner or acquire
The stack of technologies required to deliver digital outcomes includes infrastructure, cybersecurity,connectivity, data storage, analytics, machine learning, APIs, and front-end interfaces among others.
Today there are companies specializing in technologies in all layers of the stack. SIs may need to makestrategic choices on what to leverage, what to own, or what to buy. Partnerships with large international
players such as AWS, Microsoft Azure and Google Cloud can accelerate the move in key areas of thestack.
For example, NEC Corporation partnered with AWS in 2020 in a Strategic Collaboration Agreement208 .
With AWS’s support, NEC is developing a suite of cloud services to accelerate digital transformation
among government and enterprises, with a range of solutions encompassing migration, integration andconsulting. NEC also, in 2020, acquired Avaloq, a European fintech provider, in a deal that will allow NEC
to combine Avaloq’s cloud services with its own biometrics and data analytics, to provide digital solutions
to financial institutions and governments209 . By being deliberate about where in the tech stack to build
versus partner or acquire, SIs can optimize their resources and offerings to best serve clients acrossmultiple use cases.
Cultivate digital talent within SIs and helping clients with capability building
A successful digital transformation requires digital talent. The type of roles required to do this include
product managers, full stack developers, Agile coaches, designers, data engineers, machine learning
engineers and cybersecurity engineers. Cultivating this talent is another opportunity for active
engagement by SIs. First, they can build digital capabilities within their organizations, by re-skilling theirown employees – who have the requisite skillset base to quickly pick up and learn new technologies –206

ITシステム「2025年の崖」克服とDXの本格的な展開 [Overcoming the IT System “2025 Cliff” and full-scale deployment of DX],
Ministry of Economy, Trade, and Industry, March 2019, meti.go.jp.
207
Ibid.
208
“NEC signs Strategic Collaboration Agreement with AWS – a first-of-its-kind in Japan”, NEC, November 13, 2020, nec.com.
209
Makiko Yamazaki, Sam Nussey, “NEC to buy Swiss software firm Avaloq for $2.2 billion”, Reuters, October 5, 2020, reuters.com.

114

Japan Digital Agenda 2030

in areas such as deep learning, and new ways of working such as Agile methodology. Throughtrainings and capability building programs, SIs can expand the roles of their existing employees
to cover new roles such as product management.
As SIs cultivate their existing talent, they can build capability for their clients as well. Digitaltransformations require companies to employ talent in their core operations rather than fully
outsourcing – a model reserved for IT infrastructure and legacy software. SIs can help if they
expand the scope of their relationships with Japanese enterprises, taking on roles mappingout digital agendas, canvasing use cases, and building digital literacy at the management andexecutive level.
In conclusion, Japanese SIs could modify their business models to remain competitive in adigital world and help their clients make the transition. Because these SIs are embedded
in many industry verticals, and have developed deep relationships and knowledge of client
operations, they are in a unique position to influence these outcomes. However, if SIs opt outof driving the digital transformation agenda and staying updated on the newest technologies,
they face an existential threat. Clients could dislodge their entire proprietary infrastructure,
data, and applications, by picking a combination of ‘best of breed’ cloud products that are all
readily available today. In one recent example, a retailer replaced a full-stack of legacy hardware
and software with cloud infrastructure from one provider, a data platform from another, an
e-commerce platform from another, and multiple digital marketing technologies. There isnothing stopping enterprise from building up their talent, and optimizing their technology stackright now.
At this moment, it is a race between enterprises building talent and digital literacy in the core on
the one hand, and incumbent SIs building outcome-based offerings on the other. SIs need toencourage themselves to build the future they want, rather than trying to prevent the future theyfear. All they need is the will to transform.

Japan Digital Agenda 2030

115

116

Japan Digital Agenda 2030

Roadmap 2030: summaryof recommendations
Japan’s 2030 digital scorecard
Over the next decade Japan may need to make exponential advances in many areas to restore
digital competitiveness. The roadmap from today is dotted with important milestones.
By 2025 Japan may need to have stopped its productivity decline and climbed to Top 15 indigital competitiveness. It may need to double its digital talent base by then to enable creationof use cases and applications in the major sectors such as industrial manufacturing, retail, andhealthcare – all of which offer immediate opportunities. To set an example, the government may
need to have digitized at least half of its citizen and business journeys.
By 2030, Japan may need to have more than tripled its digital talent base, and achieved doubledigit penetration metrics in industry sectors. Sixth-generation secure connectivity should bemainstream, and incumbent industry sectors and government may need to be digital at scale.
Equally important, a refreshed start-up ecosystem may need to have taken hold, with new
ventures representing at least 25% of market cap.
While these goals seem bold, some may say unattainable, Japan has more than enough
intrinsically smart people and endowments to build a digital future. And all the major use casesthat need to be built across industry and government have existing proof points either in Japan or
globally – and the technologies are proven and available. Will and the attainment of skill are all thatis needed. Exhibit 21 shows potential scorecards for 2025 and 2030 that Japan can aspire to.
Exhibit 21:

How Japan’s digital scorecard could evolve between 2020 and 2030
Objectives

MetricDigital and global
competitivenessTotal factor productivity (5 year average % growth)

Digital talent

Digital industry

Digital government,
infrastructure

Japan 2020

Japan 2025

Japan 2030

-0.11%

0%>0.5%

Digital competitiveness - IMD1

27

Top 15

Top 10

Universities with software-related programs

29

100

>200

Digital talent2 as % of workforce

1%

2%

3%

Industrial Mfg.: Lighthouse 4.0 factories - WEF

2

10

30

Retail: e-commerce penetration

9%

20%

>30%

Healthcare: telemedicine penetration - IPSOS

5%

20%

40%

Finance: % mobile banking penetration

6.9%

25%

>75%

Government: % citizens using digital govt. apps

7.5%

50%

>90%

#79 (Tokyo)

1 in top 20

3 in top 20

Smart city ranking - IMD

Digital technology
and leadership

Public cloud spend (% of IT spend)

3%

25%

50%

% of global published AI conference papers

6%

9%

12%

Startup economy

Startup market cap as % of total market cap

1%

10%

>25%

# of unicorn startups3

5

20

76

1.
2.
3.

IMD World Digital Competitiveness Ranking measures the capacity and readiness of 63 economies to adopt and explore digital technologies as a key driver for economic transformationin business, government and wider society.
Engineering talent including software engineering, data engineers, and developers. Excludes consultants, project managers and process related occupations.
Companies with a valuation >$1B, including public companies that received such valuation before IPO: Mercari, Preferred Networks, SmartNews, Liquid, Playco.

