Cloud computing has revolutionized IT infrastructure and services globally, with Japan playing a key role in this transformation. In this article, I will talk about the journey of cloud computing in Japan, starting from the pre-COVID-19 era, then moving to the acceleration driven by the pandemic and its current state.

Understanding Cloud Computing: Private, Hybrid, and Public Cloud

Before we dive into the journey of cloud computing in Japan, it’s crucial to understand the different types of cloud services quickly.

• Private Cloud: This cloud service environment is dedicated to a single entity. It can run on infrastructure owned by the company or in a third-party data center facility.
• Public Cloud: This is a cloud service environment built, controlled, and maintained by a third-party provider. Multiple organizations use the services through different payment models (such as pay-as-you-go or membership). For example, Amazon Web Services, Microsoft Azure, and Google Cloud Platform.
• Hybrid Cloud: This combines public and private cloud environments. For example, a financial company can run public cloud services on privately owned infrastructure through AWS Outposts or Azure Stack.

Pre-COVID Situation in Japan (2018–2019)

In 2019, Japan had a diverse cloud computing landscape. Both public and private cloud models were common, with private cloud models having a larger market share, primarily due to concerns about the security level of public cloud environments. Despite some hesitancy about the public cloud, the Japanese public cloud market was one of the leading markets in the Asia-Pacific-Japan (APJ) region, valued at an estimated USD 8 billion in 2018, compared to USD 1.71 billion in South Korea [1][2], and USD 4.7 billion in Australia [3][4]. It was also projected a growth to USD 18 billion in 2023 with a compound annual growth rate of approximately 18% [5].

Key Market Players

The market was served by a mix of local and international providers, including Amazon, Microsoft (which had already established a presence in the country with two data centers since 2014), Google, NTT Data, Softbank Group, Fujitsu Group, and NEC Corporation.

Sector-specific Adoption of Cloud Services

Retail and consumer products companies, media, and gaming industries were leading the pack in public cloud usage. For example, FamilyMart, Japan’s second-largest convenience store chain, embarked on an ambitious project utilizing AI and Internet of Things through Google’s Professional Services and G Suite to build the next generation of communication-focused stores in 2017. Yet, a growing interest and adoption were also observed within financial services institutions that began to use the public cloud for various functions, including testing, big data analysis, fraud detection, risk modeling, and customer-facing services such as trading and mobile apps.

On the other hand, the manufacturing industry was not as proactive a user as other sectors, primarily due to the limited perceived need for public cloud and reluctance to put proprietary manufacturing data online.

Government Policies and Influence

In 2018, the Japanese government took a significant step by announcing a ‘cloud by default’ policy. This policy encouraged government agencies to consider the public cloud as the primary option when procuring new IT applications, signifying an official trust in public cloud solutions. The banking sector echoed this trust, further enhancing the adoption of public cloud solutions.

Post-COVID Era (2020–2021)

The COVID-19 pandemic transformed the Japanese IT landscape, highlighting the delay in digitization of Japan’s administration. Because of lockdowns and social distancing protocols, remote working culture took precedence, leading to a sharp spike in the demand for cloud software.

Impact of COVID-19

The pandemic really put the delay of digital transformation in Japan in the spotlight. Many businesses, households, and even government agencies found it tough to switch to remote working[6][7] because of their heavy reliance on paper-based systems. For example, the government found itself in a bind trying to send cash benefits to restaurants due to a tedious paper-based document system and long verification times.

IT Investment and Cloud Adoption in Japan

The lockdown and social distancing protocols propelled companies to reconsider their operations, leading to a notable boost in IT investments. Private investment in the IT market in Japan was estimated at 13.55 trillion yen in the fiscal year 2021[8]. This represented a growth of about 580 billion yen from the previous year, partly due to increased investments in teleworking infrastructure as a response to the pandemic, with the Telecommunication companies reaching a cloud utilization rate of 92.6 percent in 2021 [9], which was the highest utilization rate among industries.

Many Japanese companies were at a crossroads, deciding whether to stick with their current service agreements and legacy systems, including on-premise solutions or shift toward cloud-based solutions. From automating their operations to providing faster services to their clients, businesses in Japan had a wealth of options. One standout choice was implementing cloud solutions, especially when it was time to renew contracts. This shift also allowed companies to facilitate remote work for their employees, aided by the increasing penetration of smartphones.

As a result, about 43% of business enterprises in Japan fully implemented cloud computing services, with an additional 27.7% implementing cloud services in some offices or departments [10]. Consequently, Japan’s cloud platform services market segment was estimated to reach USD 9.09 billion in 2020 and USD 15.18 billion in 2023 [11].

Cloud Computing in the Government Sector

Cloud computing played a pivotal role in the government sector as well. The Japanese government inaugurated its new Digital Agency in September 2021. This agency centralized Japan’s governmental decisions relating to digitization by coordinating digital policies and advising heads of related agencies.

The Digital Agency opted for Amazon Web Services and Google Cloud for its first big push toward reform [12]. The aim was to create consistent services that all government agencies could utilize. One of the primary initiatives under this reform was a plan to build a single platform for all government websites.

Key Developments

Some of the significant developments in the market during this time include:

• In April 2021, Minna Bank, a subsidiary of Fukuoka Financial Group, decided to run its core banking system on the public cloud. To achieve this, they utilized Google Cloud’s technologies, including Cloud Spanner and Google Kubernetes Engine.
• In May 2021, Seven-Eleven Japan announced its plan to boost its digital transformation strategy with Seven Central. This data cloud platform was built on Google Cloud, underlining their commitment to innovative cloud solutions.
• In March 2021, DeNA, a 20-year-old gaming company that operates mobile and online services, including games, e-commerce, and entertainment content distribution, announced that it would join the Google Cloud Partner Advantage Program. This decision marked a significant stride in their digital journey.
• In October 2021, CARDNET, a Japan-based credit card payment service provider, opted for Hewlett Packard Enterprise (HPE) ‘s edge-to-cloud platform, GreenLake. This decision was influenced by the need to cater to the growing digital payments and settlement services industry.

