Japan’s tech sector: Time for a reboot?

If you were to ask the average investor which country is the current leader in tech, they'd almost certainly say the US. But not so long ago, the answer would have been Japan. Companies like Hitachi, Panasonic, and Sony are still household names, thanks to Japanese tech dominance in the 1980s and 1990s. Fast forward 30 years or so and Japan's semiconductor industry has revived global interest in Japan's tech ecosystem. But we believe the dynamism of Japan's tech sector today doesn't start and end with electronics and semiconductors.

What’s changed?

An increasing number of internet, software, and IT services companies are benefiting from a surge in domestic digitalization and we believe the market is waking up to the potential within Japan’s tech sector. Some investors may be surprised to learn that several Japanese software companies have succeeded in expanding beyond Japan to become global leaders in their own right, rivaling better-known Western peers in sophistication and scale.

Japan’s drive to digitalize came late relative to peers but is now a national priority. Historically, Japanese enterprises and the government have underspent on IT relative to their global counterparts. In particular, Japanese corporates have tended to rely on outsourced IT expertise, rather than in-house IT departments. This is further exacerbated by demographic challenges and anticipated wage inflation that makes productivity solutions all the more critical. As the country discovered during the pandemic, there is a structural need for both enterprises and the government to transform their IT architecture and allocate more budget to new technologies like cloud infrastructure and AI. This is driving demand for more value-additive IT solutions, benefiting Japan’s domestic IT services sector.

Case in point

Through deep research and local expertise, our team has identified a number of Japanese tech companies that we believe offer attractive opportunities for investors. Here we illustrate two prime examples.

Example 1

Our first example is a Japanese company that is a global leader in providing online hiring and staffing platforms. The company’s products deliver technology solutions to help its customers and clients improve job-seeking, hiring, and HR services. These platforms are well positioned across the world’s top job-matching markets, attracting hundreds of millions of users worldwide. The company also benefits from macroeconomic tailwinds: increased tightness in the job market means that it is providing an essential service by supplying labor where it is most needed and profitable.

We believe the company’s strategy is differentiated and forward-thinking, benefiting from a clear mission to “simplify hiring,” that has enabled a high brand recall. We project a growth in market share as employers and jobseekers become increasingly digitally-savvy, creating demand for digital solutions to make job matching easier. The company’s edge comes from its unique intellectual property: access to years of employer and employee data. We believe this makes the company a clear beneficiary of AI; using this data alongside AI is enabling them to make significant improvements in efficiency and personalization, helping companies find the right candidates quickly while also being one of the cheapest forms of hiring in the world. As a result, we foresee strong growth potential, as well as diversification benefits arising from its position as a Japanese company working on a global scale.

Example 2

The second company we highlight serves as an example of one of the companies that is becoming an enabler of Japan’s digital transformation, capturing a powerful domestic tailwind. This IT consulting company offers consulting and cocreation services while also helping clients improve productivity through automating processes. The company boasts a unique, young, and ambitious company culture and stands out for its innovative talent acquisition strategies and its targeted value proposition for small and medium enterprises. As a local company, it is well suited to meet domestic demand, able to understand local nuances that global counterparts may miss.