Source: McKinsey, McKinsey Global Institute, IMD, WEF, Gartner, Stanford HAI’s Global AI Vibrancy tool, press search

Japan Digital Agenda 2030

117

These targets involve over 90 use cases across thousands of companies to facilitate Japan’s digitaltransformation and some 50 enabling recommendations to catalyze implementation. The startup
ecosystem and systems integrators have an enormous stake in making this happen.
While we have projected some milestones in 2025, there are no major constraints on executing use
cases and recommendations today, other than talent, funds, and executive focus. These things could beachieved in a shorter timeframe with bold action. A key issue is how to get started. We have developed atwo-wave approach to execution, based on availability of talent with sufficient digital literacy in relevant
topics; ease of implementation given existing and required technological infrastructure; and complexity,
reflecting the required level of coordination between different companies and government agencies
involved.
Wave 1 – Quick wins from scaling up proven successes
Quick wins can be obtained with those use cases that build upon existing proof points and employ
technology that has already seen successful adoption in Japan and widespread adoption globally.
Recommendations to enable such wins involve putting into place practices, rules and standards; rollingout digital training and capability building; and carrying out basic digitization and automation activities.
These recommendations can be adopted by individual companies or agencies without the need to rely
on external parties. Exhibit 22 shows a summary of wave one use cases and enabling recommendations.
Wave 2 – Cementing global competitiveness with differentiating bold ideas
The longer-term roadmap involves use cases that deploy bolder technologies in broader applications,some of which have not yet been widely adopted. Longer-term enabling recommendations are expected
to be more challenging to implement than those in wave one, due to higher required digital skill levels,
technological complexity, stakeholder complexity and time. They involve regulatory changes, and various
partnerships or multiple stakeholder collaborations. Exhibit 23 shows a summary of wave two use casesand enabling recommendations.
With respect to startups and systems integrators, rather than executing specific use cases, these two
stakeholder groups will be supporting the education system, industries and government in implementing
the entire roadmap. Enabling recommendations that would allow them to do this are outlined in
Exhibit 24.
The key to success is a combination of building technology use cases and enabling them with the righttalent, regulation, mindsets, and infrastructure. These need to go hand in hand. Building out use cases
without the right talent or regulatory changes will only result in prototypes or unscaled technology. And
waiting for regulation or mindset shifts without setting out to build applications is a recipe for very slow
progress or none at all.
The transformation of the education system, industries, government, startup ecosystem and systems
integrators in line with global standards, will be crucial to achieving positive economic productivity
growth. By executing on these roadmaps, Japan can establish itself as a global hub for digital –attracting global talent, becoming the Asia headquarters of multinational companies, building lighthousedigital sites and global R&D centers; and leading the Asia Pacific region on digital innovation, regulationand infrastructure. Over the next decade, Japan has an opportunity to embark on an ambitioustransformation to realize its digital potential and re-emerge as a global leader.

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Japan Digital Agenda 2030

Exhibit 22:

Wave one use case roadmap and enabling recommendations
MindsetTalentRegulation

Strategy

Tech, data & infrastructure

Big move

Use case roadmap

Enabling recommendation

1, 2, 3

Primary & secondary

Build digital capabilities of teachers and schoolleaders to enable use of learning management
systems

Education, industry,and government
sector to create a
globally competitive
and adaptive pool ofdigital talent•

Adaptive literacy training•

Mastery-based study schedules•

Online homework delivery and grading•

Student management & parent
communication•

Online teacher collaboration platforms

Tertiary & professional

4
Industrial
manufacturing tobuild on hardware,robotics, andautomotive
endowments byleapfrogging with
software, machinelearning and deeplearning

5
Retail to capitalize
on shifting customer
trends by delivering
digital omnichannel
experiences

6
Healthcare to lead
globally on nextgeneration
personalized, remotesolutions targeting
elderly care•

Online and hybrid tertiary learning•

Interactive professional curriculum design
tools

•

Employee learning tracking dashboards•

Personalized language instruction•

ML for predictive product feature selection•

Logistics optimization through geospatial
analytics•

DL for manufacturing defect detection•

DL enabled aftermarket parts commerce•

NLP for field expertise chatbots•

ML for automated procurement•

ML for predictive service agreementtargeting•

Predictive maintenance using IoT & OTA•

DL for field installation support•

DL driven demand prediction•

ML for customer segmentation &assortment optimization

Focus on solutions for teacher effectivenessto reduce administrative working time anddrive adoption
Create a knowledge base of best-practice EdTech
tools to simplify procurement and implementation
for schools

Upskill industrial workforce in areas of softwaredevelopment and machine learning
Create practices to gather and label unstructured
data for machine learning purposes
C-level to drive resource reallocation into software,
analytics, AI to achieve future digital state

Leverage turnkey online marketplaces, and twoand three- sided platforms, and other technologies
to drive e-commerce penetration•

ML for in-store pricing•

ML for dynamic pricing online•

Deployment of turnkey online experiences•

ML optimized inventory management•

Fleet management for delivery
optimization•

ML powered personalized customer
promotions

Enhance incentive systems to reward employees fordriving omnichannel (physical and online) purchases•

ML & geospatial analytics for store
network optimization

Standardize product codes, customer IDs and otherdata to enable smoother operations and supply /demand analytics•

Digital prescriptions & online pharmacies•

Apps / wearables for event response &
disease tracking

Use digital forms and signatures to eliminate
the need for paper and seals across healthcare
processes•

Apps / wearables for disease therapy, mgt.
& adherence•

Connected point of care diagnosis(telemedicine)•

ML enabled regulatory processoptimization•

ML enabled clinical trial optimization•

ML enabled drug discovery optimization•

DL for disease detection•

ML for back office optimization•

Robotic and prosthetic limbs

Japan Digital Agenda 2030

Create in-house digital teams with technology andretail domain expertise to build capabilities anddeploy digital products
Leverage user-friendly analytics and machinelearning tools to enable retail employees to develop
ongoing customer insights

Roll out digital training for doctors, patients, andgovernment to drive adoption of digital applications
and overcome risk averse mindset
Convene new generation of digitally native doctors
to drive digital adoption
Create regulations to scale up frictionless orderingand reimbursement of online health services

119

7

Banking

Financial services
providers to build
mobile and broad
accessibility
solutions byleveraging cloudinfrastructure andopen network•

Decentralized global payments withblockchain•

Instant loans with data-driven underwriting•

Banking-as-a-Service•

Payment gateways / PSPs•

Online marketplace lenders•

Investment and brokerage platforms•

Trade & supply chain finance•Market data & info services•

Post-trade compliance with NLP

Attract domestic and international digital talent toraise the strategic importance of digital initiatives
Accelerate legacy banking and finance systems
migration to the cloud in order to increase
resilience, operational efficiency, and flexibilityof product development

Insurance

8•

Digital brokers and aggregators•

New risk coverage (cyber, etc.)

