Japan is reclaiming the digital crown

After several years of failing to keep pace with its peers, Japan has committed to revitalizing its digital infrastructure - and investors stand to benefit.

In December 2022, Yasutoshi Nishimura, Japan’s minister of economy, trade and industry, shared his country’s goal of “creating a new economy and society.” His plan to achieve this ambitious goal centers on digital infrastructure. 

Japan’s efforts to strengthen its digital economy will use both its reputation as a technological innovator and its more recent decline behind the likes of China and the US as inspiration. Inspiration alone will not be enough, however, as investment will also be required. Fortunately, government support is already in the pipeline.

“The Japanese government is planning to build a number of new data centers across the country and a decentralization of landing bases for submarine cables to diversify landing points,” says Joelin Ma, director for real estate, Asia-Pacific at APG Asset Management.

Evidence of Japan’s renewed commitment to digital infrastructure is not hard to find. This year it has been announced that a state-backed chipmaker, Rapidus, will reinvigorate domestic semiconductor production. The public-private venture has already received $510 million in government subsidies and is set to require a further $54 billion of public investment. If successful, Rapidus will form part of a wider trend in Japan where digital infrastructure serves as a catalyst for a post-pandemic economic rebound that drives substantial returns for domestic and foreign investors alike.

The technological slowdown

The decline in Japan’s technological competitiveness has not led to a total absence of investment in digital infrastructure. But, often, investments have been hampered by an aging population, an underdeveloped start-up company ecosystem and a general decline in Japan’s digital competitiveness.

In 2020, Nishimura delivered the DX Report, a damning assessment of the state of digital infrastructure in the country that warned of a fast-approaching “digital cliff.” Digital investment had stagnated in the country, allowing rival states to out-compete it. In Japan, digital investment between 1994 and 2018 stood at just 1.1 times national GDP, according to government figures. In the US, this figure was 2.8. 

The Japanese government is determined to arrest this fall. It established the Digital Agency in 2021 to promote digitalization in the region and has seen foreign direct investment skyrocket as a result of its efforts. In 2021, record levels of FDI totaling $2.4 billion went into IT and internet infrastructure in Japan, up from an annual average of $663 million in the 2010s. 

Nations in Asia-Pacific have captured significant economic benefits due to their aggressive digitalization efforts. A notable investment includes CapitaLand Investment’s first China data center development fund, with its equity commitment of around $400 million.

“The APAC data center market is witnessing an explosive growth period as investors look to capitalize on the demand for digital services in the region,” explains Fred Fitzalan Howard, associate director and data center lead for Asia-Pacific at consultancy Knight Frank.

Japan’s renewed prioritization of digital infrastructure reflects the modern global economy and competitive international landscape, but the region still has some way to go in its efforts to reclaim the digital crown. 

According to the 2022 World Digital Competitiveness Ranking compiled by Swiss independent university institute IMD’s World Competitiveness Center, Japan moved down one place from 2021, ranking below Singapore, China (including the mainland, Taiwan and Hong Kong) and South Korea. 

From enemy to ally

Digital infrastructure is globally recognized as an important way to attract investment, so bringing such investment into Japan will be no easy task. 

“While highly attractive, entering the sector is difficult,” Fitzalan Howard admits. “Land and power availability in attractive data center locations, such as Tokyo and Osaka, is minimal and costs to secure these land plots has risen aggressively as investors battle to secure the best opportunities.”

Ironically, Japan’s relative fall – as a geopolitical force, if not necessarily a digital one – may help the country reclaim some of its former glory. In the 1980s, when Japan was regarded as a digital superpower, it was at the same time criticized for unfair trading practices. 

Today, with US trade disagreements largely centering on China instead, Japan has turned from enemy to ally. The US now looks set to partner with Japan’s semiconductor industry to head off the threat of a chip shortage – with politicians and private firms such as IBM, on board in 2022.  

With Japan keen to future-proof its digital infrastructure, there are investments in the pipeline, including several assets that have been acquired for data center redevelopment. Among these are Gaw Capital’s acquisition of Fuchu Building in Fuchu Intelligent Park and Hulic’s development of the Kobunacho Kinen-Kaikan Building, both in or near Tokyo. 

Fitzalan Howard also notes another example; Singapore-based logistics specialists GLP securing land in Akishima for a $12 billion data center campus, with construction expected to start this year. As the GLP investment shows, digital infrastructure growth elsewhere in APAC need not be viewed as a zero-sum game. 

Ma adds: “Japan also has a comprehensive suite of modern laws that support and facilitate the digital economy and cloud computing, including a convention on cybercrime, comprehensive privacy legislation and intellectual property laws that cover the full range of protections relevant to cloud services – all driving strong investment appetite for digital infrastructure in Japan.” 

This appetite is being recognized and encouraged by the Japanese government, after years of allowing the country’s digital performance to flounder. 

The Japan data center market alone is estimated to grow at a compound annual growth rate of over 7 percent and reach a value of more than $13 billion by 2027 according to research firm Arizton. 

The returns that this growth will generate will appeal to investors domestically and internationally. Japan was once viewed as a digital leader – it is staking a claim to be so once again.

Cutting-edge chipmaking

In late 2022, a consortium of eight Japanese technology firms, supported by significant government backing, announced the establishment of Rapidus. 

This venture was designed to produce cutting-edge two-nanometer chips and re-establish Japan as a leading producer of semiconductor technology. 

Toyota, Sony, NTT, SoftBank, Kioxia, Denso, NEC and MUFG Bank have collectively invested a total of approximately $51.5 million to establish Rapidus, with the Japanese government pledging an additional $490 million in subsidies. Rapidus, which in February unveiled its factory location in Chitose, Hokkaido, has announced expectations of approximately $36.7 billion in investments to enable mass production of its logic chips by 2027.