Beyond the Hype: Japan’s Quiet AI Revolution in 2025
I'm in Tokyo this week (May 26–30) for work, and it's been eye-opening. I've been bouncing between meetings that are giving me a clear picture of where AI and the software landscape stand in this country.
In short, Japan is dominated by tech giants and both enterprise and SME customers, with a growing startup ecosystem, a more accessible IPO market, and a rising focus on AI. The overall vibe is strikingly different.
Here are the details.
Japan's AI and Software Industry
Japan's software industry is experiencing substantial growth in 2025, driven by coordinated government policy support, strategic corporate investment, and aggressive digital transformation initiatives. The expansion is particularly pronounced in AI and Generative AI adoption; SaaS continues to be a fundamental part of IT spending.
One interesting data point is that the Cambridge Innovation Center (CIC) opened a branch here two years ago and today houses 350 mainly startups, filling two floors in a beautiful downtown office building.
Japan was slow to adopt the Cloud due to a variety of factors. By 2023, over 77% of Japanese companies were using cloud services, reflecting widespread adoption amid a rapidly growing cloud market expected to nearly double by 2027.
Open source adoption today is strong and growing, with 82% of organizations reporting moderate or higher use—driven by AI, cloud-native tech, and vendor lock-in concerns. Privacy, security, data loss, and copyright concerns have historically slowed adoption. While still slightly below global levels due to cultural preferences for proprietary software and certification-based career paths, major firms are increasingly building open source program offices and integrating open source into core systems, signaling a strategic shift towards OSS adoption.
Published market data reveals Japan's AI sector reached approximately $6.6 billion in 2024, with forecasts projecting growth to $35.2 billion by 2033—representing a compound annual growth rate of 20.4%. Within specific verticals, the consumer AI segment demonstrates particularly strong dynamics, with market valuation expected to increase from $1.87 billion in 2024 to $7.18 billion by 2030, corresponding to a CAGR of 23.4%. Over the years, Japan’s receptive outlook on robotics and AI – especially when it comes to Automated Human Intelligence (AHI) – the process of digitally automating human subject matter expertise – has smoothed the path to adoption. As one observer noted, “there’s no fear of Terminator scenarios here.”
These metrics position Japan as a significant growth market globally with expansion rates exceeding many developed economies and reflecting both policy-driven adoption and market-led demand across enterprise and consumer applications.
Despite this robust growth trajectory, the industry faces critical structural challenges. A severe IT talent shortage constrains development capacity, while the burden of maintaining legacy systems diverts resources from innovation. Additionally, AI adoption exhibits a varied pace across market segments, with many SMEs viewing advanced AI as a future rather than immediate imperative, creating uneven market penetration.
Startup Landscape: Angels, Funding, and Exits
Japan's angel investment landscape is characterized by growing activity and increasing sophistication. The country’s Angel Tax System incentivizes startup investment by offering substantial tax benefits, such as deductions and loss recovery, to offset the inherent risks of investing in unlisted companies. The rise of "boutique funds" focused on very early-stage startups, often with smaller investments, is blurring the lines between traditional angel and VC funding. PE firms, including an increasing number of international players, are actively pursuing acquisitions, including take-private deals and carve-outs of non-core businesses from larger Japanese corporations.
In 2025, IPOs—especially on the TSE Growth Market—remain the favored exit for Japanese startups, notably in the Information & Communications and Services sectors, even for those not yet profitable. (One contributing factor is the influence of banks, which often serve as key backers of startups in Japan. These institutions tend to favor IPOs as a means of securing cash returns and place less emphasis on achieving unicorn valuations or multi-billion-dollar exits.) M&A activity is also offering increased exit opportunities, with AI, life sciences, healthcare, and technology sectors expected to be particularly active.
Generative AI and Innovation
Japanese companies are increasingly adopting generative AI technologies – especially ChatGPT and Microsoft Copilot. Notably, SoftBank has partnered with OpenAI to launch SB OpenAI Japan, aiming to provide AI services to corporate clients. Startups like Sakana AI (Series A) are pioneering in AI model development, focusing on collective intelligence and innovative training methods. As in the U.S., many data centers in Japan are powered by NVIDIA chips, and utility companies are building new power plants to support the growing demands of AI.
AI Applications in Key Sectors
Major corporations are implementing AI solutions in Japan across key industries in order to enhance operational efficiency and competitive advantage, including:
Manufacturing: Companies like FANUC and SoftBank Robotics are integrating AI into robotics for manufacturing, enhancing efficiency and productivity.
Healthcare: AI is being utilized for diagnostic support and patient management, with firms like Fujifilm Corporation and HITO Hospital adopting AI technologies.
Finance: Major financial institutions, including Mitsubishi UFJ Financial Group and Mizuho Financial Group, are employing AI for risk management and fraud detection.
Smart Cities: AI is playing a crucial role in developing smart cities, enhancing urban efficiency and services. Japan maintains a prominent position internationally in the development and implementation of smart city automation initiatives and applied technology solutions.
AI Government Initiatives and Policy
The Japanese government – consistent with its traditional public-private partnership approach to technology adoption – is actively advancing AI development through strategic initiatives such as Society 5.0, which targets a human-centric, data-driven societal framework. Furthermore, Japan aims to position itself as "the most AI-friendly country in the world" by adopting lighter regulatory approaches compared to other nations.
AI Adoption Challenges
Despite the growth, AI adoption among Japanese companies varies. A Reuters survey indicated that while nearly 24% of companies have implemented AI, over 40% have no plans to do so. Among small and medium-sized enterprises (SMEs), only 16% are currently using AI, highlighting the need for increased awareness and education.
AI Infrastructure and Research
Japan is investing in AI infrastructure, exemplified by the development of ABCI 3.0, a large-scale AI supercomputer set to be fully operational in January 2025. This system is expected to significantly accelerate AI research and development.
Conclusion
Japan’s AI industry is rapidly advancing, driven by increased cloud and open source adoption, supportive government policies, corporate investments, and growing integration by enterprise leaders. However, challenges remain in terms of widespread adoption, particularly among SMEs, and addressing data privacy concerns.