Japan, the emerging Mecca of digital innovation: Hashed’s take on Web3 opportunities
Disclosure: Hashed has established, maintained, and enforced strict internal policies and procedures designed to identify and effectively manage conflicts of interest related to its investment activities. This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Furthermore, references to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services.
Introduction
A distinct pattern has emerged in the realm of the Web3 industry. This sector, much like its software-oriented counterparts, had for the longest time been under the aegis of Western influence with the US holding the reins. However, winds of change have begun to blow, driven by recent developments on the American front coupled with ambiguous regulatory postures, possibly pivoting the axis back towards Asia. This swing is reminiscent of a comparable shift we observed in years past.
We are witnessing this evolving landscape as well. Recent times have been marked by a surge in the Japanese market, a region that until now had remained relatively quiet. We have been noticing an upswing in investments flowing into companies that either operate within Japan or consider it a significant part of their global strategy. An equally notable trend is the existing portfolios of Hashed, who are discerning a shift in market sentiment and are weighing up the prospects of making an entry into this burgeoning market.
This spike in activity around the Japanese market prompted us at Hashed to delve deeper. We felt the need to analyze this market with a fine-toothed comb, to formulate an informed hypothesis and subsequently a strategic plan as a fund. It was this train of thought that led us to undertake a firsthand observation of the market, and luckily I was invited to speak at IVS Crypto 2023, anticipated to be one of the largest annual crypto events to be held in Japan.
This visit allowed us to engage directly with Japanese projects that we have invested recently, and also to meet with portfolio families already operating in Japan to acquire a current perspective on the local landscape. It was also a chance to identify potential collaborators and local investors with whom our portfolio companies at Hashed might forge meaningful relationships. We had the privilege of meeting with government officials, leading companies and funds, as well as major L1 projects in Japan, providing us with a comprehensive and insightful view of the overall Japanese market.
From a long dark age to government-led growth
The Japanese market, in its nascent stages, was one of the first to experience a boom, much before the lexicon had even acquainted itself with the term “Web3” and prior to the establishment of a robust ecosystem. Shibuya served as the cradle to Mt. Gox, which rose to become the world’s largest centralized exchange once in the past. This prominence, however, came with a hefty price as the country bore the brunt of one of the most devastating crashes, the $500 million Mt. Gox hack, an incident that carved a deep scar on the Japanese market.
The trials didn’t end there. In the period spanning 2017–18, the Initial Coin Offering (ICO) boom lured a multitude of retail investors into the crypto world. Japan was amongst the quickest nations globally to institutionalize the crypto industry. Expectations were high, but these hopes were quickly shattered when CoinCheck, one of the country’s largest centralized exchanges, fell prey to a hack even larger than the Mt. Gox incident, costing over $500 million. The aftermath of this hack saw Japan grappling with some of the highest regulatory barriers. Then came the period of 2020–22. This phase was characterized by a bloom of new Web3 applications primarily centered around Ethereum. However, this flourishing trend had no parallel in Japan.
Despite the trials, there lies a silver lining in every cloud. A series of incidents jolted the Web3 industry in 2022, but Japan did not suffer from major damage because its activities were limited by the hectic regulations already in place. The enforced regulatory measures offered Japan a respite and a chance to step back and assess the failures wrought by inadequate risk management. In the second half of the previous year, while many started retracting from the Web3 industry as a reaction to the onset of a downturn, the Japanese government began bolstering its initiatives towards Web3 once again. Key measures included the approval of the Web3 Whitepaper and the establishment of a dedicated Web 3.0 Policy Office, heralding a new chapter in the country’s embrace of the Web3 industry.
Why the Web3 industry development strategy emerged
One might wonder why Japan has committed to placing the Web3 industry at the very heart of its national industrial agenda. For more than three decades, colloquially referred to as ‘The Lost 30 Years’, Japan remained in the shadows while other developed nations rode the crest of the Internet and mobile waves. Japan’s considerable domestic market size meant that many entrepreneurs didn’t feel compelled to venture into global markets. Furthermore, the vast liquidity of the Japanese stock market allowed businesses to go public with valuations in tens of billions of yen without having to demonstrate extraordinary growth, often leading to exits of smaller scale.
This unique trajectory has resulted in Japan’s entrepreneurial ecosystem following a path distinct from the American software startup landscape, characterized by a J-curve and significant venture funding to dominate entire vertical industries via a so-called platform strategy. However, the narrative began to shift following the cabinet reshuffle under Prime Minister Kishida. The Japanese government rolled out an aggressive support policy, aspiring to increase the number of startups tenfold to 100,000 within a span of 5 years and to invest 10 trillion yen to foster 100 unicorns. This development has kindled expectations of a progressively active Japanese startup ecosystem.
