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Last update: 04 June 2025

Author: Ilya Kulyatin ([email protected])

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PDF: https://bit.ly/japan_ai_hub

Notion: https://bit.ly/japan_ai_hub_notion

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A note from the author

Hi, I'm Ilya, an entrepreneur with a background spanning data science, finance, and AI. Having founded two data-driven startups in Singapore and NYC, I bring a unique global perspective shaped by professional experience across the US, EU, UK, Singapore, and Japan. My academic background includes a BSc in Economics, an MA in Finance, and an MSc in Machine Learning.

For the past year, while exploring new startup opportunities, I've been actively building an AI community in Tokyo called Tokyo AI (TAI), which now connects nearly 2,000 AI professionals in the Japanese capital. This experience, coupled with insights gained from living in ten countries over the past two decades, has convinced me of Japan's exceptional potential to emerge as a global deep-tech leader within the next decade.

This report, part of my broader ecosystem analysis, examines Japan's potential as an international AI hub in APAC. While the path ahead requires significant effort and structural changes, I believe Japan's unique combination of technological expertise, industrial heritage, and innovation culture positions it perfectly for this transformation. With patience and strategic focus, we can help establish Japan as a leading force in the global AI landscape.

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Contributors

I welcome anyone who wants to contribute a section or comments. I’m very grateful to the following friends who helped me with the final draft of this report:

Jerry Chi, Ryuichi Maruyama, Haris Gulzar, Aleksandr Drozd, Aveek Das, Mohamed Haggag

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Japan’s strategic geographic position, advanced infrastructure, and robust government backing for AI and deep-tech innovation have made it a significant player in the global technology landscape. The country’s dedication to nurturing the next wave of startups, combined with its state-of-the-art technical infrastructure (5G networks, world-leading supercomputing resources, and energy grid), has solidified its reputation as a center of innovation within the Asia-Pacific (APAC) region.

Both domestic and international corporations are increasingly investing in Japan’s innovation ecosystem. Over the past decade, corporate venture capital, direct investment programs, and open innovation initiatives have seen substantial growth. For example, global technology leaders such as Microsoft, NVIDIA, and OpenAI have made notable commitments to the country. Microsoft has pledged $2.9 billion to expand its AI and cloud infrastructure in Japan, while OpenAI has chosen Tokyo for its first Asian office. These investments reflect Japan’s rising prominence in the global AI arena.

Japan’s innovation capabilities are further underscored by its developed R&D ecosystem. The country consistently ranks among the world’s leaders in R&D intensity, with expenditures reaching 3.65% of GDP in 2022, a figure that exceeds those of the United States and the European Union. Tokyo, in particular, stands out as a global innovation hub, ranking highly for scientific publications, patents, and its position as the third-ranked city in the Global Power City Index, trailing only London and New York.

Academic institutions play a pivotal role in Japan’s innovation ecosystem, with leading universities and research institutes driving transformative discoveries. The number of university-affiliated startups has more than doubled in the last decade, supported by entrepreneurship programs and initiatives aimed at commercializing academic research. There are growing collaborative efforts between academia and industry, such as the Hitachi Kyoto Laboratory and the Mitsui Fudosan UTokyo Laboratory, to further enhance Japan’s R&D capabilities.

However, despite these strengths, Japan faces several challenges that must be addressed to fully realize its potential as a global AI and innovation hub.

Challenges in Japan’s AI Ambitions

While Japan possesses significant advantages, it must confront critical obstacles that could impede its aspiration to become the leading AI hub in the APAC region. These challenges, ranging from talent shortages to fragmented commercialization efforts, require strategic solutions to unlock the nation’s full potential. We would need a chapter for each of these issues, as they run deep and are a significant drag to Japan’s prospects of becoming an AI (or any other) global hub.

Language barrier

• Only 10% of Japan’s workforce is confident in professional English communication. Japan's ranking in the 2024 EF English Proficiency Index is 92nd out of 116 countries, below regional peers, and down from 87th place a year earlier.
• This linguistic gap often leads to misunderstandings in nuanced business contexts, exacerbated by the indirect nature of Japanese communication styles. Effective communication frequently necessitates the hiring of bilingual staff or professional translators, increasing operational costs and introducing potential inefficiencies. As a result, Japanese firms often prefer local IT and software providers, sometimes even requesting that local system integrators replicate foreign solutions in-house.

Regulatory landscape

• Japan’s regulatory environment remains complex and, at times, opaque, despite recent government efforts to streamline processes. Certain sectors face further bureaucratic burdens. For instance, AI-driven healthcare startups face up to 1-year ****approval cycles for medical devices.
• According to the World Bank’s Ease of Doing Business Index, Japan overall ranks 29th out of 190 countries as of 2020, with particularly low scores in areas such as starting a business and obtaining construction permits.
• The 2019 amendment to the Foreign Exchange and Foreign Trade Act (FEFTA) tightened inbound investment regulations by lowering the notification threshold for foreign investments from 10% to 1% of ownership, making it more expensive and time-consuming to get foreign investments.
• While exemptions exist, software companies are typically required to comply with these regulations, adding complexity and cost to investment processes. Recent startups funded by U.S. investors have noted that while compliance is manageable, it remains burdensome, particularly for smaller-scale investments.

