Digital Transformation in Japan: Navigating Digital Policy Trajectory Amid an Evolving Political Landscape

As Japan gears up for snap elections on October 27, the country finds itself at a critical juncture in its digital transformation journey. The government's recent initiatives to bolster digital competition practices and enhance digital infrastructure have set the stage for a pivotal year ahead but challenges remain. Read on to learn about Japan's digital policy landscape, with the key developments, potential obstacles, and future outlook for a nation that hopes to be on the brink of a digital revolution.

Impacts of Recent Political Turmoil

2024 has emerged as a crucial and dynamic year for Japan. The government has embraced new policies to strengthen digital competition practices and undertaken initiatives to enhance national digital infrastructure. However, with the political crisis in September that led to an unexpected change in leadership, it is uncertain whether new Prime Minister Shigeru Ishiba will advance his predecessor Kishida’s legacy or carve his own path in steering the country’s digital and technological ambitions.

Ishiba and the ruling Liberal Democratic Party (LDP)’s future policy decisions partly depend on the results of the upcoming snap elections, scheduled on October 27. Although Ishiba is expected to win his bid to stay in power, the governing administration faces numerous challenges in the upcoming months, including reconciling with historically low approval ratings, a struggling economy, escalating geopolitical tensions in the region, and a long-standing population crisis.

Ahead of 2025, the year when domestic businesses face a “digital cliff” if they fail to suitably adopt digital systems, and amid political unpredictability, Japan’s digital policy position will be instrumental in understanding the country’s future direction. Moreover, the government’s priorities to boost investment in next-generation technologies, such as AI and blockchain, also present opportunities for businesses to leverage an innovation-friendly landscape.

Digital Competition: Aligning with the EU’s Digital Markets Act

In June 2024, the Japanese government enacted its first ex-ante competition policy, the Act on Promotion of Competition for Specified Smartphone Software (SSCPA), to regulate the competitive landscape for smartphone software providers. The act aims to address anti-competitive practices by certain large software service providers, by closely regulating smartphone ecosystems which include app stores and browsers. It empowers the government to restrict companies — explicitly targeting two major actors, Google and Apple, which potentially monopolize the smartphone app market — from blocking third-party app stores or payment systems.

The act will require software providers to permit alternative app stores, alternative browsers and search engines, as well as allow app developers to use their preferred payment platforms for user charges rather than forcing them to opt for the native options. This aims to increase competition and create opportunities for third-party payment providers in the country. The new law is set to be enforced by the Japan Fair Trade Commission (JFTC) by December 2025.

The SSCPA or the Smartphone Act is a significant milestone toward developing a competitive environment for digital players in Japan. The country’s move to curb anti-competition practices by major tech companies follows a trend of similar international legislative efforts, including the European Union's Digital Markets Act (DMA) in 2022 and the UK's Digital Markets, Competition, and Consumers Act in 2024.

With the JFTC investigating competition practices in other areas of digital markets, including AI and e-commerce transactions, Japan is likely to explore more policy developments to keep refining its digital antitrust framework in the coming year.

Japan’s actions are also expected to influence other large economies in the region, including India, which is currently drafting its own comprehensive digital competition legislation.

Artificial Intelligence: Japan’s Vision to be the Most AI-friendly Country

In April 2024, the government published its second AI white paper, advancing an ambitious strategy to boost generative AI development and adoption in the country. Asserting a growth-oriented approach that rivals developments in other large economies (particularly China), the strategy makes a strong case for investment in AI research and development (R&D) capabilities and focuses on strengthening digital systems to support AI ecosystems.

The strategy warns that without significant R&D capabilities, delays in AI utilization could lead to a decline in competitiveness, business innovation, academic scholarship, and an increase in black box risks (challenges associated with lack of interpretability and transparency of AI models).

Although the strategy declares intentions to minimize risks to citizens while maximizing benefits, Japan’s lack of an AI regulatory framework has caused concerns about ethical considerations and the possibility of copyright infringement. The government’s views on introducing AI regulations have changed repeatedly in 2024 and are likely to be further altered under new leadership. However, the strategy promoted in this white paper indicates that any new Japanese AI policy would be more business-friendly, diverging from the EU's ethics-focused regulatory approach.

Digital Asset Incentives: Ishiba’s Cabinet Signals Positive Trends

Japan is already among the more advanced economies when it comes to blockchain technology and cryptocurrency developments. The new leadership is expected to further solidify this position. Ishiba is popularly considered crypto-friendly and is expected to favor blockchain initiatives and technological innovation, and strengthen support for emerging start-ups during his tenure. An expert in regional revitalization and rural development strategies, Ishiba even introduced the Regional Development 2.0 policy during his LDP election campaign, which includes plans to use NFTs and blockchain to restore the value of local products to global prices.

Finally, Ishiba has appointed Masaaki Taira as the new Minister of Digital Affairs, who notably used to lead LDP’s Web3 task force. Taira is known for his advocacy of AI and Web3 development in the country and has expressed intentions to reform Japan’s tax system to support crypto startups.

Digital Backwardness Remains a Challenge

Despite being widely regarded as a technological powerhouse, Japan has consistently wrestled with digital underdevelopment, ranking as low as 32nd in the World Digital Competitiveness Ranking for 2023. The country’s digital struggles were severely exposed during the COVID-19 pandemic, leading to the government launching its first dedicated Digital Agency in 2021 to kick off its digital transformation.

However, businesses and government agencies continue to depend on outdated analog technology including fax machines and floppy disks. Digital payment services also suffer in a cash-based society. While cashless payments seem to be growing, the country trails behind regional peers such as South Korea and Singapore.

This embrace of archaic tech has often been presented as a cultural quirk, but it’s also representative of a slow-to-evolve bureaucracy with the potential to endanger the country’s productivity and economy.

In a 2018 report, the Japanese Ministry of Economy, Trade and Industry (METI) warned that the country faced a “digital cliff” due to the failure of businesses to adopt digital systems, setting up firms to incur losses of up to 12 trillion yen ($86.1 billion) each year after 2025.

While the government has recognized the need to modernize systems, declaring a victory against floppy disks earlier this year, a complete digital overhaul will prove more difficult.

Future Outlook

Ever since the launch of its Digital Agency, the Japanese government has taken numerous measures to ensure that they catch up to global digital trends and promote investments in next-generation technology. With a change in leadership, an economic slowdown, and looming fears of reaching a digital cliff in 2025, the country is currently facing a watershed moment. More than ever, Japan’s digital policy decisions are crucial in claiming the country’s place as a global leader in technology and innovation.

Staying on top of global risk and digital policy developments is essential for government affairs teams. The digital landscape is always in flux, especially during years with pivotal elections around the world, and understanding the implications of these changes is crucial for navigating digital policy, regulation, and political obstacles. With FiscalNote global policy solutions, teams can gain actionable intelligence on how to navigate complex policy environments and stay ahead of potential challenges. FiscalNote Professional Services provides insights with our award-winning policy analysis delivered right to your inbox.