How can Japan navigate digital transformation ahead of a ‘2025 digital cliff’? 

As the 2025 digital cliff nears – the point at which businesses in Japan will lose JPY 12 trillion ($77.6 billion) every year for failing to adopt digital practices, according to the country’s Ministry of Economy, Trade and Industry (METI) – a revolutionary take on traditional business models is becoming increasingly urgent.

Now, companies are intensifying efforts to turn this risk into an opportunity.

Companies known for pioneering digital transformation are proposing some groundbreaking initiatives.

For instance, Fast Retailing is looking at sustainability in its business model by visualizing and centrally managing the entire supply chain from textiles to final products. At each stage of the supply chain, suppliers and partner factories register information, such as producing area and material quality, on a digital platform. Fast Retailing employees can then trace and specify the origin of materials, quality and standards when planning products as needed.

By understanding the production process of raw materials upstream in the supply chain, the company aims to achieve sustainable procurement by detecting risks to human rights and the environment at an early stage and embedding stability regarding the supply of end products, realizing a supply chain that delivers the highest value to customers.

Suntory Beverage & Food, the second-largest player in the domestic vending machine market, is leveraging artificial intelligence (AI) to enhance profitability by maximizing sales and product replenishment in vending machines. This system optimizes the selection of drink items and inventory levels for each vending machine using AI, using wireless devices on its machines to monitor stock.

The potential for out-of-stock products is reduced while improving demand forecasting accuracy. More beverages can then be sold at the right time and location, meeting diverse customer needs for each vending machine.

Chugai Pharmaceutical aims to become a top innovator in the healthcare industry by strengthening its core competency in drug discovery technology. Generally, the success rate of new drug development is one-in-23,000, taking more than 10 years and costing billions of yen. Leveraging digital technology to enhance the efficiency of the drug discovery process is a pressing challenge for pharmaceutical companies.

The company is introducing AI technology at each stage of the development process, from identifying the genes causing diseases and creating antibodies or molecules that could be candidates for new drugs to evaluating these molecules. Its goal is to improve the success rate of new drug development and significantly reduce the time and cost from development to market launch.

Companies are also advancing their business transformation using generative AI (GenAI) technologies, such as ChatGPT. Itochu Corporation aims to allow all employees to freely utilize GenAI.

In July 2023, the company released its original internal GenAI service called “I-Colleague,” as a business tool for employees to further this goal as well as streamline operations. To this end, the company seeks new business development and transformation of its business model.

To help drive industrial digital transformation initiatives, a range of government support exists.

In 2020, METI released the Digital Governance Code, which outlines the initiatives companies and executives should undertake to promote digital transformation.

It defines digital transformation as “companies responding to harsh changes in the business environment, utilizing data and digital technology to transform products, services, and business models based on the needs of customers and society, while also transforming operations, organizations, processes, and corporate culture to establish a competitive advantage.”

To enhance corporate value and strengthen competitiveness, METI certifies Tokyo Stock Exchange-listed companies actively engaged in business model transformation through digital transformation as DX stocks.

Additionally, to support the efforts of small and medium-sized enterprises (SMEs), which tend to lag behind large corporations in digital transformation progress, METI has launched the “Mira-Digi” portal site. This platform assists SMEs in visualizing management issues related to achieving digital transformation, provides consultations with experts and helps formulate future actions.

METI also subsidizes part of the costs incurred by SMEs when introducing IT tools tailored to their own challenges and needs.

The World Economic Forum’s white paper, Digital Transition Framework: An action plan for public-private collaboration, emphasizes the essential role of public-private collaboration in harnessing digital technology as a key driver of transformation in business and society. It provides a comprehensive framework for dialogue and action among policymakers and business leaders.

Digital transformation is an engine for building dynamic, sustainable and innovative economies and achieving inclusive growth. It is crucial to rebuild existing societal and organizational structures and harness the collective public-private sector efforts to accelerate this momentum.

It is also essential to integrate digital innovation with the diverse creativity of individuals across different industries and perspectives. Only with this unified effort can Japan's businesses withstand the digital cliff.