As one of the highly developed nations that missed the opportunities in Web2, Japan has been steadily transforming its image into an attractive market. Prime Minister Kishida has recently indicated Japan’s ambition to spearhead the Web3 industry by delivering keynote speeches at Web3-focused events such as IVS Crypto (and WebX Japan scheduled in July as well). His remarks about rejuvenating the cryptocurrency market to stimulate the domestic economy have also drawn significant attention. There is ample reason to believe that a large portion of the policy support and entrepreneurship will revolve around the Web3 industry, the future generation of the Internet.
Japan’s alignment with the Web3 industry can be attributed to a few other reasons as well. Being one of the most appealing reserve currency alternatives to USD puts Japan in a favorable position with regard to stablecoins, which are becoming a pivotal part of the Web3 ecosystem. The prospect of utilizing the stablecoin infrastructure to enable Japan’s traditionally robust content industry to thrive on a global scale will be an attractive proposition.
Given this harmonization of interests, the Japanese government has lately signaled a policy shift, alleviating cryptocurrency listings and readjusting tax rates for both individuals and corporations. The recent measures undertaken by the Japanese government are regarded as some of the boldest steps taken worldwide, with the ruling party directly participating in the Whitepaper development and bringing forth far more concrete proposals than most other nations. Additionally, it appears that Japan is keen on implementing a proactive legal framework for NFTs, a stark contrast to the recently passed EU’s Markets in Crypto-Assets Regulation (MiCA), which lacked deep discourse on NFTs.
Understanding the Japanese Web3 Consumer
Japan boasts a consumer base that traditionally aligns favorably with industries that constitute substantial verticals of the Web3 industry, namely gaming and anime. If we look beyond the shores of the US, Japan stands tall as the largest gaming market, an accolade that holds true even when considering the Western world. The appetite for other forms of content, such as anime, is also substantial. The Japanese market not only has content consumption deeply ingrained into its cultural fabric but also presents an alluring prospect with significantly high unit prices, particularly when compared to regions with a large user base of crypto games like Southeast Asia.
The influence that Japanese investors exert within the industry is also quite striking. Cryptocurrencies such as Ripple (XRP) and Cardano (ADA) enjoy immense popularity amongst Japanese retail investors, and these cryptocurrencies rank among the Top 10 projects in terms of market capitalization as per CoinMarketCap. Cryptocurrency adoption within the country is still relatively nascent, with merely about 2% of the population having ever owned cryptocurrencies, but the outlook appears optimistic.
In light of these considerations, Japan has increasingly become a popular choice for global Web3 corporations seeking to expand their operations in Asia. Merely a year or two ago, companies would have primarily earmarked cities like Seoul, Singapore, or Hong Kong when considering potential locations for an Asian headquarters. However, Japan’s robust domestic market coupled with substantial government support is gradually influencing global Web3 projects to prioritize Japan. Among the companies in which Hashed has invested, the decentralized derivatives exchange dYdX, asset management and brokerage services company Hyperithm, and metaverse platform The Sandbox, have already established teams in Japan and are actively exploring the market.
Formation of the Web3 industry: Development centered on IP and financial industries
What then are the defining traits of the projects taking shape in Japan? From our on-ground visits and preliminary research, it appears that the Japanese projects are largely in line with the established formula of the global Web3 industry, with considerable overlap among live businesses. Numerous companies are diligently working towards lowering the Web3 entry barriers through non-custodial wallets for novice users, characterized by enhanced UX. Meanwhile, businesses related to exchanges, once a thriving segment, are witnessing renewed interest with increasing numbers securing exchange licenses. Some have expansion strategy with some choosing to extend their operations to NFT exchanges as necessary.
There exist several active industries mirroring global trends, but a handful that display unique potential for growth within the Japanese context deserve special mention. Foremost among these is the content industry as mentioned, primarily driven by the IP, gaming, and anime sectors that we briefly touched upon earlier. In fact, we observed a multitude of content-centric companies announcing an array of new projects during IVS Crypto, and a significant portion of our recent investments in the Japanese market has been directed towards content companies as well.
