Japan’s IT Industry: Current Landscape and Opportunities

Overview:

Japan’s IT industry represents one of the largest markets globally. However, its progress in digitalisation has lagged behind other advanced nations. The COVID-19 pandemic served as a turning point, highlighting the urgent need for digital transformation. This led to government-led initiatives, such as the establishment of the Digital Agency, and a significant increase in corporate investment in DX (Digital Transformation).

According to Japan’s Ministry of Internal Affairs and Communications’ 2024 White Paper, the nominal GDP of the information and communications industry in 2022 was 54.7 trillion yen, a 1.5% increase from the previous year (53.9 trillion yen). This industry accounts for approximately 10% of Japan’s GDP.

Gartner’s report also projects Japan’s enterprise IT spending to rise by 4.7% in 2023, reaching 28.5344 trillion yen compared to 2022.

Source: Gartner

Key Features:

1. Enterprise-centric IT Market
   As indicated by the Gartner report, Japan’s IT investments are heavily concentrated among large enterprises, particularly in the financial, manufacturing, and public sectors. Core systems and ERP implementations dominate, prioritising stability and quality, with long-term usage being the norm. Japanese companies often adhere to on-site operational approaches and custom solutions tailored to their unique business processes. This has led to system bloat and increased operational costs.
   
2. Legacy Systems and the Demand for Modernisation
   Since Japan’s economic boom in the 1970s and 1980s, industries like manufacturing and finance began developing highly customised IT systems. Over decades of economic growth, these systems grew in size and complexity.
   Today, many of these systems have aged, making it increasingly difficult to meet modern business needs. However, many companies rely on external vendors and no longer fully understand their systems’ specifications. Compounding this issue, the engineers who built these systems are now retiring, leaving a knowledge gap. This has created a strong demand for system modernisation.
   
3. Outsourcing and the Strength of System Integrators (SIers)
   Japan’s IT industry is distinguished by its robust outsourcing and System Integration (SI) sector. In the 1980s, highly customised enterprise systems required specialised expertise for development and long-term maintenance. As a result, large SI companies, such as NTT Data, Fujitsu, and NEC, grew to dominate the market.
   Following the economic bubble burst, cost-cutting measures and IT talent shortages further accelerated the growth of outsourcing. While in-house IT development is occasionally discussed, outsourcing demand remains strong in practice.
   
4. Accelerating DX (Digital Transformation)
   In 2018, Japan’s Ministry of Economy, Trade, and Industry (METI) released the DX Report, warning of a “2025 Digital Cliff.” The report highlighted that without urgent DX implementation, legacy systems would cause significant problems by 2025.
   DX has since become a national strategy. While the pandemic accelerated corporate digitalisation, challenges persist, such as varying digital literacy among executives and a shortage of DX talent.
   Furthermore, the proliferation of DX-branded solutions has resulted in fragmented optimisation and uncertain outcomes, causing hesitation among user companies to adopt such products.
   
5. Severe IT Talent Shortages
   The global shortage of IT professionals is particularly acute in Japan due to several unique challenges:
   
   • Delayed IT education: Japan’s IT education lags behind, compounded by a lack of English proficiency, which slows the adoption of global technologies.
   • Low workforce mobility: Japan’s lifetime employment practices and new graduate hiring system limit mid-career recruitment and workforce mobility.
   • Challenges in hiring foreign talent: Language barriers and Japan’s unique business practices hinder the integration of foreign IT professionals.
   • Lower compensation: Compared to other countries, Japanese IT salaries are relatively low, and performance-based compensation is rare, making it difficult to attract top-tier engineers.

Although improvements are gradually emerging, solving Japan’s IT talent shortage remains a long-term challenge.

Business Opportunities for Foreign Companies:

1. DX Consulting and Solution Integration
   With the proliferation of DX-branded solutions, there is growing demand for comprehensive consulting services that support digital strategy from planning to implementation. Foreign companies can offer integrated platforms that streamline fragmented DX solutions and support advanced technologies such as data analytics and AI adoption.
   
2. Advanced Outsourcing Solutions
   Japanese enterprises continue to rely heavily on outsourcing. There are significant opportunities for high-value outsourcing services that focus on efficiency, cost reduction, and technological specialisation. For example, using AI-based monitoring tools for advanced system operation and maintenance can add substantial value.
   
3. IT Talent Solution　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　Japan’s severe IT talent shortage creates opportunities for foreign companies to provide skilled IT professionals. Services such as global IT talent matching, workforce training, and foreign talent integration support are in high demand, as Japanese companies often struggle to harness the potential of foreign engineers effectively.

These examples highlight just a few opportunities in Japan’s IT market. If you are interested in exploring further, please feel free to contact us.