Japan's IT Investments and Earnings Power in IoT Era

◆Information technology (IT) continues to evolve today, as seen in higher computer processing/memory capacity, wider and faster fixed-line/wireless communication networks, and smaller devices. New concepts, such as Internet of Things (IoT) and big data, could bring drastic changes to existing business models, and are likely to be increasingly applied across industries.

◆In 2012, US firms collectively invested roughly $442.6bn in IT, which accounted for around 39% of total private-sector capital expenditures that year. The US government has done its part, pushing policies that assume the increased use of IT. Meanwhile, Japan’s IT investments totaled roughly Y16tn in 2012, growing rather sluggishly despite the hefty amount. In 1995, information and communication technology (ICT) capital stock accounted for about 1.9% of the private-sector capital stock in both countries. Since then, however, the US has seen the figure grow faster than Japan, resulting in the US number roughly double that for Japan.

◆Aggressive IT investments in the US since the late-1990s appear to have contributed to labor productivity gains for the entire US economy, particularly for non-manufacturing industries, which are often IT users (as opposed to IT producers). While the US has called for creating added value through IT investments, Japan has spent on IT with an emphasis on improving business efficiencies and reducing costs. Their different stances have likely resulted in more modest contributions from such investments to labor productivity gains in Japan than in the US.

◆The Japanese government is working to strengthen the nation’s earnings power, defining the creation of added value through the use of IT as a cornerstone for future economic growth. To this end, it has implemented such initiatives as facilitating the greater use of IT in industries demonstrating relatively low productivity despite their significant contributions to the nation’s creation of added value. Statistics suggest that aggressive IT investments with clear goals (e.g., business expansion) could expand Japanese firms’ top line and bring other benefits.

◆In Japan, more IT specialists work in industries that provide the technology than in those that use it. Fewer firms have appointed chief information officers (CIOs) in Japan than in the US. This fact suggests that Japanese firms have yet to have frameworks and a population of IT specialists necessary for promoting more effective IT use. For Japan to stay abreast of developments in the IoT era and reinforce its earnings power overall, we believe that the nation must boost IT investments both qualitatively and quantitatively.