Japan’s digital transformation in crisis

The DX Report released by the Ministry of Economy, Trade and Industry in 2018 sounded a strong warning to Japanese companies. The report described the “2025 Cliff,” a shocking prediction that unless companies fully commit to digital transformation (DX), they could face economic losses of up to 12 trillion yen per year as they reach the limits of maintaining their aging legacy systems.

As we approach 2026, many Japanese companies have begun to introduce cloud computing and AI, but they have only achieved partial optimization and have not yet achieved overall optimization.

In an international comparative survey conducted by the Information-Technology Promotion Agency (IPA), approximately 80% of American and German companies felt that DX had been successful, while only about 30% of Japanese companies did. Furthermore, approximately 30% of companies responded that they had “no results at all.” This highlights the main reasons for this: a lack of strategy, failure to set KPIs, and a lack of human resources.

Overseas, the adoption of open source and cloud technologies has progressed since the late 2000s, and business models that create new value by reallocating existing resources have emerged one after another. Airbnb, Uber, Netflix, and Tesla are prime examples of this. However, Japan has missed out on this trend due to its rigid systems and lack of education.

DX needs to be reconsidered not as a simple introduction of technology, but as a fundamental transformation that involves the redesign of society. Now, with the advent of generative AI, the pace of change is accelerating. Whether companies can ride this wave will be a turning point that will determine Japan’s competitiveness over the next decade.

To understand the complex web of institutional, cultural, and management barriers that hold Japanese companies back when it comes to digital transformation, we spoke with Kazukazu Sekiguchi, chief researcher at the Japan Public Relations Association’s special study group, the “Lost 30 Years Verification Study Group,” and representative director of MM Research Institute, an IT research and consulting firm.

The Ministry of Economy, Trade and Industry sounded the alarm with its “2025 Cliff” report in 2018, and now we’ve finally reached that year. How do you evaluate it?

The term “2025 Cliff” is widely known in Japan, but is rarely mentioned overseas. This is because it is a phenomenon unique to Japan. The reason it’s called a “cliff” in the first place is due to technical issues that are making it difficult to update mainframes. In addition, the number of people who can handle such legacy systems is decreasing. Japan was slower than other countries to transition from mainframes to open systems. Overseas, the adoption of the Internet and open source progressed quickly and has already moved on to the next phase. Meanwhile, Japan has been dragging along old systems, and as a result, even maintaining them is now becoming difficult.

In Japan, there is a common misconception that “DX” means “ITization,” but what is the true essence of DX?

“DX (Digital Transformation)” and “ITization” are often used interchangeably, but they are actually different concepts. Both utilize digital technology to transform business models, but they differ in the areas they apply to and the depth of the transformation they bring. The IT revolution was primarily a transformation in cyberspace. It is a trend toward building business models in virtual spaces on the Internet, such as e-commerce, online banking, and social media. DX, on the other hand, focuses on transforming the real world itself with digital technology. It is an effort to redesign industrial structures and social systems using AI, IoT, and sensor technology. Recently, there has been a trend toward replacing the term DX with AI, but both share the common goal of promoting business transformation. DX is not simply the introduction of technology; it is a fundamental initiative that involves transforming organizational culture and institutional design, and will be at the core of future industrial policies and management strategies.

When do you think DX will really begin?

As I understand it, DX began in 2008. The Lehman Shock caused existing business models to stop functioning, and new models were sought after. Airbnb and Uber are emblematic of this. They reallocated existing resources such as spare rooms and private cars, and created new value through digital technology. Also in 2008, the iPhone 3G was released, and the smartphone era began in earnest. This was also the period when Tesla’s electric car and Netflix’s shift from DVD rental services to streaming services occurred. I believe that this is where DX truly began.

Why did Japan miss out on this trend?

Since 2009, Japan has experienced a series of events, including a change of government and the Great East Japan Earthquake, leaving little time for a digital strategy. Finally, in 2016, the Fifth Science and Technology Basic Plan was approved by the Cabinet, proposing “Society 5.0,” a vision for creating a “super-smart society” that uses technology to solve social issues and build a prosperous, human-centered future. However, this plan lagged behind global trends by about seven years. In 2013, Germany launched “Industrie 4.0 (Fourth Industrial Revolution),” a vision for smart manufacturing and industrial innovation through technology, while in the United States, GE and others promoted the “Industrial Internet,” which connects industrial equipment to the internet and creates value through data analysis. Japan has finally begun to address AI and robotics, but many of its technologies were disconnected from networks and still fell short of global standards. Japan also lagged behind in education. Shiga University established its first “Faculty of Data Science” in 2017 in response to the 5th Science and Technology Basic Plan, but well-known universities in Tokyo were reluctant to do so. While this may be a case of a regional university establishing a new faculty to attract students as a measure to combat the declining birthrate, I think the move to incorporate new information technology should be evaluated positively.

