My take on Tokyo's surging startup scene and Japan's boom for Rest of World
A couple of weeks after I wrote this story for Rest of World, the Tokyo Stock Exchange hit a 33-year high. Credit my editor.
Sho Hayashi might be a walking cliche in San Francisco or Austin. The 33-year-old founder, with two successful startups and a string of degrees to his name, met me in a light-filled coworking space before flying overseas for a weekend of meetings.
But here in Japan, Hayashi is a new breed of revolutionary. A graduate of the elite University of Tokyo, his standard path would have been to settle into a lifetime job — perhaps as an international diplomat, or at a time-tested corporate empire like Mitsubishi. When he attended a massive startup conference in Singapore in 2010 and realized Japan didn’t have a single representative, he asked to become one and found a new calling: entrepreneurship.
“I realized that diplomats don’t create anything; they just negotiate based on what’s there,” Hayashi said. “I wanted to create. It changed my life.”
Japan is the third-richest nation in the world but has only managed to produce some 10 unicorns. (Compare that to over 600 unicorns in the U.S. and more than 300 in China.) Its tech startup scene been held back for years by siloed and intransigent corporate leaders and an aging, risk-averse populace whose fear of innovation turned a once-futuristic nation into a digital backwater.
Since the pandemic, more people like Hayashi have been straying from routine, and their choices are being validated by record amounts of funding flowing into tech startups, new city government initiatives that support fledgling entrepreneurs, and a spate of juicy tax breaks. Combined with the behavioral circuit-breaker of Covid-19, these initiatives may be seminal: Japan’s tech scene is, perhaps, finally beginning to free itself from decades of inertia.
“It’s a total mindset shift,” said Kenta Iwata, 28, a community manager at the cross-disciplinary project Shibuya QWS (pronounced “cues”). Launched in late 2019 by railways-to-real-estate giant Tokyu Group, QWS is a radical concept in Japan: a corporate-backed space connecting employees across major companies and institutions. QWS staff like Iwata help foster those connections and get people talking.
“Fifty years ago, Japan was number one in growth, so you could have a steady life doing one job,” he said. “But having one job means meeting people only from your own company. What we provide is serendipity, a place where like-minded employees might create a new company. QWS wouldn’t have existed even five years ago.”
The pandemic helped accelerate that shift, according to Hayashi. “It’s not unusual now for people to quit their jobs and join a startup,” he said. “During the pandemic, [people] began thinking about how they really want to work, starting side projects or taking two or more jobs, even mid-career. Things opened up.”
In the vast, open-air loft surrounding us, things are bustling. Young Japanese people chat and giggle as they pass, some taking seats to mingle at long blonde-wood tables. Smartphones chime and keyboards click as the savory aroma of Japanese curry wafts down from the communal kitchen on the second floor.
Japan’s tech startup scene has long been a victim of a kind of lukewarm comfort. Five years ago, I spoke to the late Asia scholar Ezra Vogel, author of the economic bubble-era bestseller Japan As Number One: Lessons for America. He told me that while his Chinese friends were bullish on their economy and overseas plans, his friends in Japan dreaded their bland prospects — yet they preferred to stay home. A job for life, however stultifying, was better than uncertainty. “Japan has become a very comfortable place to live,” Vogel surmised. “Maybe too comfortable.”
After 2018, funding and pragmatic, startup-friendly announcements began to mount. City government-financed initiatives, such as Shibuya Startup Support and CityTech Tokyo, have helped founders gain access to the local resources they need to launch companies. The Shibuya government has been particularly active, launching a startup visa to lure overseas entrepreneurs and forging partnerships with innovation consultants like Egg Forward.
A tweak to the government’s Pension Investment Fund incentives led to public money flowing to venture capital firms, which drove a record amount of funding into mostly tech startups in 2022. That was the same year investments in the U.S. and Europe dropped by 30% and 16% respectively. Coupled with tax breaks, including one for corporations seeking to acquire startups, these projects make Japan’s current surge feel more solid.
