The State of SaaS in Japan 2022-2023
Click here for the The State of SaaS in Japan 2023-2024 version.
SaaS in Japan is a growing market in multiple perspectives. The total addressable market for SaaS is growing. The awareness and adoption of SaaS solutions are growing. The SaaS market in Japan is still very nascent, but it is growing with significant potential, as it is playing catchup today. That being said, there are a limited number of SaaS solutions. For the overall 2024 funding trends, you can look take a look at this post.
Total Addressable Market of SaaS in Japan
According to Fuji Chimera Research Institute, the total addressable market (TAM) for SaaS as of 2020 in Japan is 781.8 billion Japanese yen (roughly $7 billion US dollars). This number is expected to double by 2025 with a CAGR of 13% to reach 1,460.7 billion Japanese yen. This high growth is a result of many things, including a nationwide push for digital transformation and broader acceptance of SaaS solutions to name a few.
Source: 富士キメラ総研「ソフトウェアビジネス新市場 2021年版
Another way of analyzing the potential SaaS market is to compare it to the US market. In the US, 14.9% of IT spending is attributed to SaaS solutions. In Japan, that number sits at 4%. If Japan is able to catch up to the 14.9% mark achieved in the US, that would represent 3.7x of the Japanese SaaS market.
On the modest side, the Japanese SaaS market is expected to double by 2025. On the aggressive side, it is expected to grow by 3.7x. Whichever projection one believes, the Japanese SaaS market is expected to grow significantly in the near future.
Changing Awareness
The awareness of SaaS in Japan is changing significantly. In 2011, 56% of companies either did not understand SaaS products or had no plans to adopt SaaS products. In 2019, this number dropped to 25%. On the other hand, in 2011, only 21% had adopted SaaS products. This number has grown to 68% in 2019. Over the past decade or so, Japanese companies have shifted their mindset of SaaS and have become more and more accepting of it.
Source: 2021 SaaS report (Boxil)
The change in awareness is also reflected by the SaaS spend. In 2019, companies spent 56.1% on packaged software, compared to 43.9% on SaaS solutions. Over 50% of their IT spend is tied to legacy software. This number is rapidly changing. In 2020, the number came in much more even, slightly weighted to SaaS, with 49.5% of spending attributed to packaged software and 50.5% attributed to SaaS. The spending forecast for 2025 is 37% on packaged Software and 63% on SaaS solutions. SaaS is expected to continue to substitute and replace packaged software solutions.
Source: 富士キメラ総研「ソフトウェアビジネス新市場 2021年版
Still Limited Local SaaS Solutions: The Japan Opportunity
Japan is on a great trajectory of SaaS adoption. That being said, there is still a massive opportunity for SaaS solutions looking to enter Japan. The main driver for opportunity is rather simple — There just aren’t that many SaaS solutions in the Japanese market today. The number of SaaS investments in Japan is much lower. In 2019, 156 SaaS companies received VC investments.
Source: 2019 SaaS Report (Entrepedia)
In the US in 2019, there were 3407 investments in SaaS companies. That is over 20x more in terms of number of companies invested.
Source: SVB Bank “State of SaaS: H1 2022 Perspectives on the trends impacting the SaaS ecosystem”
There are many possible reasons that the number of SaaS investments is lacking in Japan. One of the reasons is the lack of entrepreneurs. There are not that many companies to invest in as the number of companies started is significantly lower than the US.
That being said, the Japanese is pushing hard with the Startup Development Five Year Plan to address the lack of entrepreneurs, increase the number of startups being created, and to build a more robust ecosystem.
Though the future is bright for Japan, the current reality is that there are not that many SaaS solutions in Japan – As a result, the SaaS trend in Japan is lagging. For global companies, this is a big opportunity, as there isn’t as much competition. Entering the Japan market should be a real consideration for companies looking to enter a new market. If you’d like to learn more about our approach on Japan entry, please book a call here.
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