Japan’s digital deficit might be a good thing

The billions of dollars flowing from Japan to the likes of Apple, Amazon and Microsoft might eventually be more of a positive than a negative.

“The digital deficit has grown this much mainly because more companies and individuals are using digital services, meaning digitalization has accelerated, which we believe is a huge plus,” says Kengo Wataya, a researcher at Mitsubishi Research Institute.

Last year, Japan recorded a ¥5.5 trillion ($34 billion) deficit in digital services as huge sums were spent on cloud services, operating systems, email services, social media and internet-based transactions with firms based overseas.

The total is more than double what it was just a decade ago.

The figure actually includes some nondigital-related costs due to the way the government compiles data, but this is the best reference, a government official said.

Japanese companies normally reluctant to adopt new technologies started to become heavy users of them during the pandemic, as necessity forced them into remote and distributed work.

The digital deficit “should be evaluated by analyzing both positive and negative sides,” Wataya argues.

He said that the key to ensuring that the deficit does not harm the economy is by using the services to create value, improve existing products or create new profitable businesses, and not simply to make businesses more efficient.

The strength of Japanese firms has traditionally been in importing raw materials and turning them into made-in-Japan products to sell overseas, so the country should aim for the same with digital technologies, he adds.

Just using the cloud is not enough. They have to innovate on it.

Even if the digital deficit were to expand, it wouldn’t be an issue as long as Japanese companies boost profits to offset the increased costs, Wataya says.

Yuichi Kodama, chief economist at Meiji Yasuda Research Institute, echoes the point.

Foreign tech giants are just providing platforms, and “the main issue is whether Japanese firms can effectively use them to create new value. Japanese firms should be able to do more,” Kodama wrote in a report.

Japan’s digital deficit recently set off alarms in some quarters in the country, especially as the number has become so big and forms such a noticeable item on the country’s international accounts.

If Japanese firms are unable to fully take advantage of digital technologies, the swelling of the digital deficit could become a problem as it increases capital outflows. Some analysts argue that the yen has weakened in part due to a flood of money going to international tech service providers.

“Japan’s digitalization efforts and the continued increase in the digital deficit are structural, so this is believed to continue to curb the yen’s gain,” a report by Nikko Asset Management published in March reads.

Security is also a concern, as foreign firms’ domination of the cloud means that Japan might lose some control over critical infrastructure.

More broadly, the digital deficit highlights how far Japanese tech has fallen on the world stage.

More than a decade ago, some Japanese firms still maintained a presence in certain advanced fields. NTT Communications was a leader in the domestic cloud market in 2011, and other Japanese firms were also in the top five.

But big, foreign tech companies have been dominating the market in recent years, with Amazon Web Services in the lead.

“There have not really been competitive products and services by domestic players, which is why the digital deficit is growing,” Wataya says.

The government has taken note of this. The issue was mentioned in a digital strategy document compiled last month.

Japanese firms’ competitiveness can be measured by checking “how many systems and apps that people use in their daily lives are produced by them,” said digital minister Taro Kono during a news conference last month.

Since it’s unlikely that new or existing domestic players in Japan will be competitive enough to go toe-to-toe with U.S. tech giants in the next several years, the digital deficit will likely widen even more, Wataya says.