Employment regulations

• Japanese labor laws are highly protective of employees, posing challenges for startups seeking flexibility.
• Employment contracts are often vague, lacking specific job responsibilities that could be evaluated during performance reviews. This makes it difficult to terminate employees, even during probationary periods, reducing flexibility often required by early-stage innovative companies.
• Startups face significant hurdles in adjusting their workforce in response to changing business needs. In extreme cases, companies have struggled to dismiss employees who fail to meet basic attendance requirements.
• While the ecosystem is gradually evolving, with increasing acceptance of contract-based gig work, further reforms are needed to enhance workforce flexibility and support startup growth.

Conservative business culture

• Japanese firms tend to favor long-standing relationships with local suppliers, often prioritizing familiarity and reliability over cost or quality advantages offered by foreign providers.
• These relationships are characterized by interdependence, extensive information sharing, and a deep understanding of mutual expectations, making it challenging for new entrants to penetrate the market.
• Even when foreign suppliers present superior offerings, Japanese companies may still opt for local partners due to the perceived stability of established relationships.

Over-reliance on system integrators

• System integrators (SIs) play a central role in Japan’s IT ecosystem, acting as intermediaries between enterprises and technology providers.
• While SIs ensure the seamless deployment and maintenance of systems tailored to Japan’s unique regulatory and operational requirements, this reliance can create inefficiencies. The SI-driven model often introduces additional layers of decision-making, slowing the adoption of emerging AI solutions. Enterprises may prioritize incremental updates over transformative changes, limiting the deployment of advanced AI systems.
• By outsourcing integration to SIs, companies may miss opportunities to engage directly with AI innovators, both domestically and internationally, potentially limiting exposure to new technologies.
• Balancing the strengths of the SI model with a more open, collaborative ecosystem will be crucial for Japan to maintain its technological rigor while promoting innovation and global competitiveness in AI.

Low Patent Commercialization

• Japan ranks among the global leaders in patent filings, with 289,200 patent applications filed in 2021, third behind China and the U.S., according to the World Intellectual Property Organization (WIPO). Japan produces the highest number of patents per patenting organization (3.7) and per resident, 0.16% vs 0.10% US and 0.06% China (source, source).
• However, this innovation output starkly contrasts with its underperformance in translating patents into market-ready products or revenue-generating technologies. As an example, Stanford University generated approximately $59m from patents, while the University of Tokyo generated around 800m yen in 2022 (source).
• “The proportion of international joint research in Japan's patent applications is second to last among major countries after South Korea (OECD, 2024). […] The delay in internationalization in innovation is considered to be one of the causes of the long-term stagnation of the Japanese economy, and improvement is urgently needed.”

Skills gap

• A 2024 survey revealed a projected 50% hiring gap for AI-related positions, with 60% of IT decision-makers identifying AI as their most significant skills shortage. Japan is projected to face a deficit of 789,000 software engineers by 2030, according to data from METI.
• Only 12% of IT professionals feel adequately equipped to utilize AI technologies effectively, highlighting a substantial disconnect between workforce capabilities and industry demands.
• STEM graduates in Japan are 0.16% of the population vs 0.30% in the US, and 0.33% in China. According to the MEXT, the number of students entering doctoral programs at graduate schools will be 15,014 in fiscal 2023, down 20% from the peak in fiscal 2003 (source). In particular, the number of students progressing from master's to doctoral programs has fallen by 40% (source).
• The search for tech talent is costly, with headhunters charging success fees of up to 30-45% of annual salaries, compared to 15% in markets like the United Kingdom.

Small Venture Capital ecosystem

• In 2020, Japanese startups raised approximately 460 billion yen, with a portion allocated to AI initiatives. Post-COVID estimates by the Cabinet Office suggest total startup investments reached 7.4 billion yen, with a portion allocated to AI initiatives.
• By comparison, U.S. AI startups alone secured over $30 billion in funding in 2023, despite a broader decline in venture capital activity.
• Japan’s venture capital investment as a percentage of GDP is 0.02%, significantly lower than that of the U.S. (0.5%), Israel (0.6%), and the European Union (0.2%).
• While Japan ranks among the top four globally in R&D intensity as a percentage of GDP, its venture capital ecosystem lags. The Tokyo-Yokohama cluster, for instance, leads globally in R&D investments but ranks 21st in venture capital activity.
• As of 2023, Japan had only 15 unicorns, a stark contrast to the U.S. (600), China (200), and the U.K. (50). While some startups achieve unicorn status post-IPO, the overall landscape remains underdeveloped.
• There is significant potential for growth: Japan could accommodate a tenfold increase in venture capital investment, from 7.4bn to to 75bn, if it were to match the VC-to-GDP ratios of the U.S. and U.K. This presents opportunities for both domestic and foreign startups and investors, as evidenced by the growing interest of international venture capital firms in the Japanese market.

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