Japan data centres: algorithm, resilience and carbon neutral
July 17, 2024 / By Naoko Iwanaga
In terms of revenue, the Japan data centre market is the second largest among developed countries (MSCI World Index ex. Hong Kong), after the US. It is also the largest market in Asia Pacific, followed by Australia, New Zealand and Singapore (Statista). Looking ahead, market growth is expected to accelerate to 10.8% by 2027. This is largely due to factors including digital transformation which increases demand for cloud services and AI. The industry is expected to take advantage of the growth opportunity and increase its competitiveness with innovation and sustainability.
Japan’s data centre market has steadily developed due to a myriad of advantages including geography (connecting North America, Europe and Asia Pacific), political stability (percentile rank of 86.79 according to the World Bank’s Worldwide Governance Indicators), along with disaster prevention measures. There are also geopolitical advantages as compared with other Asian locations as global uncertainty increases. A rich talent pool (74% of the population enrolling in higher education institutions compared to the OECD average of 57.0%) and wide acceptance of AI also adds to Japan’s attraction as a data centre hub.
At present, over 50% of data centre supply (area) and 98% of internet exchange (IX) access for internet service providerIs are concentrated in Tokyo and Osaka. However, most of clean energy supply is located in other regions in Japan. To address this imbalance and enhance resilience, the government has offered incentives for data centre development outside of Tokyo and Osaka. Adoptions include Softbank and IDC Frontier’s project in Hokkaido, with an initial supply of 10 MW in 2026, followed by an additional supply of up to 300 MW.
In the data centre real estate market, investment yields are falling due to increased investor interest. Investor interest is expected to continue growing as demand for data centres increases driven by digital transformation and technological innovation, which is expected to increase the computing power required in data centres to the next scale from exa (1018) to zetta (1021).
Figure 1: Data centre transaction yields in Greater Tokyo (lowest)
Source: JLL Research
Figure 2: Computing performance forecasts
Source: METI, Preferred Networks, JLL Research
Note: FLOPS (Floating-point Operations Per Second) is a unit of computer processing speed,
the number of operations that can be performed per second. Computational performance of up to
8.5 EFLOPS can be achieved in calculations when using generative AI.
With the increasing importance of ESG considerations and carbon neutral target set at 2040, energy efficiency is a critical issue for data centres with high power consumption. To improve the figure, implementing cutting edge technology and developing carbon baselines and actionable sustainability strategies will be key. In addition, as observed in major platformer players in the US, demand for renewable energy is expected to increase. In fact, Equinix TY15 due for establishment in September 2024, is an AI data centre initially offering 1,200 cabinets and will operate with renewable energy.
Recent increases in development costs, reflecting land prices, construction prices and a tight labour market, have impacted developers’ plans. In some cases, they are reviewing investment plans and re-evaluating strategies. External expertise at the business planning phase is expected to play the important role to enhancing the quality and speed of the business and assisting investors in their decision-making.
The outlook for Japan’s data centre market remains strong, driven by digital transformation and wider adoption of AI. Data centres allows businesses to invest in innovation and green transformation, while at the same time attracting investors seeking sustainable and resilient long-term growth.