(Ambitious yet less-defined government initiatives — like the national Digital Agency and Prime Minister Fumio Kishida’s pledge to increase tech startups tenfold in five years — have been eyed with some skepticism by the industry.)
Chinese-born, U.S.-raised Yan Fan, who worked as a software engineer in Silicon Valley, moved to Japan six years ago and co-founded Code Chrysalis, a coding boot camp for mostly corporate clients. Code Chrysalis is aimed at filling Japan’s shortfall in engineers, something that has both slowed software development and forced Japan to import developer talent.
When she relocated, Fan had no delusions about Japan’s limited opportunities for entrepreneurial growth. “I told everyone to at least start their careers in the U.S. so they can learn how to fail,” she said. “There’s no tolerance for failure here.”
But recent developments have her feeling more sanguine. Mergers and acquisitions around tech have been increasing, she pointed out, and graduates from Japan’s top universities are embracing jobs at startups. It has become trendy to join Google, Netflix, and Facebook, even if those brands might mean little to their parents. Code Chrysalis now occupies an office in Tokyo’s tony Motoazabu district, and boasts a technical team that is 50% female and 9% non-binary.
“There’s a big generational thing happening in Japan,” said Fan. “But you have to find the right balance between old Japan and the new Japan emerging.”
Post pandemic, she said, there’s been an increase in demand from large corporations for generalized coding skills. “‘DX,’ ‘reskilling,’ ‘agile’ are all huge buzzwords … Every major Japanese company is exploring what they need to do and has the cash to do it.” The startup’s client list currently includes Nomura Research Institute, and the country’s first unicorn: e-commerce site Mercari.
Historically, foreign pressures, or gaiatsu, have forced change in Japan. These days, there is plenty of pressure coming from inside the country. The unmitigated spiral of its declining population has already resulted in a severe labor shortage. Estimates say that by 2050, Japan’s population will have dropped from around 125 million in 2023 to just 97 million. Then there’s the anemic state of Japan’s digital infrastructure, which was exposed during the pandemic’s peak with the slow and lackluster snail mail-based vaccine campaign and the requirement for reams of paperwork in order to enter the country.
Tomonori Iida describes that moment as a reckoning for Japan. He heads a program aimed at teaching older Japanese employees digital skills, partly run by Benesse Corporation — a name perhaps best-known outside Japan for its innovative, art-driven reinvention of Naoshima Island.
“I think Covid[-19] made us realize how vulnerable we were without digitization. A lot of things just stopped or stalled,” said Iida. “This was a wake-up call for us, forcing government and corporate leaders to spring into action.”
Japan’s tech scene finally has some momentum, an energy that feels palpable. But is it really on the verge of producing something new for the rest of the world?
According to international finance lawyer Yuki Shirato, who has also been an angel investor and served on the board of several startups, the biggest changes in Japan’s tech scene may take five to six years. That’s a lifetime in Silicon Valley, but a rapid clip in centuries-old Japan. “The language and mental barriers, the resistance to taking risks — that will take time to overcome,” he said.
Japanese tech startups will likely have different values and goals, he added, along with a greater focus on innovation in areas like fintech, biotech, and health care. There will also be a bigger push towards the development of more pragmatic, hardware-contingent products, such as smart devices.
Japan’s high quality of life is also not lost on local and foreign entrepreneurs — some of whom are questioning the wisdom of moving fast and breaking things in a world now breaking apart.
Shirato recounted the story of an American friend, a founder based in Tokyo, whose son recently suffered a life-threatening injury. In the U.S., he said, the cost of the son’s treatment would have exceeded one million dollars and bankrupted his friend’s company. “That’s just not part of our culture.”
Hayashi would agree. “It’s about priorities, I guess,” he told me, minutes before hailing an Uber for the airport. “If your only goal is to maximize financial gains, it’s probably wiser to work for higher wages abroad. But Japan is a place where society gives, and you can give something back.”
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