Commentary from The Center for Innovation, Trade, and Strategy
Overcoming Japan’s Uphill Battle Toward Digital Transformation
Daisuke Kawai examines the factors that have slowed the pace of Japan’s digital transformation and argues that new initiatives introduced in the wake of the pandemic should help address these challenges.
Foreign notions of Japan tend to project images of a high-tech culture, and in certain industries like robotics in the major population centers this is largely true. Japan, however, has been lagging behind advanced nations in adopting newer forms of technology and streamlining government services.
Underinvestment in information and communications technology (ICT), exemplified by 80% of ICT spending going toward maintaining legacy systems, and a lack of user training persist into the 2020s. As a result, over 1,900 intergovernmental procedures still require the use of outdated storage devices, including CDs, mini-disks, and even floppy disks. A high-profile case in point occurred in 2022 in Yamaguchi Prefecture when a city clerk sent a floppy disk containing citizens’ data to a bank to initiate Covid relief payments. The bank then misformatted the online transfer order resulting in one resident receiving a lump sum of 46.3 million yen (approximately $350,000)—the total payment meant for 463 residents. The recipient quickly absconded with his unexpected windfall, causing a legal headache for the local authority.
In short, the government of Japan has long faced significant socio-technical hurdles in rolling out digital-based services. This commentary argues, however, that new initiatives introduced in the wake of the pandemic should help address these challenges.
Causes of Japan’s Delayed Digital Transformation
Numerous factors have slowed the pace of Japan’s digital transformation. Societal resistance to embrace rapid change, the response to the Covid-19 pandemic, delays in and lack of human resources to implement digitalization at the national and local government levels, administrative inefficiencies caused by insufficient system coordination, and the deterioration of services for residents, including cumbersome procedures and delays in distributing benefits, have all contributed to the lack of progress in the digitalization of government services.
A white paper by the Ministry of Internal Affairs and Communication highlighted personnel shortages in the ICT sector as a significant factor. The Ministry of Economy, Trade and Industry (METI) has estimated that this shortfall will worsen by the end of the decade due to wage structures that reward long-term employment, resulting in a brain drain of young ICT professionals seeking employment overseas or in foreign-owned companies. A study by METI published in 2019 found that local firms offer ICT workers in their twenties less than half what their U.S. counterparts pay. When framed in the context of Japan’s broader demographic challenges—i.e., an aging population, rural decline, and lower salaries for younger people—the reasons for falling behind the technological curve become more evident.
On top of these outmoded practices is the strong societal impulse for privacy, which is backed by rigorous but inconsistent data privacy rules. The Personal Data Protection Law applies to private firms, national administrative institutions, independent administrative institutions, and national university corporations. Additionally, each local authority has its own personal data protection ordinance, leading to differing definitions and restrictions on personal data handling, hindering the provision and utilization of personal data, especially across jurisdictions. Laws and regulations must be harmonized at the regional, or ideally national, level as a prerequisite to ensure citizen confidence that privacy is guaranteed even while sharing data.
Additionally, the Personal Information Protection Commission plays a significant role in protecting the public’s rights and interests, but its monitoring and supervisory powers are currently limited. Its powers over administrative bodies and local authorities need to be acknowledged to promote data sharing in a secure manner. It is also crucial for the privacy commissioner to explain, or require administrative bodies and companies to explain, in simple terms the philosophy, extent, and sharing of data to the public and users, as well as to establish procedures to receive inquiries and complaints from individuals.
If these measures are inadequate, concerns regarding privacy and discrimination will be difficult to dispel, even if no legal violations have occurred. Many citizens will continue to shun digital options and instead use the hanko—a centuries-old system of unique physical seals used for authenticating documents instead of a handwritten signature—and offline physical media for perceived personal security reasons. In fact, due to these significant challenges, the antiquated approaches would likely have continued uncontested if not for the corresponding growth in demand for digitalization in social, educational, and administrative settings arising from the stay-at-home orders during the Covid-19 pandemic. This increased demand finally spurred the Japanese government to take comprehensive action.
The Digital Agency and My Number Card. When former prime minister Yoshihide Suga came to power in 2020, he made the creation of the Digital Agency one of his pledges and started recruiting talent to accelerate the government’s digital transformation. The agency was established in September 2021 to cut through the “stovepiped” vertical administration and improve efficiency through standardization and collaboration between national and local government and other systems.
Starting with the creation of the Digital Agency, the Japanese government has promoted the spread of My Number Card (a smart version of the Japanese Social Security identification card) and the paperless system. In particular, Digital Minister Taro Kono has been remarkably active and vocal and has achieved some relative success in increasing the penetration rate of the My Number Card to 70% of the population.
The Digital Garden City Nation Initiative. Against this backdrop, Prime Minister Fumio Kishida launched the Digital Garden City Nation Initiative to transform local social issues into engines of growth and realize a sustainable economic society. On June 1, 2022, the government held the 8th meeting of the Council for the Realization of the Vision for a Digital Garden City Nation and published the Draft Basic Policy for the concept of the Digital Garden City Nation Initiative, which calls for the doubling of digital investment to substantially increase public and private digital investment in local areas. This is a major government policy with a total budget of 5.7 trillion yen ($42 billion). The Digital Garden City Nation Initiative has been positioned by the Kishida government as an important pillar of its growth strategy for the realization of “new capitalism” and a digital society with the aim of “solving the problems faced by local regions through digital implementation…where no one is left behind and everyone can enjoy the benefits of digitalization.” Under the Kishida administration, this concept is the main measure being promoted in the Digital Agency.