Citizen journeys

Government todefine a vision andbold goals to provide
digital citizen andbusiness services•

Online account for childcare support•

Digital residence certification (juminhyou)•

Online driver’s license renewal•

Electronic pension applications

Business journeys•

Online portal to enable 1-day company
setup

•

Online trade platform for paperless
import/export•

Automated corporate tax processing•

Permits granted as-you-go

Use electronic forms and signatures
to fully eliminate need for paper-based processes
across all government administration
Define e-government user experience standards
and user interface design principles
Define a secure future state cloud architecture,and back-end migration guidelines
Define data governance, publish select datasets,
and make secure Application programming interface(APIs) available
Digitize high-frequency, low-complexity government
citizen and business processes to demonstrate
early impact
Shift focus from avoiding digital risk to minimizing
risk through improved cybersecurity, in order toovercome risk averse mindset of both government
agencies and citizens
Augment digital talent and digital capabilities
within government agencies to reducehigh reliance on vendors

9
Government andindustry collaborate
to scale smart cities,building on Japan’s
public infrastructure
endowment• Smart solutions to reduce energy
consumption• Intelligent traffic control• Real-time air & water quality monitoring• Waste collection route optimization• Peer to peer accommodation platform• Lifestyle wearables• Infectious disease surveillance• Home energy automation systems• Real time public transit information• Predictive maintenance of transportsystemSource: McKinsey

120

Japan Digital Agenda 2030

Ensure cybersecurity to protect smart city
infrastructure, and address citizen privacy
and security risk
Create digital feedback mechanism tocontinuously improve city offerings
Add civic tech talent across city agencies

Exhibit 23:

Wave two use case roadmap and enabling recommendations
MindsetTalentRegulation

Strategy

Tech, data & infrastructure

Big move

Use case roadmap

Enabling recommendation

1, 2, 3

Primary & secondary

Harmonize privacy regulations countrywide toenable wide solution rollout

Education, industry,and government
to create a globallycompetitive andadaptive pool ofdigital talent

4
Industrial
manufacturing tobuild on hardware,robotics, andautomotive
endowments byleapfrogging with
software, machinelearning and deeplearning•

Early-warning systems•

Special needs education: accessibility andtailored learning•

AR/VR for immersive learning

Foster collaboration between EdTech,education publishers, and teachers to design
solutions with proven positive learning outcomes

Tertiary & professional•

Adaptive standardized tests,
automated grading•

Credential networks for professional
associations•

AR/VR for situational professional learning•

Fully autonomous vehicle deployment•

NLP to gather early sentimenton prototypes•

DL for vibration interpretation& control•

Audio-based installation quality testing•

NLP for prediction of supplier negotiation
potential

Launch agile digital divisions to operate
unencumbered in a ‘test and learn’ environment
with latitude from legacy organization
Accelerate development of L5 autonomous vehicles
to maintain global leadership, and enable withregulatory change
Develop legal and insurance frameworks
for autonomous driving to reduce development
reluctance
Foster partnerships between automotive players
and leading tech companies
Create initiatives to incentivize industrial
manufacturing companies to adopt digital
through public-private collaboration

5•

Retail to capitalize
on shifting customer
trends by delivering
digital omnichannel
experiences

Connected stores for streamlined
shopping•

Robots for last mile delivery•

Robots for automated shelf stocking•

AR/VR for omnichannel productexperiences•

Robots for locating, sorting and packing•

Full product traceability through storeddigital data•

Robots for surgical assistance•

Robots for physical therapy, rehabilitation& lifestyle support•

Robots for delivery & dispensing•

Biofabrication for medical devices•

Biofabrication for research and testing

6
Healthcare to lead
globally on nextgeneration
personalized, remotesolutions targeting
elderly care

Leverage secure cloud data platforms to process
high frequency and volume of retail customer data
to enhance operations and customer centricity

Roll out pervasive, secure connectivity
in hospitals nationwide to ensure seamless datatransfer across the network
Create cloud-based interoperable data platform
to support safe sharing of patient data,
backed by regulations and adequate cybersecurity
Create financial incentives for digital solution
development to support pre-clinical andclinical trial period
Create partnerships between healthcare players
and cloud / AI companies to leverage combined
expertiseJapan Digital Agenda 2030

121

7

Banking

Financial services
providers to build
mobile and broad
accessibility
solutions byleveraging cloudinfrastructure andopen network•

Digital wallets•

POS and merchant services•

Data-driven investing for expandedcustomer segments•

Open Banking•

Account management and personal
finance•

Digital business lending

Foster extensive Open Banking and data flows tofacilitate the implementation of broader use cases
Explore partnerships with fintechs
as well as non-financial industry players
to launch innovative services and revenue streams

Insurance

8•

Usage-based policies with IoT•

Automated insurance claims•

Micro-insurance•

Digital underwriting and analytics

Citizen journeys

Government todefine a vision andbold goals to provide
digital citizen andbusiness services•

Remote voting for expats•

1-stop shop for all governmentto-citizen services•

Online scholarship application portal

Business journeys

9
Government andindustry collaborate
to scale smart cities,building on Japan’s
public infrastructure
endowment•

1-stop shop for all governmentto-business services•

Platform for IP applications•

Digital admin from day 1•

Integrated smart cities•

3D printed homes & buildings

Source: McKinsey

122

Reorganize divisions around products to achieve
greater agility and data sharing to benefit customers

Japan Digital Agenda 2030

Establish clear digital governance amongst
government agencies
Digitize government processes and services
end-to-end with no paper or analog exceptions, tofully capture productivity gains
Consolidate and streamline the government
procurement process of digital solutions

Foster public and private sector collaborations thatcombine smart city planning with asset development
Embrace an open approach to investment tosupport innovation and private-sector participationin smart city development

Exhibit 24:

Enabling recommendations for startup ecosystem and systems integrators
MindsetTalentRegulation

Strategy

Tech, data & infrastructure

Enabling recommendation

Big move

10

Shift mindsets of entrepreneurs and advisors to tackle customer problems
with global market relevance and lead with scalable software offerings

Startup ecosystem
to develop a
concept-to-exit
formula that
produces globally
scalable ventures

Support local founders by providing access to employment system benefits,
and attract foreign founders
Streamline incorporation process and administrative setup; from registering,
to setting up banking, to securing real estate
Expand incentives for angel investing
Create standard mechanisms for frictionless capital raising, andadded flexibility into existing mechanisms
Support higher work mobility with entrepreneurs leading the way,
and system enabling portability of benefits from large employers to startups
Grow venture capital ecosystem with enough firepower to do late stage financing
and underwrite global software startups
Focus on growth, share gain, and global relevance; aim at IPOs to capture maximum
value versus focusing on early profitability and early sub-scale IPOs

11
Systems integratorsand technology
providers to help
their clients
acceleratetransformation, bybuilding talent in thecore and leveraging
global best practices

Support clients in moving away from legacy systems towards
newer technologies (e.g. cloud solutions)Switch from selling products and application specific technology to becoming
technology partner that brings best of global innovation across digital use cases
Develop compelling digital offerings that abide by global best practices, open
standards & design principles
Choose where in the technology stack to build versus where to partner or acquireRe-skill own employees in areas such as machine and deep learning
Expand scope of client relationships to support with strategic visioning
and building digital literacy
Lead client digital capability building efforts
Adopt practices such as Agile methodology

Source: McKinsey

Japan Digital Agenda 2030

123

124

Japan Digital Agenda 2030

Lessons learned from the last
decade of ICT progress
It is for the education sector to develop digital talent, for the industry sectors to undertake initiatives
that apply digital technologies, for the government to create digital citizen and business journeys, andfor startups and systems integrators to drive economic renewal. Together, these big move themes will
be required to drive a countrywide digital transformation. In this context, much can be learned fromlooking at what worked and what didn’t in Japan over the past decade. The basis of this retrospective
is a previous white paper titled ‘Achieving the Full Potential of the Internet Economy in Japan’ that was
published in 2009 by the American Chamber of Commerce in Japan.
The white paper explored 66 tactical recommendations along 12 themes, to drive policy reform, as wellas critical public and private sector initiatives. Accordingly, the recommendations have been subdivided
into policy initiatives and sector initiatives. To form a view on how far the policy and sector initiatives
were realized, we surveyed a broad range of over 100 experts, with experience in both private and public
sectors.

