Japanese Firms Lag in AI Adoption, Favoring Domestic Investment

More than 80% of Japanese firms have yet to fully deploy artificial intelligence (AI) in their operations, according to a Reuters survey. This trend could hinder official efforts to boost productivity and aligns with a broader preference for domestic over overseas investment. The survey, conducted by Nikkei Research from July 29 to August 6, contacted 510 companies, of which 219 responded on condition of anonymity.

About 60% of respondents said AI is being used only in some parts of their companies or in other limited ways. Another 18% are still undecided about whether to introduce AI into the workplace, while 6% have not even considered it. The remaining 16% have deployed AI company-wide as an integral tool.

"We have started using it company-wide, but its use is limited to tasks such as document creation," a manager at a wholesaler wrote in the survey. A real estate firm official added, "We don't know how to put it in use."

Government Efforts and Investment Trends

A government report this year showed Japan lagging behind other industrial powers in AI adoption. Only 86.4% of local firms are using generative AI for at least one task, compared with China's 98.1%, Germany's 91.6%, and the United States' 90.9%. This gap is significant, as AI is increasingly seen as a key driver of productivity and innovation.

When asked about their AI budgets for the next one to two years, 4% of respondents expect annual growth of 50% or more, while 21% anticipate an increase between 10% and 50%. Another 30% project single-digit expansion. However, 31% have not decided yet, and none plan to reduce their AI spending.

On resource allocation, 82% of respondents favor domestic investment over overseas investment, a preference that aligns with Prime Minister Sanae Takaichi's growth strategy. Takaichi has vowed to boost domestic investment to spur economic growth, emphasizing the importance of supporting local industries and innovation.

Investment Implications

The reluctance of Japanese firms to fully embrace AI could have significant implications for investors. While the government is pushing for increased adoption, the slow pace may limit immediate productivity gains and competitive advantages. Investors should closely monitor how companies are integrating AI into their operations and whether they are making meaningful investments in this area.

Prime Minister Takaichi's focus on domestic investment suggests that firms with strong local presence and those aligned with national priorities may receive additional support. This could create opportunities for investors who align their strategies with these trends. However, the lack of widespread AI adoption also highlights potential risks, as companies falling behind in technology may struggle to remain competitive globally.

While Japanese firms are making some progress in AI adoption, significant challenges remain. Investors should be cautious and look for companies that are actively investing in and integrating AI technologies to stay ahead in a rapidly evolving market landscape.