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Japan Digital Agenda 2030 Literature title Literature 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 9 Japan’s digital scorecard 12 The trends pushing for digital change 13 Japan’s endowment 16 Contextual Japanese constraints on digitization 18 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, software development, artificial intelligence and other digital technologies and ways of working 31 Big move 2: Drive broad-scale upskilling across the workforce by shifting from traditional to adaptive learning to build digitally relevant skillsets 35 Big move 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 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 digital omnichannel experiences 65 Big move 6: Healthcare to lead globally on next-generation personalized, remote solutions targeting elderly care 75 Big move 7: Financial services providers to build mobile and broad accessibility solutions by leveraging cloud infrastructure and open network 85 Big move 8: Government to define a vision and bold goals to provide digital citizen and business services 99 Big move 9: Government and industry collaborate to scale smart cities, building on 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 This page intentionally left blank 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 a range of recommendations across Japan’s still nascent Internet Economy, including changes in government ICT procurement practices, measures to protect privacy and intellectual property, steps to promote online commerce and digital government, and digitization and sharing of healthcare 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 need to fully embrace digitization across its economy from manufacturing to healthcare to finance to the retail sector and in the delivery of government services. The ACCJ and McKinsey & Company have partnered to develop a perspective to elucidate the issues facing Japan over the next decade in digitizing its economy and society. This partnership brought 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 creation of a broader base of digital talent, how Japanese industry and government can digitize their value chains, and the respective roles that startups and existing systems integrators can play in accelerating 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, and technology 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 this broad-based research effort. Their contributions are noted in the acknowledgements section of this document. Jenifer Rogers Naoyuki Iwatani ACCJ President 2021 McKinsey Japan Managing Partner 2021 Peter Fitzgerald André Andonian ACCJ President 2020 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 endowment that 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 the development 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 risk- averse mindset; senior leaders focused on company longevity rather than productivity; limited exposure of some industries to global competitors; a gridlock effect between a private sector waiting for digital endorsement by government and a government waiting for the private sector to forge ahead; and most important, 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 never been 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 competitiveness would 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 their operations, 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, product managers, 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 software expertise 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 the education 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; such as 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 that leverage 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
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