Japan's Appeal as an Investment Target for AI Companies

Yoshimitsu Kaji
Chairman & CSDO
Cinnamon AI

March 2024

How do Japan's social issues link to the demand for AI, and what potential does Japan hold as an investment target for tech companies? Yoshimitsu Kaji, Chairman and CSDO of AI solutions company Cinnamon AI, describes the appeal of Japan's AI market from a variety of perspectives.

While opinions vary, Tokyo University Professor Yutaka Matsuo calls the current wave of innovation the “fourth AI boom,” with rapid advances taking place in the technology and power of AI. Accordingly, the ethics and regulation around AI have become urgent issues that need international consensus.

Europe and the U.S. have a different approach towards this issue. Japan's middle-ground position between the two is important: "Broadly speaking, the European countries take a strict 'hard law' stance toward the practical application of AI. In contrast, the U.S. takes a 'soft law' stance, valuing flexible guidelines that are not legally binding, based on consensus and custom," he says.

At the G7 Hiroshima Summit in 2023, Japan facilitated a key framework agreement on global AI regulations: "As the chair of the summit, Japan lead discussions on the issue," explains Kaji, "The resulting landmark agreement is known as the 'Hiroshima AI Process Comprehensive Policy Framework', an international policy framework endorsed by the G7 leaders."

Designed to promote safe and reliable AI systems, the framework has been praised by stakeholders beyond G7 governments, including emerging economies, the private sector and academia. It is expected to bring comprehensive AI-related regulations around the world.

Prior to the 2023 agreement, Japan's Data Free Flow with Trust (DFFT) proposal had gained the support of world leaders at the 2019 G20 Osaka Summit and was incorporated into the Leaders' Declaration. What do the Japan-led DFFT and Hiroshima AI Process mean for the AI market? Kaji outlines Cinnamon AI's stance: "The DFFT is an initiative to promote the free flow of data, which is good for business and for addressing social issues, based on the premise of establishing reliable regulations on privacy, security, intellectual property and other matters. Japan played a significant role in the formation of this international consensus, and this will be appreciated in the future as a historical turning point," he says.

It is still challenging to predict how society and the economy will be affected by the rapid development of AI, which is expected to overtake human intelligence at some point in the future. Due to this uncertainty, many argue that AI should be regulated to some degree. While the international community is expressing a sense of caution, there are many fields in which Japan can take the lead.

Ahead of many other countries, Japan faces multiple social issues, such as a shrinking workforce due to an aging society and declining birthrate. It also needs to increase its resilience against climate change and natural disasters. We asked Kaji what role Cinnamon AI's evolving solutions can play in solving these problems: "There has been a significant decline in the working population in Japan, and people see this negatively. However, I believe it can also be an opportunity to spread knowledge around AI."

Kaji continues, "Paradoxically, this problem could function as a catalyst for innovation. Europe, the U.S. and other developed countries are facing problems of youth unemployment. People are worried that the introduction of AI, especially in its early stages before it becomes multimodal, will deprive young people of jobs, especially labor-intensive ones. These concerns are hindering the spread of AI."

In Japan, however, this way of thinking is not so prevalent, according to Kaji: I believe Japanese people seem naturally open to using AI and robots as "friends" who can be helpful. This might be coming from their polytheistic beliefs. Barriers to introducing AI tech, therefore, are generally low. I believe that Japan's acceptance of AI will also work positively in solving social issues and in the diffusion of new technologies. The demand for AI is quite clearly increasing," he says.

In November 2022, the Japanese government announced its "Five-Year Plan for Startup Development," the aim of which is to build a startup ecosystem in Japan and increase investment in startups to 10 trillion yen by FY2027, generating a second startup boom. Moving forward, the plan aims to create 100 unicorn companies (startups with a market capitalization of over 100 billion yen) and a total of 100,000 new startups.

"Japan has experienced rapid economic growth since the end of World War II thanks to startups, mainly in the manufacturing sector. Even though the economy has been stagnant in recent decades, momentum is building—especially within the government and at established companies—to nurture promising startups. I personally also feel that the infrastructure is becoming better suited to encouraging startups," says Kaji.

According to him, large corporations that already have platforms and funds play an important role in nurturing startups, especially in Japan. In the future, the key to success will be to promote technological development through open innovation in collaboration with startups.

"At Cinnamon AI, we would like to collaborate more with startups to generate further innovation. This mindset gets increasingly absorbed in the management of Japan's large companies," says Kaji, "The Japanese stock market has reached new highs and market trends are firm, unlike the bubble period. Moreover, the Japanese government is promoting Japan as an "asset management" nation: a country that supports startup growth. I believe that the investment environment here is highly promising for global investors and aspiring startups alike," concludes Kaji.