Manufacturing
Overview

The Japanese economy is the fourth largest in the world in terms of GDP, and the manufacturing sector accounts for approximately 20% of the nation's GDP, positioning it as a vital segment of the economy.¹ Japan's electronics and automotive components are particularly competitive globally. The country holds over 60% of the global market share in 220 product categories, greatly surpassing the United States, Europe and China.² In addition, Japan's manufacturing industry is expected to improve production efficiency and create new value through digitalization and decarbonization, driving further growth in the overall manufacturing market.

Although Japan's manufacturing industry experienced a temporary decline in sales due to the impact of the COVID-19 pandemic, it recovered in FY 2022 and achieved growth rates exceeding pre-pandemic levels (Figure 1).

In the manufacturing sector, sales of transportation equipment, food, fabricated metal products, and general-purpose machinery have significantly increased year-on-year, driving overall sector growth (Figure 2). Among these, transportation equipment recorded outstanding sales and a high year-on-year growth rate, positioning it as a particularly promising market with strong potential for continued expansion.

The manufacturing sector in Japan is also a key player in the domestic employment market, accounting for approximately 15% of total employment as of 2023.⁶ Although the proportion of manufacturing within all industries is lower in Japan due to the transition to a service economy, its proportion is still comparable to countries such as South Korea, Thailand, and Malaysia, which are the next largest major manufacturing hubs in Asia behind China and Vietnam.⁷ Globally, Japan has a high proportion of its workforce employed in the manufacturing sector.

On the other hand, the global manufacturing environment has become increasingly uncertain in recent years. Russia's invasion of Ukraine has led to increasing resource and energy prices, higher material procurement costs, and shortages of critical components such as semiconductors. These challenges demonstrate the importance of strengthening supply chains. According to the 2022 survey of Japanese manufacturers, almost 50% of large companies intend to pursue digitalization and decarbonization to build a stable supply chain. Although the proportion of small and medium-sized enterprises (SMEs) is lower than that of large companies, SMEs show the highest enthusiasm for digitalization, followed by decarbonization efforts (Figure 3). Large companies are actively utilizing their abundant resources and capital to drive digitalization and decarbonization, to stabilize their supply chains. SMEs, on the other hand, are more likely to prioritize digitalization for efficiency and cost reduction.

In Japan's manufacturing industry, both the public and private sectors are promoting digitalization to improve production processes and data utilization. The Japanese government is pursuing several policies for promoting digital transformation in the manufacturing industry, including the development of guidelines, evaluations, and metrics in collaboration with companies, governments, and academia, as well as the promotion of data integration and standardization among companies.⁹。

Additionally, as digitalization progresses, private companies are increasingly focusing on leveraging data. A 2020 survey found that more than 80% of manufacturing companies use data in at least one operational area¹⁰, surpassing the level of data used in information and communication, energy and infrastructure, trade and distribution, and services. The use of data is particularly advanced in "Product and service planning and development" and "Production and manufacturing" (Figure 4). It can be observed that the simplification and optimization of production and manufacturing processes through digital technologies, as well as the use of data for planning and development, are gaining attention in the manufacturing industry.

Digitalization is also gaining momentum in the automotive and electronics industries in particular. On the other hand, experts believe that digitalization has lagged in the chemical and materials industry because it is difficult to digitize chemical processes in the first place, in addition to the difficulty of digitizing years of technological accumulation. To improve the digitalization of the industry, initiatives are being taken to achieve higher productivity through data utilization, which helps provide support for on-site technicians.¹² As the chemicals and materials industries digitalize, they have the potential to catch up with other sectors, leading to further growth in the future.

The use of AI and digital twin technology is gaining significant attention among digital initiatives in the manufacturing industry. For example, industrial robots and automation systems that can operate reliably even in emergencies¹³ are expected to see increased use in manufacturing. Additionally, Japan's manufacturing sector faces the challenge of an aging workforce. The use of digital twin technology to record the work of experienced workers is recognized as a way of streamlining and facilitating the transfer of their expertise.¹⁴ In this context, the adoption of digital technologies in the manufacturing sector is expected to increase. Overseas companies with cutting-edge technologies are expected to enter into the Japanese manufacturing industry, along with increased technology partnerships and collaborations with Japanese companies.

In the wake of the Paris Agreement, global momentum towards decarbonization has accelerated, and Japan is also moving forward with the decarbonization of its industries. The manufacturing sector is particularly important, accounting for around 36% of the country's CO2 emissions, surpassing other sectors such as transport, households, tertiary industries, and energy. In FY 2020, CO2 emissions from the manufacturing sector reached 370 million tonnes, with the majority coming from materials industries such as steel, chemicals, paper and pulp, and ceramics and cement. ¹⁵。

In 2022, the Cabinet Office conducted a survey targeting Japanese private companies and reported that a significant proportion of companies intend to increase capital and R&D expenditure through green investment by FY 2030. This is particularly evident in the steel and electrical equipment industries (Figure 5). The rising focus on controlling CO2 emissions is believed to have influenced the green investment level within the steel industry, which emits a large amount of CO2 during the manufacturing process. The electrical equipment industry is also likely to be influenced by the growing demand for CO2 emission control in power generators, as highly efficient power generators are expected to contribute to energy savings and decarbonization in a wide range of industries.

The manufacturing sector is actively working to improve process efficiency, reduce environmental impact, and create new business value through digitalization and decarbonization. Overseas companies with innovations that align with the needs of Japan's manufacturing industry, particularly in digital and green technologies, are expected to have greater business opportunities in Japan, including entry into the Japanese market and collaboration with local firms.