Japan rebased GDP highlights robust software investment momentum

We have upgraded our outlook for business investment and productivity in Japan following the December transition to 2020 as the base year used to estimate GDP. The new figures show that software investment by SMEs since the 2010s has been much stronger than previously thought.

Software investment actually tripled in the past 25 years – a pace comparable to the Eurozone – instead of staying flat. As a result, the share of intellectual property, including software, in total fixed investment (excluding residential) rose to 33% for H1 2025 from 26%.

We now project business investment to gain by 1.1% annualized over 2025-2030, instead of our previous assumption of a 0.4% gain. Persistent labour shortages and the need for digital transformation will continue to support software investment. And compared to machinery investment, software tends to be immune to policy uncertainty.

The revision also upgraded labour productivity in 2024 by 1.5%, but our updated outlook for labour productivity growth is only marginally higher despite the stronger software investment outlook. Digital technology utilization, for business transformation especially among SMEs, has been and will likely continue to be low due to a shortage of IT-skilled workers.

While the revision shows that software investment has not been as miserable as previously believed, it largely reflects a catch-up in digitalization and labour-saving measures. What’s more, AI adoption rates are still low in Japan and its impact is only likely to be felt later.