Japan should keep a close eye on the European Union’s recent rollout of the Digital Markets Act (DMA). As the results of the EU regulatory experiment unfold over the next year, taking account of the lessons — and downsides — of the DMA could greatly improve Japan’s digital regulatory efforts.
First, the economic backdrop: The latest report from the Tokyo-based Japan Productivity Center, released March 4, confirms that Japan remains mired in a deep productivity slump. The country’s productivity woes extend even to the highly digitized information sector, where productivity since 2019 has fallen at a 1.7% annual rate. By contrast, productivity in the U.S. information sector has risen at an annual rate of 5.2% since 2019, while productivity in the German and French information sectors have risen at an annual rate of only 0.8% and 0.6%, respectively, since 2019.
For Japan and Prime Minister Fumio Kishida, one key policy question is how to get the country’s information sector growing again. The information sector includes telecom companies, software companies, and internet companies, as well as artificial intelligence efforts.
Japan is currently considering enacting a “Digital Antitrust Law,” inspired by the EU DMA. Like the DMA, the proposed Japanese law would create a new set of regulatory obligations for the largest tech companies, addressing potential competitive issues.
But will the proposed digital antitrust law enable faster tech growth in Japan? The first thing to note is that the United States has maintained extremely strong gains in the information sector without passing a DMA-like law. Instead, competition issues are being handled within the framework of existing antitrust law.
By contrast, the EU’s push to impose a new regulatory framework on the information sector, starting with the 2016 General Data Protection Regulation (GDPR) and continuing through to the DMA, seems to have done little to accelerate European tech growth the largest EU economies, like Germany and France, continue to show sub-1% productivity growth in the information sector. Ironically, one bright spot is the EU App Economy, supported by Google’s and Apple’s investments, which showed 53% growth in App Economy jobs since 2019.
Indeed, the DMA’s initial implementation seems to have a bevy of unpleasant side effects. For one, consumers can no longer get to Google Maps directly from Google Search, adding extra clicks and more typing, as European journalists have reported. This is extra problematic for less experienced users, who have lost their “easy-to-use” connection between searching for a store, say, and getting directions to the store.
For another, the DMA mandated changes in search that appear to favor large intermediaries who fall just below the size that would make them “gatekeepers.” A Reuters article observed that:
Lobbying groups representing airlines, hotels, and restaurants on Wednesday warned that changes proposed by Alphabet’s Google to comply with EU landmark rules may drive users to large online search services at their expense.
That is, the new regulations means that Google can’t stop large intermediaries from outbidding direct suppliers for prime online slots. So if a DMA-like law was enacted in Japan, that could hurt small and medium businesses.
Another issue is safety and security, which is a big concern in Japan. The new DMA regulations may require Google and Apple to share consumer information with other companies. While this may “level the playing field,” it may also undermine security for consumers.
The DMA’s impact on app stores also has important implications for Japan if it follows the EU’s regulatory lead. Our recent blog “Europe’s App Store Regulation Experiment” suggests that:
…..alternative app stores pose the danger of a race to the bottom, both for app stores and developers. Security is expensive. Each update or version has to be extensively tested, and the data protections maintained in operation. Developers have an incentive to spend less on security and more on flashy new features. Alternative app stores may have an incentive to be more hospitable to developers who invest less in security.
Japanese regulators have the opportunity to observe the EU’s giant experiment with the DMA. That gives Japanese regulators a chance to see what works and what doesn’t in tech regulation.