Incremental progress in ICT initiatives
The heat maps below indicate average progress across all initiatives classified under policy and sector
respectively. While the donut graphs indicate average progress of all initiatives within that category, thecolor of the individual boxes corresponds to the level of progress that respondents deemed was madeover the 10-year period in implementing that specific initiative.
Progress across policy initiatives ranged between 30% and 50% per category, as displayed by thegraphs. At an initiative level, 4 out of 36 policy initiatives, representing 11% of the total, were perceived ashaving achieved a high rate of progress above 70%. 19 policy initiatives - just over half - were perceived
as having a medium rate of progress between 31% and 69%. 13 policy initiatives - accounting for 36% of
the total - were perceived as having low progress rates under 30%.
Among the policy initiatives, bright spots were ‘Encouraging Active Participation in High Level Private
Sector CIO Forums’ and ‘Manage the Problem of Spectrum Interference’. For the latter, comments notedparticipation in various roundtables and study groups over the years, as well as the timely collection ofdata through frequency usage surveys by the Japanese Ministry of Internal Affairs and Communications.
Another policy initiative with a large number of positive responses and comments - and an averagescore of 69% - was ‘Ensure Regulation of Data Centers and Cloud Computing is Consistent with Global
Best Practices’. Comments here noted alignment and enhanced cooperation with the US, promotion offrameworks such as APEC CBPR (Asia-Pacific Economic Cooperation Cross-Border Privacy Rules), andthe 2019 DFFT (Data Free Flow with Trust) policy put forward by the Japanese government as concrete
indications of traction gained in this arena.
On the other hand, lows were seen in categories such as ‘Government Reorganization & Leadership’where the lowest rating policy initiative was ‘Establish an Independent Regulatory Agency for Internet
Policy’. Ratings for this initiative ranged between 0 and 28% and the general commentary was that
there was no movement and action in this area. Mention was made of the Digital Agency slated to beestablished in 2021 - still in the concept phase at the time of the 2009 white paper. But respondents
commented that the Agency was likely to lack organizational power and that the assignment ofresponsibilities - many cutting across MIC and METI - was unclear, creating additional challenges.
Moreover, while the new Digital Agency was viewed as a positive sign of progress, indications show that
it is likely to focus only on digitization of government services rather than more holistic aspects such as
talent development.

Japan Digital Agenda 2030

125

Exhibit 25:

Policy initiatives – heat map of progress
High: 70% or above completed

Government
reorganization &leadership

42%

Introduce a New
Legal Framework for
Information andCommunications
Activities
Create an Effective
National CIO Council

Medium: 31%-69% completed
Consolidate theInternet Policy
Promotion Function
Encourage the
Appointment ofProfessional Chief
Information Officers
in Private Enterprise

Low: 30% or below completed

Establish an
Independent
Regulatory Agency
for Internet Policy

Empower the JFTC
to Promote
Competition within
the Internet
EconomyEstablish a
Professional
Certification Process
for CIOs

Encourage Active
Participation in
High-Level Private
Sector CIO Forums

No progress madeEstablish a GOJ
Office to Promote
International Best
Practices andIncreased Foreign
ICT Investment

NTT reform

37%

Spectrum policy
reform51%

Start the Debate on NTT’s
Future Role Now

Require Greater
Transparency in NTT
Procurement and Pricing
Policies

Guarantee Access to NTT
Networks

Develop and Implement a
Plan for Functional
Separation andPrivatization of NTT

Manage the Problem ofSpectrum Interference

Introduce Spectrum
Auctions

Enable Flexible Spectrum
Usage and Base Station
Deployment

Introduce Spectrum
Trading

Rationalize Spectrum Usage Fees

Impose “Open Access” Conditions
on Spectrum Licenses

Expand Spectrum Commons

Review the Law Concerning theProtection of Personal Information
to enhance clarity and consistencyof enforcement

Refrain from Regulating Content on
the Internet

Ensure Regulation of Data Centersand “Cloud Computing” is Consistent
with Global Best Practices

Privacy, security &data portability

55%

IP & online content

64%

Continue Efforts toStrengthen IP
Protection Online

Clarify the Role of
the JFTC

Promote DigitalContent Distribution
on the Internet

Reform the Levy
SystemExpand SelfRegulation

Standards &innovation

39%

Continued reform inpublic & private ICT
procurement

30%

Ensure Broad Inclusion andParticipation in the StandardsSetting Process

Ensure Govt.
Procurement
Practices be
Transparent, NonDiscriminatory, TechNeutral, and Adhere
to PerformanceBased Criteria

Focus on Interoperability andHarmonization in the StandardsSetting Process

Avoid the Premature Setting ofStandards

Encourage
Government
Ministries andAgencies to Move toa Multi-Year
Budgeting Process

Improve Competition
and Transparency by
Permitting
Government
Prototype Funding

Take Steps toHarmonize GOJ
Procurement
Practices with
International
Auditing Standards
and Rulesn = 118 total respondents
Source: Survey on Assessing Ten Years of US-Japan Cooperation on Building the Internet Economy, 2020

126

Japan Digital Agenda 2030

Incentivize
Improvements ofPrivate Procurement
PracticesOn the topic of digital governance, a respondent, who was highly involved in the US-Japan economic
policy dialogue, noted that leaders only infrequently introduce new legal frameworks and establish newagencies; further, a decade prior to the publishing of the 2009 white paper, Japan had just undergone
reorganization of its agencies – late in the 1990s, effective in 2000 – making it unlikely for such an
event to occur again in the near future. The extent to which the digital revolution has disrupted the waysof thinking and working across both industries and government was not something that could be fully
grasped back in 2009, and is something that poses challenges even today. While looking at the progressof policy initiatives in the 2009 white paper may paint a dispiriting picture, it is important to note that the
paper did aim extremely high, and undershot the magnitude to which the internet economy and the restof the economy would intertwine over the coming years.
High-level progress across sector initiatives ranged between a 25% and 50% per category. Only 1
sector initiative out of 30 was perceived as having achieved high completion. 16 sector initiatives - justover half - were perceived as having achieved medium progress, and 11 sector initiatives - or 37% - aslow. Overall, sector initiatives performed worse than policy initiatives, with an average progress scoreacross the category of 39%, compared to policy’s average of 45%.
Some sector initiative categories had quite a lot of variability among their constituent initiatives. For
example, although ‘Promotion of Online E-commerce’ had a high average, scores fluctuated between
0 - 99%, with lows in ‘Expand Subsidies and Advisory Services to Improve Small Business Operations
and Interconnectivity Online’; and conflicting opinions among respondents on ‘Actively Promote an
Internationally Harmonized Approach to Online Business and Cloud Computing’ as well as ‘Support
Growth of Online Financial Transactions through Non-Bank Institutions’. In reality today, Japan stands ata single digit e-commerce penetration, so promotion did not translate into building applications.
The overall highlight among sector initiative categories was ‘Promotion of Green ICT’ with consistently
high scores ranging between 50 and 70%. Key areas of progress here included public and private
sector discussion around improving power usage effectiveness and data center efficiency, deploymentof smart sensors and building of smart grids, deregulation of the energy market by METI in 2016 formedium-scale customers, and a boost in telecommuting and mobile work spurred by the COVID-19
pandemic.
With regards to Japan’s progress in Green ICT, there were a couple of interesting insights noted in thesubmitted commentary. Firstly, while Japan made improvements, the progress was still perceived as
lagging other economies like the US. Secondly, much of the progress was perceived as being driven
by external factors, e.g., COVID-19 forced a transition to remote work; climate change and increasing
international policy awareness coupled with pressure on Japan to decarbonize drove the developmentof green data centers. It is likely that these factors will persist going forward, creating an opportunity forthe government to institutionalize some of the changes to drive further progress. Areas where further
progress can be made include the promotion of renewable energy-powered data centers and greater
integration of variable renewable energy and distributed energy resources.
The lowest performer in this category - which was also the lowest performer overall - was the‘Convergence of Internet with Education’, for which scores ranged between 10 and 50%, followed by‘Delivery of Government Services Online’.
Looking into specific areas where limited progress was noted across both policy and sector initiatives,
respondents noted two common themes:— Directives not translating into action: a common thread among the comments suggested
discussions often did not lead to concrete actions. An initiative that had unusually low rankings was‘Support Patient Control of PHR’, which had scores ranging between 3 and 13%. Here, the rationale
was that while respondents were aware of the high-level movement to connect My Number Card to
PHR, there was little to no administrative action to create infrastructure, technology, or a financial
and legal framework to support this. E.g., there was no consensus on the funding and investment
needed to create an interoperable system.

