Japan’s digital transformation: risks and opportunities in the data centre market

Japan continues to attract global attention in the data centre space as it is viewed as a relatively safe option when it comes to development. The country’s political stability and reliable electricity supply is appealing to the global investors looking to expand their data centre portfolios in Asia.

Data centre construction costs in Japan have continued to climb over the past year, with our 2023 Data cost centre index ranking Tokyo as the world’s most expensive place to build data centres, up from fourth place in 2022.

Japan benefits from having a large market to cater to, but increased demand, coupled with limited contractor capacity, has led to the sustained uptick in costs we are seeing today.

As the third-largest economy in the world, Japan has a unique set of advantages that attract investors, made only more appealing by the government’s ambitious digital transformation approach to the economy and society. We’ve identified three drivers for investors in the Japanese data centre market.

1. Expanding the reach of data centre server space

Currently more than 85 percent of Japan’s server space lies within the Greater Tokyo or Osaka/Kansai area. The Japanese government has announced subsidies of up to JPY45bn, to be distributed over the next four years. These are to encourage development outside of these key regions.

The subsidy also aims to limit risk in the event of major natural disasters, while also enabling more efficient power distribution (including the incorporation of renewable energy sources) and reducing data traffic.

2. Edge computing and the demand for smaller data centres

Attention is also turning to the development of smart technologies. In an increasingly data-driven world, data traffic is growing exponentially, with a diversification of needs outside of hyperscale cloud computing.

The development of smart technologies, such as the Internet of Things (IoT) in manufacturing and autonomous vehicles, will give rise to heightened demand for smaller data centres across Japan.

This will enable localised edge computing, the range of networks and devices near the end user, to be processed faster and therefore closer to those end users.

3. Embracing innovation through generative artificial intelligence (AI)

With the rise of artificial intelligence being embraced globally, business leaders and policy makers are seeing generative AI as the next big game changer.

The Japanese government is no exception and has established an AI Strategy Council that will respond to the development of generative AI technologies, such as ChatGPT, and consider any potential applications and associated risks. Data centres will be at the heart of this innovation and transformation, enabling the accurate and efficient processing of big data.

Japan’s climbing costs and logistical constraints

While the Japanese market continues to present opportunities for investors, cost escalation, extended lead times and labour shortages are major areas of concern.

The revised Labour Standards Act in Japan will limit the amount of overtime that construction labourers are permitted to undertake, adding to the already existing strains on resource and lead times.

Balancing opportunity and risk in Japan’s data centre construction market can be challenging without local technical expertise and professional networks.

Data centre developers and investors can therefore make informed decisions with the latest market intelligence from project and cost management professionals who have supported global tech giants in optimising returns on investment in data centre assets.

To mitigate risks and safeguard investment, data centre developers and investors will need to develop a robust procurement strategy, optimised for the domestic Japanese market and ongoing project controls to maintain operational transparency throughout their projects.