Why disruptive challenges make Japan fertile ground for investors

There's an inflection point taking place in Japan that is creating opportunities for foreign investors, according to Koichiro Nakamura of Sozo Ventures.

The common image of Japan is one of a conservative country where change happens slowly. That’s true, but it’s also a society that can shift rapidly when the barriers to change suddenly fall.

When that happens, social consensus re-aligns efficiently and cohesively. The pace can be particularly swift if the government and large corporations use their outsized influence to spread the message.

The current moment feels like such an inflection point in Japan’s society.

The pandemic, the pressure for environmentally friendly business practices and the rapid aging of Japan’s population are three factors that are forcing the country to embrace change at an abnormally fast pace.

That, in turn, is creating opportunities for foreign investors to tap into the new demand for services and products that will be spurred by these changes.

It took a pandemic to finally shake loose Japan’s devotion to the “salaryman” lifestyle of arduous commutes and late nights in the office. Remote working was taboo in corporate Japan until covid-19 forced companies and the government to encourage workers to stay home or stagger their shifts when they come into the office. Now that habits have changed, they won’t swing back entirely.

Koichiro Nakamura Sozo Ventures
Koichiro Nakamura, Sozo Ventures

Companies have met the challenge by investing heavily in the IT infrastructure needed to support remote workforces. Companies and government officials are also moving to end the use of outdated manual processes, such as personal identity stamps (known as hanko) and fax machines.

Yoshihide Suga, Japan’s new prime minister, has made the digitalization of the government bureaucracy and wider society a key priority of his administration, aiming to establish a new digital agency to make it happen. Hitachi is among several large corporations to have dumped the hanko in recent months, setting out a “paperless office” plan.

ESG takes hold

Consensus in Japan over the need for environmentally friendly policies and ESG investments appears to have reached a tipping point, promising more opportunities for tech to support green goals. The government recently pledged the country would be carbon neutral by 2050.

The announcement is prompting companies to find ways to reduce their carbon footprint and increase their ESG appeal. Major trading house Itochu Corp, for example, announced it would sell its stake in a Colombian coal mine and plans to sell sustainable development goal bonds targeting overseas investors.

Healthcare inflection point

Perhaps the most significant inflection point Japan has reached concerns its healthcare system and the wider consequences of its rapidly aging and shrinking population. The oldest society in the world, a third of Japan’s population will be over 65 by 2036.

The wave of elderly and the shrinking of the working-age population are problems that Japan has seen coming for decades, but these issues are now starting to hit home in ways that are forcing the government and companies to act.

The government is encouraging companies to allow employees to work until age 70, at least, beyond the official age of 65. This will force companies to shoulder more healthcare costs and incentivize them to invest in technology and services that keep their employees healthy and productive for longer.

Massive opportunities

While Japan’s rapid graying is usually seen as a burden, it also represents massive opportunities for innovation and a window into the not-so-distant future of other societies, including the US. The impact of aging will ripple out into lifestyle changes that require more services, such as transportation for the elderly and the prevention of elder crime.

Companies that have innovative solutions for the related problems, ranging from healthcare tech to assistance for the elderly and automation, can use Japan to build models before taking them global.

The usual instinct of US investors is to support a model at home before seeking to export the ideas. But these disruptive trends in Japan are making it an increasingly attractive place to begin, then look back to the West.