Japan Digital Agenda 2030

127

— Impact did not carry over to public sector or rural areas: Many comments focused on the low
digital literacy and the limited support available to implement sector initiatives in rural areas.
Digitization efforts were viewed as driven by the private sector rather than the government.
E.g., most progress related to education via the internet seems to have been made in private
schools, while no change has been seen in public schools in this area. For ‘Improving Educational
Administration through ICT’, the rankings were between 4 and 9%. Similarly, it was perceived thatrural businesses received less government support when it came to online e-commerce. Progress on
the sector initiative ‘Expand Subsidies and Advisory Services to Improve Small Business Operations
and Interconnectivity Online’ averaged around 20%.

Exhibit 26:

Sector initiatives – heat map of progress
High: 70% or above completed

Delivery of
government
services online

Medium: 31%-69% completed

Create a Coherent
Information Architecture
for Providing Government
Services

Implement User-Centric
Design Principles for all
Government Websites

24%
Implement “Single Sign-on
Technology” for e-Government
Services

Promotion of online
ecommerce

57%

Convergence of theinternet witheducation

27%

Consolidate the “Backend”
Operations of All
Government Offices andDevelop a Unified Platform
for e-Government
Services

Adopt and Fully Implement a System
for Filing and Searching Security
Interest, or Liens, in Collateral

No progress madeCombine Business
Process Restructuringwith Business Process
Outsourcing

Encourage Private Sector
Investment in Data Centers

Treat Online Business like
“Real” Business, Develop
Comprehensive Approachto “Special” Challenges of
the Online Environment

Expand Subsidies andAdvisory Services to
Improve Small Business
Operations and“Interconnectivity” Online

Support Growth of Online
Financial Transactions
through Non-Bank
Institutions

Actively Promote an
Internationally HarmonizedApproach to Online
Business and Cloud
ComputingInstall Wireless Capability
and PCs in Every
Classroom

Mandate a Regular
Replacement Cycle for
PCs

Integrate ICT Devices into
the Learning Experience

Support a Public-Private
Partnership to Encourage
Student Usage of PCs in
the Home

Strengthen Teacher ICT Skills andEstablish Position of ICT Education
Coordinator

Delivery of better
healthcare solutions

Low: 30% or below completed

Rapidly Introduce EHR
and Interoperable
Standards

Improve Educational Administration
through ICT

Support Patient Control of
PHR

Promote e-Learning for Students
and Graduates Alike

Permit Private Companies
to Store and Manage
Healthcare Records
Outside Hospitals

Allow Private Sector
Access to National
Healthcare Databases

33%
Consolidate andIntegrate “Backend”
Hospital Operations

Use HIT to Reduce
Errors and Improve
Patient Safety

Promote Remote
Diagnosis andTreatment

Reform HealthAdministration andProvide Incentives
for Greater ICT
Utilization

Introduce ICT
Training into theMedical Curriculum

Promotionof green ICT

56%

Support Construction of “Green”
Data Centers in Japan

Promote “Smart Grid” and “Smart
Sensor” Technology

n = 118 total respondents
Source: Survey on Assessing Ten Years of US-Japan Cooperation on Building the Internet Economy, 2020

128

Japan Digital Agenda 2030

Create Incentives for New Mobile
Work and Lifestyles

A disconnect between dialogue and execution
The chart below shows a summary of progress made on initiatives, based on what discrete stage wasreached in implementation, aggregated across all categories for policy and sector initiatives respectively.
The numbers in the circles indicate what % of recommendations reached that stage, whereas thenumbers in the arrows indicate drop-off between the two stages.
%
Exhibit 27:

Lowest drop-off%

Highest drop-off%

Lowest drop-off%

Highest drop-off

Dialogue to execution continuum of progress across policy and sector initiatives

Dialogue but
no planDialogue but
no planPlan but noconsensus
on next
stepsbut noPlanconsensus
on next
steps

Decisionstaken but
implementtation not
Decisionssatisfactory
taken
but
implementtation notsatisfactory

Good
progress,close to>75%
Good
progress,close to>75%

100%
progress
100%
progress

No progressmadeNo progress
madeTotal1
Total1

PolicyInitiatives

74%

-22%

52%

-9%

43%

-23%

20%

-19%

1%

PolicyInitiatives

74%

-22%

52%

-9%

43%

-23%

20%

-19%

1%

SectorInitiatives

81%

-24%

57 %

-13%

4 4%

-31%

13%

-12%

1%

SectorInitiatives

81%

-24%

57 %

-13%

4 4%

-31%

13%

-12%

1%

1.

23%
23%

18%
18%

100%
100%

100%
100%

Total includes 4 initiatives (3 in policy, 1 in sector) which lost relevance as the market developed

Source: Survey on Assessing Ten Years of US-Japan Cooperation on Building the Internet Economy, 2020
1.

Overall, it can be seen that over a ten-year timeline, plenty of initiatives were started but very few
reached an effective conclusion. While actions were taken, only 1% each of policy and sector initiatives
were perceived as achieving 100% progress.