From the onset of the internet industry, Japan has been a prolific creator of enduring IPs, continually repurposing them in line with evolving business rules. During the growth of the mobile industry over the past decade, the most successful games were the likes of Dragon Ball and Dragon Quest. Their success was built not on the creation of new IPs but on the strategic integration of existing IPs into new devices. We envisage that this approach will hold merit in the Web3 content industry, including crypto games. The recent surge in the NFT and metaverse market has seen businesses leveraging time-honored IP to experiment with Web3-aligned concepts such as animated NFTs and VTubers.
While startups may find it challenging to operate a business directly in this realm, and hence it may not be an immediate investment priority, it is worth noting the increasing discussions around stablecoin and Security Token Offering (STO) sectors. For instance, Mitsubishi UFJ Financial Group (MUFG), Japan’s premier banking entity, recently unveiled Progmat Coin, a solution facilitating the issuance of stablecoins while also supporting token securities and utility tokens. Concurrently, SBI Securities is adopting a forward-leaning stance in technology incorporation, issuing its bonds and subsidiary common shares as tokenized securities.
Characteristics of Japanese founders and company culture
Having touched upon policy transformations and market conditions within Japan, we now shift our attention to the ecosystem participants we engaged with during our visit. To start with, there is an unmistakable “otaku” mindset among Japanese founders. The heavily funded market such as Web3 demands a high degree of authenticity and perseverance to sustain business operations over a long duration. I was left deeply impressed by the profound passion exhibited by Japanese founders across a diverse array of fields, ranging from VTuber and anime projects to pioneers in the metaverse and DeFi projects.
A critical factor in understanding Japanese founders lies in the gap between local and global founders, a consequence of the potent domestic market as mentioned earlier. The relative ease of listing companies diminishes the necessity for business expansion beyond national boundaries, resulting in local founders not pursuing much aggressive global operations. Language barriers on the global stage further contribute to this trend as many other asian countries.
In contrast, global founders, particularly in the Web3 sector, exhibit distinct characteristics. Regulatory barriers and adverse policies amplified post the 2018 hacking of centralized exchanges, compelled many Web3 project founders to seek friendlier shores overseas, typically in Singapore or Dubai. These countries are also the preferred destinations for entrepreneurs from Asian countries that have recently tightened crypto regulations in general.
Actively seeking investment opportunities in Japan necessitates a thorough understanding not only of the overall entrepreneurial culture but also of the specific culture within the Web3 industry. A major characteristic of the Japanese Web3 industry is the legacy of an outsourcing culture inherited from traditional sectors. Rather than striving to be a full-stack company with expertise across all business aspects, companies tend to specialize in one area and establish collaborative partnerships to address the remaining business facets.
For instance, in Japan, gaming companies are more inclined to partner with established Layer 1 projects like Oasys, instead of developing their own mainnets as observed in South Korea. The Web2.5 Hub-Verse structure of Oasys can be viewed as an architectural embodiment of this partnership culture. Even projects like XPLA, possessing their own mainnets, have embraced Oasys as a mainnet partner within the Japanese market. This scenario is indicative of an industry operating based on a division of labor system.
One aspect of the Japanese corporate culture that struck me as unfortunate is its discrepancy with the evolving nature of the Web3 industry. The existing corporation-centric mindset and inertia result in a scarcity of bottom-up projects. A glance at the top 50 projects by market capitalization on CoinMarketCap reveals a plethora of bottom-up style of startup projects. This observation leads one to ponder whether Japan will see a surge in such projects in the future. My takeaway is that an explosive growth of the Japanese Web3 industry, backed by capital support, would necessitate the emergence of leaders imbued with an entrepreneurial spirit.
Where is the capital flowing in the Japanese Web3 market?
During my visit to Japan, I had the opportunity to engage with several Japan-based funds that are enthusiastically investing in both domestic and international projects. If we consider the Web2 market in isolation, the Japanese startup landscape has traditionally been less appealing to international investors. Global VCs typically inject capital after the early rounds, which are generally financed by local VCs. The early Initial Public Offering (IPO) environment in Japan was not structurally conducive for global VCs to enter, and thus, the Japanese startup ecosystem was primarily financed by local VCs.
When we turn our attention to the Web3 ecosystem, the number of global VCs actively investing in the Japanese market is still limited. So, what is the level of activity of local VCs in this domain? Among local VCs, only a few are fully dedicated to Web3. The majority follow a strategy of allocating a certain percentage (10–20%) of their funds to Web3 investments. Furthermore, by global VC standards, both the fund size and ticket size offered by these local VCs tend to be relatively small in nature.