Current State

Even with the COVID-19 pandemic over, its impact continues to fuel the adoption of cloud-based solutions in Japan’s private and public sectors. However, compared to other leading countries, Japan’s level of cloud adoption still has room for growth. According to the “Communications Usage Trends Survey 2020” conducted by Japan’s Ministry of Internal Affairs and Communications, only 68.7% of the 2,223 companies surveyed confirmed they were using cloud technologies either partially or across their entire firms. This rate is lower than the 70.6% adoption level achieved in the United States in 2012 [11][19].

Despite these figures, cloud technologies and global Cloud Service Providers (CSPs) are vital to the Japanese IT industry. Projections suggest that the domestic cloud platform services market (IaaS/PaaS) will reach USD 15.82 billion by 2024 [13]. Moreover, the Software as a Service (SaaS) segment is expected to exhibit an annual growth rate (CAGR 2023–2027) of 10.75%, resulting in a market volume of USD 14.82 billion by 2027 [14].

Key Developments: Increasing Adoption of Cloud Solutions

In 2023, three significant developments highlighted the growing reliance on cloud computing in Japan:

• April 2023: Fujitsu launched a cloud-based platform dedicated to the healthcare sector. This platform enables the secure collection and utilization of health-related data, thus fostering digital transformation within the medical field [15].
• March 2023: In an ambitious project slated to start in 2023, the Japanese Self-Defense Forces (SDF) announced plans to integrate their information systems into a single centralized cloud. This move aimed at enhancing operational efficiency, cooperation, and cybersecurity within the SDF [16].
• June 2023: Capgemini, a global cloud services provider, fortified its presence in the Japanese market with this strategic acquisition of BTC Corporation, a leading local provider of cloud and digital services [17].

Wrapping up

Japan has been a fertile ground for the growth of cloud computing, and it is expected to remain so in the foreseeable future. The ongoing digital transformation across industries, propelled by the impacts of the COVID-19 pandemic and the rapid adoption of remote work, will continue to fuel the cloud computing market in Japan. Additionally, the country’s shift towards ‘cloud by default’ in the public sector and the increased adoption by the private sector indicate a bright future for cloud computing in Japan.

However, despite the significant growth and promising outlook, challenges still exist. The relatively low cloud adoption rate compared to other leading countries and the need for more IT and cloud-native talent underscore areas for potential improvement. Thus, a concerted effort from both the government and private sectors is necessary to tackle these challenges and fully realize the potential of cloud computing in Japan.

Resources

• [1] “South Korea Spending Public Cloud IaaS,” Statista: https://www.statista.com/statistics/992036/south-korea-user-spending-public-cloud-iaas/
• [2] “South Korea Spending Public Cloud Services,” Statista: https://www.statista.com/statistics/992004/south-korea-user-spending-public-cloud-services/
• [3] “Australia Public Cloud Market Size by Segment,” Statista: https://www.statista.com/statistics/1211875/australia-public-cloud-market-size-by-segment/
• [4] “Australia IaaS Market Revenue,” Statista: https://www.statista.com/statistics/1211896/australia-iaas-market-revenue/
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• [10]” Japan Cloud Computing Penetration Rate Business Enterprises”, Statista: https://www.statista.com/statistics/1094823/japan-cloud-computing-penetration-rate-business-enterprises/
• [11] “Cloud Report,” Deloitte Japan: https://www2.deloitte.com/jp/en/pages/risk/articles/growing-on-the-cloud.html
• [12] “Amazon-Google-win-Japan-government-cloud-contract”, Nikkei: https://asia.nikkei.com/Business/Technology/Amazon-Google-win-Japan-government-cloud-contract
• [13] “Japan Cloud Platform Services IaaS and PaaS Market YOY Comparison,” Statista: https://www.statista.com/statistics/824578/japan-cloud-platform-services-iaas-and-paas-market-yoy-comparison/
• [14] “Software as a Service — Japan,” Statista: https://www.statista.com/outlook/tmo/public-cloud/software-as-a-service/japan
• [15] “Fujitsu Launches New, Enhanced Version of its Cloud-Based Platform for Health Care,” Fujitsu: https://www.fujitsu.com/global/about/resources/news/press-releases/2023/0328-01.html
• [16] “Japan to unify Self-Defense Forces data into central cloud,” Nikkei Asia: https://asia.nikkei.com/Politics/Defense/Japan-to-unify-Self-Defense-Forces-data-into-central-cloud
• [17] “Capgemini to boost its cloud and digital end-to-end transformation offerings in Japan with acquisition of BTC,” Capgemini: https://www.capgemini.com/news/press-releases/capgemini-to-boost-its-cloud-and-digital-end-to-end-transformation-offerings-in-japan-with-acquisition-of-btc/
• [18] “Digital Transformation in Japan 2022”, EU-Japan Center for Industrial Cooperation: https://www.eu-japan.eu/sites/default/files/publications/docs/Digital-Transformation-Japan-Assessing-opportunities-forEU-SMEs.pdf
• [19] “Cloud Adoption: Where Does Your Country Rank?”, Gartner: https://www.gartner.com/smarterwithgartner/cloud-adoption-where-does-your-country-rank