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Yen's Decline Exposes Japan's Reliance on Overseas Tech Giants

Weak yen highlights Japan's economic vulnerability and dependence on overseas tech giants for cloud services. Rising costs and squeezed profits strain Japan's digital services industry. Japan's "digital deficit" sends wealth abroad, impacting the country's balance of payments.

This overreliance on foreign service providers has strained Japan's digital services industry, leading to increased costs and squeezed profits. As a result, Japan is facing a "digital deficit" that is sending wealth abroad.


Fumihiko Tanizaki, the general manager of investor relations at Tokyo-based company Digital Arts, expressed surprise at the dollar reaching the 150 yen level. Tanizaki highlighted the soaring costs of servers and other services due to the yen's depreciation, which has significantly impacted profits. He emphasized the urgent need for action to address this issue.


For Digital Arts, server and related costs account for approximately 30% of the company's cost of sales. These costs increased by around 140 million yen ($898,000) year on year, reaching 1.3 billion yen. The average exchange rate for the year was 144 yen on the dollar, which was 9 yen weaker than the company's assumption of 135 yen. This led to increased payments in dollar-denominated contracts.


Digital Arts relies on Amazon Web Services (AWS) for managing security services and related activities. While the market itself expanded and the company's revenue grew by 10%, rising costs resulted in almost flat operating profits of 44 billion yen.


Cloud services have become indispensable for a wide range of businesses. However, data from the Ministry of Economy, Trade and Industry (METI) reveals that domestic cloud service providers only hold a 30% market share in Japan, with major overseas IT giants like Amazon, Microsoft, and Google dominating the rest.


One notable issue is that when customers access Amazon, the service description is in Japanese, but the prices are in U.S. dollars. This discrepancy is evident in the cost of cloud storage and business application migration, which can amount to $1,402 and $2,059 per month, respectively.


The financial impact of this reliance on overseas tech giants is evident in Japan's balance of payments. The digital-related balance of payments deficit reached 5.5 trillion yen in 2023, a 16% increase compared to the previous year and double the figure from five years ago. Apart from cloud computing, Japan's overseas payments for web-related services and software development far exceed its receipts.


Japan's domestic IT capabilities are struggling to keep up with this trend, both in terms of technology and supply capacity. As Japan intensifies its digital transformation (DX), the "digital deficit" continues to widen, resulting in capital outflows from the country. Some industry officials have even likened Japanese companies as a whole to "digital serfs" in the world, reminiscent of lowly farmers in feudal times.


Recognising the problem, the government is taking steps to enhance economic security by focusing on developing domestic infrastructure. In April, METI announced subsidies of 72.5 billion yen to support infrastructure development for artificial intelligence by five domestic companies, including KDDI. Additionally, the Digital Agency has chosen Sakura Internet as the first domestic provider for the "Government Cloud" system, enabling the central and local governments to operate on a common platform.


However, significant hurdles remain. Foreign providers have been able to charge higher prices than their domestic counterparts due to superior usability and stronger security features. Kengo Wataya of the Mitsubishi Research Institute emphasised that American companies maintain a strong competitive edge, particularly with the full-scale utilisation of generative AI. The more Japanese companies rely on these services, the larger the digital deficit will grow.

 
  • Weak yen highlights Japan's economic vulnerability and dependence on overseas tech giants for cloud services.

  • Rising costs and squeezed profits strain Japan's digital services industry.

  • Japan's "digital deficit" sends wealth abroad, impacting the country's balance of payments.


Source: NIKKEI ASIA

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