On the whole, the more substantial financial influx seems to originate from traditional corporations, including banks, telecom companies, and commercial enterprises, in much bigger size than local VCs. A standout instance is the announcement by NTT Docomo, Japan’s largest telecommunications company, of its intention to invest ¥600 billion (approximately $4 billion) into Web3 infrastructure. In the meanwhile, SBI Holdings is making active strides into the Web3 ecosystem, launching a $50 million fund called Decima, in partnership with gumi, MZ Cryptos, and Animoca Brands. Similarly, Mitsui is planning a joint venture in collaboration with Animoca Brands.
Investment prospects for the Japanese market and Hashed’s thoughts on it
Given Japan’s substantial domestic market and the government’s vigorous support for the Web3 sector, ample opportunities for investment present themselves. And there are even more huge potential especially in content-centric applications — a domain where Hashed demonstrates significant strength. In the Web2 industry, numerous Korean firms have made successful inroads into the Japanese market. Therefore, even if it does not involve direct investment, it is of strategic interest to us as ecosystem participants to actively nurture the burgeoning Web3 industry in Asia.
For industries such as social, entertainment, and gaming, the past decade has seen numerous companies experience substantial growth in South Korea, subsequently achieving global reach after establishing a solid foothold in both South Korea and Japan. LINE, for instance, although it didn’t secure the top position in South Korea, claimed the prime spot in Japan, expanded into Southeast Asia, and eventually rose to the top in Thailand as well. In the entertainment industry, idol groups from both nations, including JYP Entertainment’s TWICE, have enjoyed success in both countries and have even ventured into the global market.
Particularly in the IP industry, the value chain between Japan and South Korea is increasingly becoming intertwined. There are instances where Japanese IPs such as <The Seven Deadly Sins> have been adapted by Korean game companies to achieve remarkable global success, and conversely, Korean IPs like <Solo Leveling> have seen global success and have been adapted into animations in Japan.
While Korean firms are emerging as key partners for Japan, recognizing this trend and approaching Japan as an attractive early-stage investment market are different propositions. If we consider solely the IP domain, opportunities for startups could be limited, as business development is likely to be pursued via collaboration between larger corporations. Hence, the future will demand exploration beyond mere collaboration around existing IP.
Independent of the industry, Japan emerges as a market worthy of early-stage investment consideration. As previously mentioned, the government’s keen interest in nurturing startups and supportive policies provide a significant opportunity for the Web3 industry. However, beyond the seed stage, the number of local funds actively investing in the Web3 market is quite limited. Furthermore, Western-based funds specializing in Web3 have yet to display signs of entering the Japanese market. This is reminiscent of the situation in the Korean venture market prior to the growth of Korean Web2 companies.
In this context, a strategy that permits global funds — those capable of executing investments until the post-seed stage and with a deep understanding of the Japanese market — to invest in attractive ventures backed by local funds could be effective. If a Japanese Web3 company can mature into a global startup, the investments waiting in a relatively depressed market could become an appealing investment as investors start to recognize the potential of the Japanese market. The main challenge lies in demonstrating that Japanese projects have competence in the global market.
Conclusion
In light of recent trends and development, Japan is gradually emerging as a pivotal player in the Web3 landscape. Despite experiencing setbacks in the past, the nation’s resilience and adaptability have fostered a favorable environment for Web3 evolution, spurred on by supportive governmental initiatives and strategic growth plans.
The country’s vast domestic consumer base, combined with their cultural affinity towards industries like gaming and anime, is uniquely suited to the verticals of the Web3 industry. Additionally, Japan’s standing as an alternative reserve currency to USD lends it an added advantage, especially in the context of the burgeoning stablecoin ecosystem within Web3.
In spite of cultural nuances posing certain challenges, the tenacity and dedication of Japanese founders have the potential to navigate these hurdles and drive innovation in the sector. Notably, corporate heavyweights and traditional entities within Japan have also begun to exhibit a keen interest in the Web3 landscape, adding to the momentum of the industry.
At Hashed, we recognize the synergies between our strengths in content-centric applications and Japan’s flourishing sectors like IP, gaming, and anime. We aim to contribute to the growth of the Asian Web3 industry not just through direct investment, but also by fostering strategic collaborations. Despite the inherent complexities, we maintain a bullish outlook on Japan’s role in the global Web3 market, provided there is a demonstrated ability for Japanese projects to scale globally. As the dynamics of the sector continue to unfold, Japan’s growing prominence is undeniable.
Special thanks to Dan Park, Wooster Han, and Nathan Lee for reviewing this post.
** We’d love to hear more from the founders and next generation leaders of Japan’s Web3 industry, so please feel free to reach out to us at contact@hashed.com.
