Japan's AI Renaissance: Corporations Embrace the Future

The Japanese equity market witnessed a remarkable resurgence in the second quarter of this year, fueled by a growing appreciation of corporate reforms and favorable policies. While Artificial Intelligence (AI) played a role, it didn't dominate the market's performance, echoing global trends.

In line with worldwide patterns, AI's impact on Japan's market was most evident in semiconductor stocks. Major players like Tokyo Electron, Renesas, and Advantest saw significant gains, rising between 30% and 60%. However, the overall market also experienced robust growth.

What's particularly striking is the surge of interest and investment in AI, especially generative AI, among Japanese companies in 2023. This may come as a surprise considering Japan's historical lag in digital transformation (DX). However, AI has emerged as a focal point within DX investments, signifying a shifting landscape.

Telecommunications giant NTT is a prime example, actively developing its own large language model (LLM) tailored for the Japanese market, set to launch later this year. Companies like Panasonic have already seamlessly integrated LLMs into their operations. Even in the industrial sector, Machine Learning (ML) and LLM technology investments are starting to reshape business prospects.

Taking a multi-year perspective, in my view, the implementation of AI technology is poised to be a decisive factor distinguishing industry winners from losers. For stock analysts, this shift extends beyond semiconductors. The level of AI readiness and integration within the companies under scrutiny now stands as a critical factor when assessing medium-term earnings prospects.

This Japanese AI surge aligns with the global AI revolution discussed in our previous article, "Riding the AI Wave." Just as companies worldwide are harnessing generative AI's potential, Japan is no exception. Nvidia's prediction that natural language processing (NLP) would become a major AI application has indeed become a reality in Japan.

As we've previously explored, the benefits of generative AI extend across industries. In Japan, this is evident not only in semiconductor stocks but also in diverse sectors, from telecommunications to industrial companies. These developments underscore the broader trend we've observed — AI is not just transforming technology; it's reshaping entire industries and redefining corporate strategies.

In conclusion, the embrace of AI-enabled technology by Japanese companies signifies a pivotal moment in Japan's technological evolution. It is a testament to the global AI wave that continues to shape the landscape of innovation and industry competitiveness. As we navigate this AI-powered future, staying attuned to AI's impact on both local and global scales, in my view, could be essential for investors and businesses alike.

*This article was first published, in Chinese, in the Hong Kong Economic Journal.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. The views expressed in this document should not be taken as a recommendation, advice or forecast. Past performance is not a guide to future performance. We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.