Total includes 4 initiatives (3 in policy, 1 in sector) which lost relevance as the market developed

Source: Survey on Assessing Ten Years of US-Japan Cooperation on Building the Internet Economy, 2020

Looking at the execution continuum for policy initiatives, it was seen that in spite of dialogue having
started on nearly three fourths of all initiatives, only 21% were viewed as having achieved good orcompleted progress. The drop-off occurred in the planning and decision-making stages, with thesteepest drop-off of 23% between once decisions were taken and implementation was started. Anothernotable point was that for nearly a quarter of policy initiatives, no progress was made at all. The phasebetween planning and decision-making had the lowest drop-off of 9%, indicating that lack of consensus
was not the key bottleneck here.
There was a similar pattern in sector initiatives, where in spite of four fifths of all initiatives proceedingtill the dialogue stage, only 14% achieved good or completed progress. The key drop-off here was at thesame stage as with policy, between decision-making and implementation, although the drop-off was
steeper at 31%. For 18% of sector initiatives, no progress was made at all.
Overall, policy initiatives progressed better than sector initiatives. 7% more policy initiatives made it
to a stage of good progress, and 27% of commenced policy initiatives made good progress comparedto just 16% of commenced sector initiatives, indicating that sector initiatives had steeper drop-offs
through the execution process. Especially at the implementation stage, sector initiatives had a drop-off
that was 35% higher than policy’s drop-off. This may be due to the complexity of implementing sector
versus policy initiatives - while policy initiatives end with changes on paper, sector initiatives often call for
concrete actions that impact the end users.
This could imply that challenges arose from sector initiatives that directly affected end users, e.g.,patient access to health records or student PC usage in homes. Often, policy changes are the enablers
for sector initiatives, e.g., patient access to health records depends on regulations regarding patient data
usage. So, until a policy or regulation change is fully enacted, the dependent sector initiatives cannot
make progress.

Japan Digital Agenda 2030

129

The findings for this question are consistent with the respondent comments for the previous question,
namely that there was a gap in concrete government direction to see the dialogue to execution
continuum through. Decisive action is needed, and perhaps the new Digital Agency will prove pivotal inthis regard. Future policy and sector initiative rollouts should consider where the process stalled in thepast to avoid making the same mistakes twice.

Enablers and barriers to progress
To identify the root cause behind the limited progress, we asked respondents to rank the top 5 factorsthat served as enablers or barriers to the progress of each initiative. Based on the responses, eachfactor was given a net score - if positive, the factor functioned overall as an enabler and if negative, thefactor functioned as a barrier.
Exhibit 28:

Policy initiatives - barriers and enablers
Low (<30%) progress barriers and enablers
Net barrier
effectNo neteffectHigh (70+%) progress enablers and barriers
Net enablement
effectNet barrier
effectLeadership drive

Dialogue

Positive Results

Funding

Funding

Formalization

Risk Mindset

Leadership assignment

DialogueNo neteffectNet enablement
effectParticipation

Formalization

TalentParticipation

Positive Results

TalentRisk Mindset

Leadership assignment

Leadership drive

Note: net effect calculated by averaging weighted enabler / barrier rankings of each element where enabler ranking of 1 corresponds to 5 points, 2 corresponds to 4, etc. and barrier counts as negative
Source: Survey on Assessing Ten Years of US-Japan Cooperation on Building the Internet Economy, 2020

For policy initiatives, limited leadership drive and positive results were seen as the strongest barriers
that brought about low progress, followed by funding and risk-averse mindsets. The topic of risk
aversion came up in multiple comments, and it would seem that Japan faces a bit of a ‘precedence
gridlock’ - where no party or agency wants to be the first to adopt something that has never been tried
before and does not have proven results. The vicious cycle of all parties waiting around for someone elseto go first - exacerbated by the unwillingness to take risk - hinders progress on digital policy initiatives.
On the other hand, achieving small, scalable successes - even at a local level - may provide the ‘positive
result’ incentive needed to encourage a change in attitudes. For leadership drive and funding, given
the cross-ministry nature of various policy initiatives, a clear leader with decision-making authority andoversight is needed - the lack of this figure seems to have hindered progress. There is hope that theplanned Digital Agency will have the necessary mandate for this, as well as control of procurement andbudgeting, to ensure that adequate funding is available where needed. It was noteworthy that funding
showed up as the second highest enabler for high-progress, i.e., more-successful, policy initiatives.

130

Japan Digital Agenda 2030

On the other hand, dialogue showed up as the highest-ranked enabler in high-progress policy initiatives.
Leadership assignment, participation, and formalization were also viewed as factors that enabled
progress, along with talent. Interestingly, talent scored higher in low-progress policy initiatives as anenabler, and in-house digital understanding was viewed as a necessary skill that had not been achieved.
Resistance among government officials to implementing technologies beyond their understanding
and comprehension was stated as a reason for the government avoiding certain digitization actions
altogether, in spite of the productivity gains those technologies may bring.
For sector initiatives, limited formalization was viewed as a key barrier. This reinstates the idea that it ispolicy that drives implementation, and that private sector initiatives are often dependent on government
support for direction, funding, and conducive regulations. Here, too, risk-averse mindsets are a barrier:private sector companies in Japan are less willing to break the rules and face litigation than their westerncounterparts. Private sector activity is often dependent on what the government institutionalizes andregulates, and if regulations are conservative, private sector activity is accordingly affected.
In addition, leadership assignment and funding availability were also viewed as key barriers. Further
commentary on sector initiatives surrounding education noted the lack of consensus between local
and regional governments on funding for students lacking adequate connectivity for e-learning. Whenprivate sector funding was not easily available, this proved to be a challenge.
For high progress, the commentary noted dialogue, formalization, and leadership assignment as key
enablers. Given four fifths of all sector initiatives made it past the dialogue stage as demonstrated by theprevious section, it seems Japan has made progress in starting communications. The focus needs to beon ensuring those communications materialize into concrete plans and actions, which are then driven
forward.

Exhibit 29:

Sector initiatives - barriers and enablers
Low (<30%) progress barriers and enablers
Net barrier
effectNo neteffectHigh (70+%) progress enablers and barriers
Net enablement
effectNet barrier
effectFormalization

Dialogue

Risk Mindset

Formalization

Leadership assignment

Leadership assignment

Funding

Positive Results

Leadership drive

Participation

Positive Results

TalentTalentFunding

Participation

Risk Mindset

Dialogue

Leadership drive

No neteffectNet enablement
effectNote: net effect calculated by averaging weighted enabler / barrier rankings of each element where enabler ranking of 1 corresponds to 5 points, 2 corresponds to 4, etc. and barrier counts as negative
Source: Survey on Assessing Ten Years of US-Japan Cooperation on Building the Internet Economy, 2020

Japan Digital Agenda 2030

131

Reflecting on the past, and looking ahead
The final recommendation in the 2009 white paper called for the creation of a ‘process’ through which
the US and Japanese governments and their respective private sectors might work together in driving
the other recommendations found in the white paper, through a ‘US-Japan Dialogue on the Future of theInternet Economy’, with government, private sector, and academic participation.
The recommendation was developed with the express intention of avoiding in the Internet space manyof frictions that had characterized the US-Japan economic and trade relationship from the early 1970s
forward:“Collaboration on the Internet Economy escapes the zero-sum dynamicof many trade talks and can help nurture the innovation that is essential
to the future of our economies. This dialogue would break new
ground for the United States and Japan since the emphasis would beon mutual learning, exploring areas of convergence and transferring
agreement between the two countries into a broader regional andglobal consensus.” – (ACCJ Internet Economy White Paper 2009)
The proposal struck a responsive chord in government and business circles in both countries,
resulting in the formal launch of the US-Japan Policy Cooperation Dialogue on the Internet Economy
on November 10, 2010 with the participation of the two governments, led respectively by the US
Department of State and the Japanese Ministry of Communication and the two business communities
represented by the ACCJ and Keidanren.
Subsequently, over the past decade, the Dialogue has been convened 11 times, most recently on
September 25, 2020 (Exhibit 30).

