Deriving healthy returns from Japan’s healthcare innovation

Faced with demographic decline, Japan is rewriting the script on healthcare resilience and exportable innovation.

The declining demographic landscape of Japan has implications for both the national government and the healthcare industry. Specifically for the former, it has raised health-related expenditure significantly over time.

Beyond fiscal pressures, the healthcare industry faces a dual challenge: a growing demand for caregivers amid a shrinking share of young workforce, and the urgent need for medical technologies to compensate for the limited availability of human labour.

Graph 1 shows the start of the decline in the number of working-age citizens, and this coincides with an increase in medical patent applications. If Japan plays its cards right, this critical crossroads will position the country to lead in medical technology and labour policy innovation.

To plug these gaps, Japan’s healthcare system is transitioning into a digitally integrated model focused on enhancing drug development, diagnostics, and patient care. Renowned for its efficient universal healthcare and high life expectancy, the country is now investing in digital infrastructure to maintain and augment its traditional system through a data-driven scheme. Private companies are leading the charge with technological advancements at a rapid pace, supporting economic growth.

Breaking past health shocks

Japan’s transformation into a medtech and healthcare innovation hub is not only fuelled by necessity: it also awakens foreign investor interest. The global COVID-19 crisis accelerated international interest in Japan’s precision instruments, diagnostic tools, and elderly care technologies.

Graph 2 illustrates the spike in foreign direct investments (FDI) towards the chemicals and pharmaceuticals sector in 2021, which was the height of the pandemic. During this period, the sector accounted for nearly 90 per cent of manufacturing FDI and 40 per cent of total inward FDI. The year 2023 marked a modest rebound following a sharp post-pandemic decline while investments in the electrical machinery segment – Japan’s top FDI recipient – recovered. These trends underline the importance of tracking global events, regulatory shifts, and policy signals that influence investment flows into healthcare.

The pandemic ushered in significant shifts in healthcare delivery, with over 10 per cent of healthcare providers adopting telemedicine service channels as the use of artificial intelligence (AI) gained popularity.

One standout case is Ubie’s AI-medical interview system developed in 2017. During the pandemic, it supported over 600,000 monthly users in Japan by automating patient interviews, preparing clinical notes, and suggesting potential diagnoses to physicians. As a result, it saved physicians more than 1,000 overtime hours and slashed administrative workload by a third. Additionally, its expansion into the US market brought in a user base of over 4 million between 2022 and 2024, drawing investment from Google. From 2021 to 2024, it is estimated to have added JPY 150 billion (USD 1 billion) in economic value and improved overall health outcomes, including life expectancy.

Moreover, Japan’s edge in robotics is reshaping surgical procedures such as those for prostate cancer and urological diseases. These innovations reinforce Japan’s position as a global pioneer in digital health and medtech advancement. Entrepreneurial physicians are also reshaping the system from within – cancer detection, flu diagnosis, and rapid heart disease diagnostic tools are some applications. By contributing directly to the development of diagnostic and therapeutic AI tools, they are helping advance clinical technologies that could push the domestic medical AI market beyond USD 110 million by 2027.

Innovation-friendly ecosystem

Japan’s government has played a proactive role in facilitating these changes with strategic roadmaps for regenerative medicine and digital health integration. Policy frameworks such as the Healthcare Policy 2020, alongside adjustments to reimbursement models, are designed to reward medical innovation and reduce regulatory delays. Another framework is a fast-tracked approval system – Japan’s equivalent of the US FDA Breakthrough Therapy designation – called Sakigake Designation that expedites regulatory review for novel drugs for serious medical conditions. Other initiatives include a forthcoming 10-year fund to support pharmaceutical start-ups, increased research and development budget through the Japan Agency for Medical Research and Development, and updated regulations on telemedicine practices.

Public-private partnerships are foundational to Japan’s healthcare transformation. Universities, public labs, and private firms are collaborating on AI-based drug discovery, remote diagnostics, and biotechnological platforms.

At Lundgreen’s, our outlook for Japan’s digital health sector remains positive. Venture capital investments in Japanese health startups have increased, especially in domains like mental health platforms, AI-powered diagnostics, and wearable health trackers. We are upbeat about the viability of investments towards this space, supported by the fact that Japan is a global innovation leader and is faced with the need to meet an ever-growing demand of its population for accessible and responsive health interventions.

Further, the growing penetration of AI in Japan’s health industry is projected to reach JPY 15 billion (USD 101 million) in 2025, including applications in AI drug discovery systems, sales support automation for pharmaceutical firms, and diagnosis support. More broadly, Japan’s health tech market is forecasted to reach nearly JPY 996.5 billion (USD 6.7 billion), driven primarily by innovations in diagnostic and therapeutic mechanisms.

Yet, challenges remain. While available digital infrastructure is expanding, adoption remains low. Resistance to AI use in clinical practice is widespread, partly due to limited insurance coverage for AI-enabled treatments in Japan. Nearly 80 per cent of medical institutions has yet to adopt any AI tools as of 2023. Further, regulatory complexity remains a barrier for smaller players lacking the financial and legal capacity to navigate Japan’s stringent compliance environment. Bridging these gaps will be critical to ensuring equitable access to innovation nationwide and supporting the growth of this rapidly expanding industry.

Nonetheless, Japan is steadily advancing its position as a leader in global healthcare innovation. From AI-driven diagnostics and robotic surgeries to genomic research and cloud-based platforms, the country offers a model for aging societies worldwide. The interplay between demographic urgency, technological expertise, and robust policy backing is transforming healthcare into both a domestic necessity for the elderly and an investment opportunity for foreign investors.

This original article has been produced in-house for Lundgreen’s Investor Insights by on-the-ground contributors of the region. The insight provided is informed with accurate data from reliable sources and has gone through various processes to ensure that the information upholds the integrity and values of the Lundgreen’s brand.