Digitisation in Japan – why it offers opportunities for investors

Samuel Barbosa - Japanese Fintech sector

Digitisation in Japan – why it offers opportunities for investors

COVID-19 has thrown a spotlight on various parts of the global economy that are just not working. From infrastructure issues to the lack of digital access, the pandemic shows what must change. And for Japan it’s all about digitisation.

Improving digitisation in Japan will increase investment

Improving the digital infrastructure in Japan could swiftly double its growth rate. Despite being the third largest economy in the world, adopting digital tech has never been high on Japan’s agenda. Lagging this far behind other countries in digitisation and the use of innovative tech is no longer viable in a COVID-19 world.

Digitisation in Japan is at the very top of new Prime Minister Yoshihide Suga’s reform plans. And according to economist Susumu Takahashi, who is also the Vice Chairman of the Government’s reform panel, rapid digitisation could push Japan’s potential growth rate from below 1% to more than 2%. To get there, the country must fully embrace innovation and use it to boost productivity.

In an interview with Bloomberg, Susumu said that boosting Japan’s growth by any more is unrealistic for now. But, he warned, if Japan doesn’t use the pandemic crisis as the time to insist on rapid digitisation, the country will never catch up to the rest of the world.

Out-dated infrastructure hindered COVID relief in Japan

At the height of the pandemic crisis in Japan, there were many delays in getting cash handouts to people. This is because of the extremely out of date admin infrastructure and use of old systems. In many cases, attempts were made to ensure people could apply online, but quickly fell flat. These attempts were then scrapped in favour of a paper system. This is clearly not where Japan should be, and to future proof the country, its people and its economy for future crises, digital transformation must happen fast.

Other factors slowing down Japan’s move to digitisation include ancient traditions, such as using name seals for various business documents. All of this hampers the country’s plans to attract overseas investment and to establish itself as a 21st century financial hub.

Having said that, overseas investors saw that the country was about to undergo a major reset during the height of the virus crisis. For example, investment funds from Europe and the US took the opportunity in the summer to boost their acquisitions of stakes in Japanese companies. Clearly anticipating a total restructuring and industrial realignment, overseas investors are stepping up.

US investment firm Carlyle Group has invested hundreds of billions of Yen in Japanese conglomerates, including the depleted tourism and restaurant industries. Another US-based firm, Blackstone Group, also plans to invest around 100 billion Yen in Japan each year. Blackstone is particularly interested in the logistics, pharmaceutical and tourism sectors, which are all expected to recover when the crisis stage of the pandemic is over.

Permira, a UK-based private equity fund is also interested in investing in healthcare and logistics in Japan. We can expect that these kinds of funds will play a significant role in the realignment and digitisation of Japanese companies. These types of investments will continue to rise as the Prime Minister strives to make his mark in a meaningful way before the general election takes place. And he has made reform of the country’s infrastructure and digitisation his major rallying cry.

Japan’s growth rate estimated to more than double

Japan’s potential growth rate has hovered just below 1% since around 2014. The Government says that it stands at around 0.7% currently, while the Bank of Japan estimates an even lower percentage. Neither of these key estimates have even reached 2% since the mid-1990s.

If Japan follows in the footsteps of countries like Estonia, which is now one of the most digitally viable countries in Europe, then investment and growth would also be higher. However, for now Japan must concentrate on just catching up with the US, China and Europe.

Either way, the digital transformation and total realignment of the industrial and business sectors in Japan will now speed up exponentially. It will be interesting to see how fast digitisation will happen in 2021.