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Transforming Japan’s digital economy

The Japanese government, led by Prime Minister Yoshihide Suga, has placed priority on its digital transformation policy and is preparing to create an agency that will usher the country into the digital world. But the success of Japan’s digital economy depends on its willingness to end its paper-driven culture.

Takuya Hirai, the country’s newly appointed digital minister, said that establishing a digital agency is part of the government’s effort to recover from decades of lackluster adoption of digital technologies – despite being one of the world’s most advanced economies.

According to the OECD Digital Economy Outlook 2020, Japan is at the lowest rank among 31 countries in online procedures, with only 5.4% of citizens using digital applications at public offices.

The problem, according to Takuya Hoshino, senior economist at Dai-ichi Life Research Institute, is a lack of government investment in digital technology, which also hampers the private sector’s productivity and efficiency.

At present, Japanese officials still prefer paper documents and seal for approval at government offices. Politicians also opt for face-to-face meetings instead of teleconferences.

Additionally, the country is characterized by its vertically structured bureaucracy, wherein each ministry and local government have their own computer systems that are incompatible with others. Ministries have independent LAN networks from different vendors due to differences in online security policies.

Japan Research Institute data reveals that only 12% of administrative work in the Japanese government are done online. A July 2020 report from a government regulatory reform panel estimates that it could cost the government 323 million working hours annually if it does not undergo digital transformation, which translates to approximately $8 billion in personnel costs.

Since the early 2000s, Japan has been trying to push the digital agenda, but the Covid-19 pandemic has highlighted the advantages of moving societies online.

During the pandemic, the Japanese government struggled with the distribution of a ¥100,000 stimulus payment for each resident as well as with the use of fax in reporting coronavirus infections.

Minister for Digital Transformation Hirai said that the pandemic has opened eyes up to the need for digitalization and that the government should take advantage of this opportunity. He mentioned that the digital agency will be further expanded after its launch.

Establishing a digital agency

Suga envisions the digital agency as a “strong organization which can function as a powerful control tower, with highly talented people gathering from both the public and private sectors, to lead the digitalization of the society as a whole.”

The prime minister’s vision also covers financial and local economic policies. During the LDP presidential election, he mentioned the existence of too many local banks. He finds their consolidation and digitization inevitable.

Hirai believes that digital transformation would help Japan’s economy more broadly. “There is no question that being late on digitalisation is one reason for our low potential growth, so if we can maximise our late-mover advantage to catch-up then we can raise Japan’s economic growth rate,” he told the Financial Times. The agency would serve as a platform for the growing number of data that will shape Japan’s future.

The private sector will also benefit from the creation of a digital agency, he said. “If you look at companies that are highly valued by the market such as Amazon, Japanese companies have been a little weak in qualities such as innovation and resilience in the face of change.”

The digital agency will be comprised of over 500 people from both the bureaucracy and the private sector. Engineers and other technology experts will be recruited by the government from both from within and outside Japan to establish a digital infrastructure for government agencies.

What are the chances of success?

In an opinion piece, Jun Mukoyama, a fellow at the Asia Pacific Initiative, said that the digital agency must remove the government’s vertically segmented structure for system designs or budgets while introducing meta-level strategic thinking and consolidating digital policies and plans.

Those include the industry ministry’s industrial digitalization and cashless payments, the education ministry’s digitalization of education, the local governments’ regional digitalization, he wrote.

He emphasized the importance of consistency across the government to truly implement its cybersecurity and data strategy.

“It is necessary for the government to build the architecture and infrastructure of a fundamental platform that will serve as digital public goods for the private sector to utilize to proceed with the digitalization of the whole society.”

Mukoyama recommends positioning the digital agency above other ministries. It should not only manage administrative systems but also lead ministries and take part in policy making. He also said that the country’s best people in IT should be allowed to work with the government and use cutting-edge technology “in a free development environment.”