Simply put, the Digital Garden City Nation Initiative is about using digital tools to improve rural life and revitalize regions on the periphery of the economy. The development of rural areas has been an issue since the Abe administration. While many measures have been implemented to attempt to address the challenge, the Digital Garden City Nation Initiative aims to take this further. Its goal is to create similar conveniences and attractions as urban areas, while preserving the richness of each region, through the power of digital technology.
Specific digital transformation measures under the Digital Garden City Nation Initiative. The Japanese government will take the lead in digital infrastructure to support the realization of the Digital Garden City Nation Initiative, while also utilizing private-sector vitality to develop state-of-the-art digital services throughout Japan. In digital infrastructure, plans are underway to expand 5G networks to cover 90% of the population by 2023. Since most digital infrastructure is concentrated around Tokyo, more than a dozen regional data center sites will be developed over the next five years. In addition, as part of the Digital Garden City Superhighway, over the next three years the government plans to complete a submarine cable along Japan’s border in the Sea of Japan to provide the country’s less developed and less populated western regions access to higher-speed fiber internet.
Furthermore, the Digital Garden City Nation Initiative will include the development and implementation of advanced digital services, which will be gradually enhanced over time. Specific projects will be tailored to the actual conditions of each region and could include smart city projects, mobility as a service, smart health, disaster prevention, smart agriculture, and digital transformation for public administration. The public and private sectors will work together to build services, starting with areas where the benefits would be felt most immediately. In addition, the government has floated the “super city” concept initiative, which aims to provide a wholesale interconnection of the services and systems used across a city, even beyond the scope of a smart city, by 2030.
The Digital Garden City Nation Initiative Promotion Grant. One of the pillars of the Digital Garden City Nation Initiative is the Digital Garden City Nation Initiative Promotion Grant to “realize a new capitalism.” The grant addresses the negative effects of conventional capitalism, such as a declining middle class, environmental sustainability issues, and significant urban-rural disparities.
Problems such as population decline, aging, and industrial hollowing-out are more serious in rural than urban areas and require rapid policy interventions to correct. The Digital Garden City Nation Initiative Promotion Grant aims to create conveniences and opportunities that rival those of cities by utilizing the power of digital technology while maintaining the attractiveness of rural areas. The grants, which are given by the state to each local authority, are not one-time subsidies but rather provide an annual budget to implement measures that suit that year’s situation. Examples of priority projects include the dissemination and promotion of the My Number Card, utilization of start-ups to support government services, and interregional cooperation on digitalization.
The Digital Garden City Nation Initiative is a laudable effort and reflects Japan’s newfound commitment to its practical digital transformation. Particular emphasis has been placed on the dissemination of the My Number Card to address the urban-rural divide in public service provision.
However, as noted earlier, long-standing cultural resistance to digitalization among the Japanese public remains a key challenge, including significant concerns over linking personal information to the card. Many people also fear that the government will have access to all their health information and assets if they connect their health insurance and bank accounts. Additionally, some foreign nationals in Japan who are permitted to use aliases to avoid discrimination, in particular ethnic Chinese and Koreans, are forbidden to include their aliases on their My Number Card. This is one of the major reasons that many Asian permanent residents in Japan, who are typically supporters of the main opposition political parties, oppose the idea. Privacy concerns may explain why the current 70% penetration rate is potentially an upper limit in the short to medium term.
Given these challenges, it will take considerable time to promote digitalization in Japan. The government needs to be mindful of this and continue to engage in public dialogue and education about the benefits of digitalization and how it can help address the social problems that the country faces. Currently, the government is taking a more proactive stance in pursuing policies to promote digitalization under the leadership of Digital Minister Kono. However, enhanced cybersecurity policies are also necessary to address concerns about information leaks and sensitive information management by the government. These measures could include building robust cybersecurity technology that uses the latest advancements in quantum technology and establishing a system that prevents the government from accessing health and financial information without individual citizens’ permission. Yet, with an estimated shortfall of 450,000 ICT workers by 2030, the new policy measures of issuing special work visas for foreign ICT workers, encouraging universities to establish new ICT-specific departments and mandate ICT skills in entrance exams, and offering compulsory programming classes for elementary and high schools may not be sufficient to fill the skills gap without greater financial incentives for ICT graduates to work in the government.
Overall, the government’s policies represent a broad approach that should help provide a sense of security and comfort to the public with regard to digitalization, which would go some way toward advancing Japan’s digital transformation. Given Japanese demographics and cultural approaches that favor traditional working practices and personal privacy, as well as the private sector’s underinvestment in new systems and young ICT workers compared to foreign firms, the transition to a more digital society will probably take time. What is likely is that as the younger and middle-aged generations begin to gain a greater share of voting power, and as elderly residents’ attitudes toward work, technology, privacy, and immigration slowly fade out of the national mindset and the bureaucracy, Japan’s digital transformation will gain more public support and be more effectively implemented.
Daisuke Kawai is a Research Fellow at the Japan Institute of International Affairs (JIIA) and the National Graduate Institute for Policy Studies (GRIPS). His areas of expertise are Japan’s foreign and security policy, Indo-Pacific security, technology policy, and arms control, with an overarching research interest in emerging technologies. He is also the serving secretariat of the Council of Security Cooperation in the Asia Pacific (CSCAP) Japan.
 Ministry of Internal Affairs and Communications (Japan), “Introduction: History of Digitalization in Japan,” 2021, https://www.soumu.go.jp/johotsusintokei/whitepaper/eng/WP2021/chapter-introduction.pdf.
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 Ministry of Economy, Trade and Industry (Japan), “IT-jinzai jukyu ni kan suru chosa (gaiyo)” [Study on the Supply and Demand of IT Personnel (Summary)], October 20, 2022, https://www.meti.go.jp/policy/it_policy/jinzai/gaiyou.pdf.