132

Japan Digital Agenda 2030

Exhibit 30:

A decade of US-Japan policy cooperation on the internet economy

Key issues
Dialogue One
Tokyo | November 10, 2010

Dialogue Two
Washington, D.C. | June 9-10, 2011

Dialogue ThreeTokyo | March 22-23, 2012

Dialogue Four
Washington, D.C. | October 18-19, 2012

Dialogue Five
Tokyo | March 12-13, 2014

Dialogue Six
Washington, D.C. | September 16-17, 2014

Dialogue Seven
Tokyo | February 25-26, 2016

Dialogue Eight
Washington, D.C. | September 21-22, 2017

Dialogue Nine
Washington, D.C. | July 23-24, 2018

Dialogue Ten
Tokyo | October 10-11 2019

Dialogue Eleven
Virtual Web Conference | September 25, 2020

Japan Digital Agenda 2030

Utilization of cloud technologies in education and health; better
security for commercial networks; preserving openness of theInternet.
ICT role in disaster response; protecting critical infrastructure;joint research on future technologies; working with multistakeholder partners in international institutions.
Stronger cooperation on global data privacy concerns; creation ofa bilateral cloud computing working group; enhanced measures
to respond to cyber incidents.
Collaboration on interoperability and data portability in the
Cloud; sharing best practices on e-government and open data;
steps to strengthen consumer data protection.
Addressing growing cross-border cybersecurity issues;
supporting APEC Cross-Border Privacy Rules; promoting
industry-led standards development for cloud computing.
Support for the transition of IANA to ICANN; affirmation of
proposals from “NETmundial” conference; research cooperation
on New Generation Network/Future Internet
Presentation on “Smart City” concept and IOT; concern withdata localization and other obstacles to cross-border data flows;
coordination on domestic approaches to privacy.
Encouraged greater participation in APEC CBPR; reaffirmed
bilateral coordination on digital trade concerns; shared
information on cybersecurity challenges.
Harmonizing of domestic regulation on AIT and IOT; joint
session with US-Japan Cyber Dialogue on managing cyber risk;
commitment to cooperation on digital trade rules.
Welcomed Japan-US Digital Trade Agreement; partnership on
digital policy issues in international fora; report from WG on
Japan US Strategic Digital Economy Partnership
Digital response to global pandemic; promotion of secure
deployment of 5G technologies; sharing views on US-Japan
Digital Trade Agreement and Data Free Flow with Trust initiative

133

The “habits of cooperation” nurtured in the Dialogue over the years resulted in announcement on
October 7, 2019 of the US-Japan Digital Trade Agreement. The agreement includes inter alia provisions
prohibiting custom duties and discriminatory taxes on digital products, a commitment to ensure thefree flow of data bilaterally, including with regard to financial services; mutual recognition of digital
signatures; a prohibition on data localization requirements that restrict where data can be stored; andprotections against force disclosure of proprietary source code algorithms.
As the Dialogue continues to mature, discussions will likely increasingly move from bilateral concerns todeveloping shared positions in international fora, such as the Organization for Economic Cooperation
and Development, and in coordinating positions vis a vis third parties, such as the EU and China.
For example, the “Statement on Innovation and Digitization” released at the G-20 meeting at Osakain 2019 highlighted philosophical differences between the US/Japan and the EU with respect torulemaking for the digital economy: the Europeans favor a larger government role in Internet governancewhile the US and Japan support more market-driven solutions.
This partnership between the two countries on shared international concerns is vitally important toensuring the future growth and innovation of the global digital economy from which both countries
benefit. Leveraging the cooperation and progress that have been cultivated by the Dialogue, Japan must
act rapidly and decisively to push further changes in both public and private sectors, if it does not want tolose another deca

134

Japan Digital Agenda 2030

Acknowledgements
This report was jointly produced by the American Chamber of Commerce in Japan (ACCJ) and
McKinsey & Company. It highlights the expertise and insights from McKinsey Digital as well as industry
practices in Japan and globally.
The development of this project was led by the ACCJ New Digital Agenda Taskforce with the McKinsey
leadership and authoring team shaping the research, perspectives and insights of the report:

ACCJ Board
Advisors

ACCJ New Digital Agenda
Task Force

McKinseyleadership

McKinsey authoring
team

Jenifer Rogers
ACCJ President ‘21

James Miller
Task Force Chair

Naoyuki Iwatani
Managing Partner Japan ‘21

Andres Naranjo
Partner

Eriko Asai
ACCJ Chairman ‘21

Jim Foster
Task Force Senior Advisor

Andre Andonian
Managing Partner Japan‘20

Yoshishige Shiota
Associate Partner

Peter Fitzgerald
ACCJ President ‘20

Hans Klemm
Task Force Advisor

Tasuku Kuwabara
Senior Partner

Shivin Agarwal
Engagement Manager

Christopher LaFleur
ACCJ Chairman ‘20

Beth Phelps
ACCJ Senior Director

Kenji Nonaka
Senior Partner

Ambika Vora
Associate

Kuniko Nakamura
ACCJ Director

Lari Hämäläinen
Senior Partner

Davide Cultrera
Senior Analyst

Judith Hanna
AdvisorMichael Chui
Partner, MGI

The report benefited immensely from the time and industry expertise of several McKinsey colleagues
including:Industrial manufacturing

Retail & Consumer

Healthcare

Daisuke Nozaki

Naomi Yamakawa

Yukiko Sakai

Chiaki Kato

Paul McInerney

Raymond Chan

Chihiro Kato

Michihiko Kurokawa

Atsushi Sorita

Yuta Murakami

Tomoharu Hirayama

Financial services

Government & Education

Startup ecosystem

Jeff Galvin

Maya Horii

Junaid Mohiuddin

Fumiaki Katsuki

Emma Dorn

Rushab Gala

Eunjo Chon

Saurabh Sanghvi

Kei Komachi
Core digital technologies
Andre Rocha - Agile
Christian Jansen - Robotics
Dough Cha – AI/ML
Gustav Grundin - 5G
Harrison Lung - CloudJapan Digital Agenda 2030

Jeremy Eaton - IoT
Jonathan Tilley – Robotics
Jörg Bromberger - Additive Mfg.
Juan Hincapie - Agile
Keita Morikawa - 5G
Mathieu Dumoulin - Cloud

Matt McDevitt – AI/ML
Patrick Nagel - Cybersecurity
Shuhei Ishida - AI NLP
Shota Shimizu - AI NLP
Takuya Matsumoto - Cloud
Thomas Delaet - Cloud

135

Furthermore, we would like to extend our sincere thanks to all the ACCJ member executives and sponsor
leads who engaged us in meaningful dialogues that contributed immensely to the quality of the researchand insights. In particular, we wanted to recognize the following technology, industry and innovation leaders
for going above and beyond in their engagement and support for this report:
ACCJ Member Leads

Andy Conrad - Aflac
Bruce Appleby - Aflac
Ann Rollins - Apple
Atsushi Tsuchida - Salesforce
Danielle Kriz - Palo Alto Networks
Tokuo Kikuchi - Palo Alto Networks
Hiroyoshi Watanabe - Amazon
Jun Takei - Intel
Junichiro Asano - IBM