What is the biggest barrier preventing Japanese companies from making progress in digital transformation?

There are problems in technology, organization, culture, and the mindset of management. First, on the technology side, innovation is hindered by a perfectionist approach that refuses to change the systems built in the analog era. In the internet era, the mainstream approach is to release products and services to the market and improve them while incorporating user feedback. Apple and Tesla are emblematic of this approach. On the organizational side, seniority-based systems, silo structures, and a “one-size-fits-all” mentality hinder reform. On the cultural side, values ​​such as “it takes three years to master a stone” and “taking it easy is bad” are still deeply rooted, leading to the perception of efficiency as “lazy.” Managers, too, are bound by their analog-era experiences and tend not to make efforts to fundamentally change the way young people work using digital technology. On the institutional side, there is a lot of government intervention without substance, and this administrative guidance is hindering innovation. Another problem is the structure in which the monitoring duties of supervisory agencies have become “job creation” for bureaucrats, prioritizing organizational maintenance over social impact.

In terms of organization, seniority-based systems, silo-based structures, and a “parallelism” mentality are said to be hindering reform, but what kind of drawbacks are arising as digitalization progresses?

In Japan, there is a tendency to try to adapt digital to existing systems and organizations, just as one would “fit a kimono to one’s body.” In the West, the idea is to “fit the body to the clothes” — in other words, to adapt the organization to a standardized digital system. For example, even when introducing SAP’s ERP (Enterprise Resource Planning) system, Japanese companies try to customize the package software to fit their own company’s way of doing things, which prevents productivity from increasing. This self-reliance is an obstacle to efficiency. I think this is because they do not understand that the essence of DX is “redesigning the organization.”

Will the emergence of generative AI such as ChatGPT be a breakthrough for digital transformation, or does it pose the risk of creating new disparities?

The emergence of generative AI is an accelerator of digital transformation, and it threatens to undermine the very existence of existing business models. The two are not simply an extension of each other, but will act like a multiplier, dramatically accelerating the pace of business transformation. Naturally, if companies or individuals fail to keep up with this trend, they will be left behind. The emergence of new disparities is inevitable. The key is how to address these disparities. In Japan’s political structure, budgets tend to be spent on those who hinder change, but in the age of AI, resources should be invested in increasing employment fluidity. I believe that reskilling, which involves rethinking existing working styles, is the only way to save people from the new digital divide.

Could NTT’s proposed next-generation optical communications infrastructure, “IOWN (Innovative Optical and Wireless Network),” be a game changer for digital transformation?

The IOWN concept is the first Japanese technology in a long time, and it has the potential to revolutionize the digital market dominated by the US GAFA. By using optical signals for computer processing, it is expected to increase transmission capacity by 125 times, reduce latency by 200 times, and reduce power consumption by 100 times. Since the advent of generative AI, global demand for electricity has skyrocketed, and IOWN is attracting attention as a technology that can alleviate that load. However, with the planned 2030 implementation being delayed until 2032, and with similar photonics-electronics convergence technologies announced by NVIDIA, the US’s largest GPU (graphics processing unit) manufacturer, and Broadcom, a major US communications semiconductor manufacturer, Japan needs to move quickly to commercialize use cases.

Finally, what do you think will be most important for Japanese companies to truly advance DX in the future?

I think the most important thing is the determination to change. The technologies already exist. Cloud computing, AI, and IoT are all used worldwide. The question is how to use them and what changes they will bring about. Japanese companies are too tied to their past successes. Perfectionism, vertical organizational structures, seniority-based promotion, and a culture of “no tolerance for failure.” Unless they overcome these obstacles, digital transformation will remain a mere informatization and will not lead to fundamental change. We also need to have more faith in the power of the younger generation. They are digital natives, with flexible thinking and a sense of urgency. The success of digital transformation will depend on whether management is prepared to draw out this potential and entrust it to them. And then there’s education and human resource development. Reskilling is not a one-time measure, but a continuous social investment. Not only companies, but governments, universities, and local communities must work together to seriously develop digital talent. Digital transformation is not about technology; it’s about redesigning society. Whether Japan can seriously face this transformation will be a turning point that will determine the next decade.

This article originally appeared on CIO Japan.