Digital transformation (DX) is mission-critical in Japan, we all know that. But do you understand why?

We sat down with Evan Burkosky, Digital Transformation Expert and Country Manager at Dynamic Yield, to find the answers to this pressing issue. Evan has been researching the state of digital transformation in Japan for many years and looked at it from different angles. He knows Japan’s macro-economic background and where it stands in international comparison as well as the specific work processes of individual companies and organizations.

In part 1 we talked about the 20 year history of DX in Japan, the current state of digital transformation in Japan and how it compares to its international peers.

In part 2 we focus on the effects the Covid-19 pandemic had on the adoption rate of digital services and the alarming “2025 Digital Cliff“ that Japan is facing if things don’t change.

Watch the Full Interview

How is Japan’s tendency towards uncertainty avoidance linked to the country being a laggard in terms of digital transformation?

If you look at Japan, you see a country that is constantly disrupted by national disasters. There are earthquakes, tsunamis, volcanos, typhoons etc. So working with tangible items like paper documents feels much safer than digitized information. Paper documents can be filed and stored in a warehouse that is fire and water resistant, whereas digitized information could be lost if an earthquake destroys a server farm for example.

I think that’s some of the initial hesitancy of Japan in adopting digital transformation. Paper has been around for thousands of years whereas digital transformation is fairly new and it’s hard to accept that digital information is something permanent.

There are also cyber security issues like data being hacked for example. And then there is the fact that there is so many different digital services and tools and everything changes so quickly. It’s just very hard to grasp all of it. Psychologically it’s hard to trust something that is so fluid.

But wouldn’t cloud services solve some of these problems?

That is a very good point. We are at a point with a wide adoption of cloud services. Put in very simple terms and ignoring other aspects like processing power etc, cloud services are basically backups of your data that sit on multiple machines that are all linked together. So if one server goes down, your data still exists on multiple other servers. It’s basically a safe place for your data. So yes, cloud services play a major role in the digital transformation we are currently witnessing in Japan.

Japan had two decades to work on this. Why are we seeing this change now?

The pandemic. It has been about 18 months since Covid-19 started and by now (September 2021) it has become a true change agent for Japan. Both the private and the public sector have realized that this pandemic and potential future pandemics will change the way we work permanently. 18 months of pandemic have proven that we can do remote work and that in many cases we are even more efficient than previously in the office. 

Most nations around the world have seen a huge increase in the use of digital technologies because of the pandemic. For example in the US, e-commerce adoption has increased 10 years worth in 3 months. The digital acceptance of technology has shot up in all sectors from watching movies online, shopping, ordering meals, communicating with friends and family etc. However, a recent McKinsey study showed that Japan is the only OECD country whose increase of digital adoption during the pandemic only increased by single digits whereas all other members increased their digital adoption by at least 10%. So even now, Japan still lags behind. The same report also showed that only 16% of digital transformations in Japan has been successful.

Another study showed that only 28% of Japanese companies are able to work from home because they are heavily dependent on paper based processes like the stamping of documents etc. This slowed down that shift a lot. Another issue was that most Japanese corporations are very restrictive in regards to IT services, meaning in many cases employees can only log in to the tools and services they use for work from their office IP address. They were simply not allowed to even open their email inbox from a location outside the office.

In terms of hardware a lot of employees especially in SMEs didn’t have portable computers but were dependent on their desktop computers in the office to do their work. These smaller companies also lack the resources to just purchase notebooks for all their employees at once.

If you look at Japanese households, you can see another issue. A lot of people in Japan don’t have home internet access or personal computers anymore. The spread of smartphones and fast 4G/5G mobile internet simply made it unnecessary because people were able to do everything from their phones or tablets. The access to computers from home has actually fallen from a peak of 87% of all households in 2009 to only 69% in 2019. This means that many Japanese households were not equipped for remote work.

But the pandemic is now changing that and for the most part we are seeing companies catch up with it.

In the beginning we talked about why DX is so important for Japan. One point we didn’t cover is the so-called “2025 Digital Cliff”. Can you talk a bit more about this possible outcome?

The “2025 Digital Cliff” is a term coined by the Ministry of Economy, Trade and Industry METI in its “Report on Digital Transformation (DX)” from 2018. This report identified that with Japan’s current lack of digital transformation, it will suffer a 12 Trillion JPY (~108 Billion US$) loss annually which accounts to roughly 5% of its GDP. The situation is very severe and in order to retain GDP and avoid the “2025 Digital Cliff” Japan must engage in digital transformation.

On the bright side, McKinsey and the American Chamber of Commerce in Japan (ACCJ) published their Japan Digital Agenda 2030 Report that identified that by 2030 Japan’s overall GDP can be increased by 735 billion US$ if Japan successfully engages in digital transformation and makes several key changes.

More about what Japan can do to promote DX will follow in our next article.

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