136

ACCJ Members

Ken Katayama - Microsoft
Mari Matthews - Google
Masaru Ogawa - AT&T
Maya Mamiya - Eli Lilly
Megumi Tsukamoto - Caterpillar
Mihoko Nishijima - Adobe
Priya Mahajan - Verizon
Shuichi Izumo - Cisco
Yasushi Kobori – Facebook

Amy Jackson - PhRMA
Frank Packard - TAP Japan
John Carlson III - AbbVie
Yoshitaka Sugihara - Netflix

Japan technology community

Japan innovation community

Hiroshi Esaki - Tokyo University
Naoko Mizukoshi - Leftright Law
Koichiro Komiyama - JPCert
Akinori Maemura - Keio University
Jun Murai - Keio University
Jiro Kokuryo - Keio University
Toshinori Kajiura - Keidanren
Makoto Yokozawa - Keidanren

Jim Weisser - Weisser Ideas
Joshua Barry - Zaiko
Patrick McKenzie - Stripe
Mark Bivens - Tachi.AI Ventures
Matthew Romaine - Lionpath
Renfield Kuroda - Mizuho
Shane Reustle - Reustle Consulting
Rob Claar - HekaBio
Aston Bridgman - JP Morgan

Japan Digital Agenda 2030

Finally, we are very grateful for all the support from the ACCJ Secretariat as well as McKinsey research,
editorial, analytics and assistant teams:

ACCJ Secretariat

McKinsey research team

McKinsey editorial and support team

Noriko Okamoto
Executive Assistant

Tomoko Nagatani
Research

Andrew Gowers
Executive editor

Raena Murakami
Communications Specialist

Kyoko Sato
Research

Nitin Uppal
Survey analytics

Sean Garvey
Committee & Events
Coordinator

Sayuri Katsura
Research

Miho Tanabe
Executive assistantFumiko Okada
Research

Chieko Yanagisawa
Executive assistant

Tae Ahn
Research

Yuka Kubo
Executive assistantTatsunori Kuniyoshi
Research

Fumie Fukada
Executive assistant

Tomoko Hibino-Niitani
Research

Kimika Fujiwara
Executive assistant

Bruno Lee
Research

Haruka Asano
Executive assistantDiksha Gupta
Research

Sandy Luo
Executive assistant

Naoko Kitada
Accounting Manager
Chizuko Sawada
Assistant Accountant
Ayano Nakano
Programs Manager
Noriko Ijichi
Assistant Director for
External Affairs
Asami Ide
External Affairs
Coordinator for Japanese
Government Affairs
Alexandra Melillo
External Affairs
Coordinator for
U.S. Government Affairs

Japan Digital Agenda 2030

Krishnakumar Nair
Senior designer
Raja Sekar
Designer137

February 2021
Copyright © McKinsey & Company / The American Chamber Of Commerce In Japan
www.mckinsey.com / www.accj.or.jp
www.digitaljapan2030.com@McKinsey / @AmChamJapan@McKinsey / @The.ACCJ
https://www.linkedin.com/company/mckinsey/
https://www.linkedin.com/company/american-chamber-of-commerce-in-japan/

ACCJ Member Leads
This report was produced by McKinsey & Company in collaboration with the American Chamber ofCommerce in Japan (ACCJ). McKinsey would like to thank ACCJ Member leads, whose input has helped
inform this report.

— Adobe— Aflac— Amazon— AWS— Apple— AT&T— Cisco— Lilly— Facebook— Google— Intel— IBM— Microsoft— Salesforce— Palo Alto Networks— Verizon

The 2030 Digital Road Map for Japan is a Chamber-wide initiative since all ACCJ companies are involved
with and have benefitted from the ongoing digital transformation of Japan’s economy. We are especiallygrateful to the 16 ACCJ members companies that provided financial support and practical input for thecontent and analysis found in this study.
There is a great deal of information in the report about the technologies that are driving innovation in
Japan’s digital economy and specific sectors of the economy where these can potentially have the mostimpact.
But an equally important theme throughout the report is that of the partnership between US companies
operating in the digital space and Japanese businesses and consumers, who have welcomed the newtechnologies and business models that US firms have pioneered in Japan. This is especially the case forthe sponsors who have made this report possible.
AT&T and IBM have a long history in Japan and have worked closely with Japanese companies, suchas NTT, mega-banks, large manufacturers and other domestic technology infrastructure and service
companies to provide hardware, software and service solutions to support Japanese competitivenessglobally. Verizon has been a key player in the Japan market since 2000 and has emerged as anothertrusted provider of secure global connectivity and collaboration solutions to large MNC’s including
Japanese corporations to drive their vital digital transformation initiatives.
Intel has a long collaboration history with Japanese industry from innovative personal computerdevelopment such as mobile computing and broadband deployment in Japan to cutting edge
semiconductor manufacturing technology. Cisco Systems helps to securely connect the unconnected,
offering a mix of cloud-based services, software and hardware solutions to creating long-lastingcustomer partnerships in Japan. Microsoft was an early pioneer in bringing the personal computer tooffices, schools, and homes in Japan and is now leading the shift to cloud-enabled services.
Apple has been providing innovative products and services to Japan since 1983. The iPhone introduced
a technology platform for mobile apps and the App Store changed the model of software development
and distribution, providing developers with the potential for broader distribution and access to aworldwide audience.
Google and Facebook entered the Japanese market in the early 2000s, leading a second wave of US
corporations who succeeded in Japan. Google is well known for its search, mapping and Internet video
services. Facebook has become the most popular social media site in Japan. Both companies have
deployed innovative advertising platforms built on their service offerings.
Amazon offers Japanese businesses large and small the ability to sell directly to consumers acrossJapan and the world, and Amazon Web Services offers a range of reliable and secure cloud services toJapanese companies, helping them to reduce costs and serve their customers better.

Salesforce, known for its quick and flexible digital solutions, is incentivizing Japanesebusinesses in their move to the cloud by offering services that improve work productivity andsupport customer relations, marketing and streamlined service flows. Adobe’s innovations
have transformed how individuals, businesses and governments engage and interact via print
and online to deliver the most compelling experiences in a streamlined workflow with optimizes
experiences across media and devices.
Palo Alto Networks helps address today’s security challenges leveraging the latest
breakthroughs in artificial intelligence, analytics, automation, and orchestration, protecting
organizations in Japan across clouds, networks, and mobile devices.
Aflac, the leading provider of medical and cancer insurance in Japan, is embracing digitaltransformation to meet the changing insurance needs of consumers and create shared value.
Eli Lilly, committed to advancing digital solutions for healthcare providers to ensure optimalcare for patients, is enabling healthcare systems to be more efficient and resilient. Bothcompanies are increasingly utilizing digital technologies to support their development of new
products for the Japanese market.
The 2009 ACCJ White Paper proposed many areas for US-Japan cooperation on the Internet
Economy from finance to healthcare to improving government operations. It also helped
launch a government-to-government dialogue with industry representation that came to both
symbolize and offer a practical mechanism for improved bilateral cooperation on shared issues.
The current report is clearly in this tradition.
Our goal is to build on this process of exchange between the governments and the now close
cooperation between our business sectors, forged importantly by our Sponsors and thebroader Chamber membership, to further assist in the growth of Japan’s digital economy and tohelp sustain a global economic and business environment supportive of future innovation in thedigital space.