Physical AI is emerging as one of the next major industrial battlegrounds, and Japan’s push is driven more by necessity than anything else. As workforces shrink and pressure increases to maintain productivity, companies are increasingly deploying AI-powered robots throughout factories, warehouses, and critical infrastructure.
Japan’s Ministry of Economy, Trade and Industry said in March 2026 that it aims to build a domestic physical AI sector by 2040 and capture 30% of the global market. Japanese manufacturers already have a strong position in industrial robots, accounting for about 70% of the global market by 2022, according to Japan’s Ministry of Economy, Trade and Industry.
Based on conversations with investors and industry executives, TechCrunch examined what’s driving this change, how Japan’s approach differs from the U.S. and China, and where value is likely to emerge as the technology matures.
due to labor shortage
Ro Gupta, managing director at Woven Capital, told TechCrunch that several factors are driving adoption in Japan, including cultural acceptance of robotics, labor shortages due to demographic pressures, and deep industrial strength in the mechatronics and hardware supply chain.
“Physical AI is being purchased as a continuity tool. How can we make factories, warehouses, infrastructure and service operations run with fewer people?” Global Brain General Partner Do Ho-gil also said. “In my view, labor shortage is the main reason.”
Japan’s demographic crunch is accelerating. 2024 marks the 14th consecutive year of population decline. The working-age population only accounts for 59.6% of the total, and this proportion is expected to decline by nearly 15 million over the next 20 years, Doh noted. This is already changing the way businesses operate. A 2024 Reuters/Nikkei survey found that labor shortages were the main driving force driving Japanese companies to adopt AI.
“Drivers have gone from simple efficiency to industrial survival,” Sho Yamanaka, president of Salesforce Ventures, told TechCrunch. “Japan faces physical supply constraints that make it impossible to maintain essential services due to labor shortages. With a declining working-age population, physical AI is an urgent national issue to maintain industry standards and social services.”
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Japan is stepping up efforts to advance automation across manufacturing and logistics, according to Mujin CEO and co-founder Issei Takino. Governments have promoted automation to address structural problems such as labor shortages. Japanese company Mujin has built software that allows industrial robots to handle picking and logistics tasks autonomously. Mujin’s approach focuses on software, particularly robot control platforms, that allow existing hardware to operate more autonomously and efficiently, Takino said.
Hardware strength, system risk
An area in which Japan has historically excelled is the physical component of robotics. Whether these benefits will carry over into the AI era is a more open question. Japan continues to show strength in key robotic components such as actuators, sensors and control systems, while the United States and China are moving faster to develop full-stack systems that integrate hardware, software and data, according to Japanese venture capitalists.
“Japan’s expertise in high-precision components, a critical physical interface between AI and the real world, is a strategic moat,” Yamanaka said. “Controlling these touchpoints can provide a significant competitive advantage in the global supply chain. Our current priority is to deeply integrate AI models with this hardware to accelerate system-level optimization.”
Hardware capabilities are strongest in China and Japan, with Japan being particularly strong in robot motion control, and the United States leading in service layer and market development, Takino said. Historically, many U.S. companies have leveraged their software strengths to build integrated businesses similar to Apple, combining powerful software platforms with high-quality hardware sourced from Asia. But this model may not fully translate to the new world of physical AI, Takino said.
“In robotics, especially physical AI, it is important to have a deep understanding of the physical properties of the hardware,” Takino said. “This requires not only software capabilities but also highly specialized control technologies, which take significant development time and involve high failure costs.”
WHILL, a Tokyo- and San Francisco-based startup that builds autonomous personal mobility vehicles, is taking a broader, full-stack approach to global expansion by leveraging Japan’s “monozukuri,” or craftsmanship heritage, CEO Satoshi Sugie told TechCrunch. The company has developed an integrated platform that combines electric vehicles, onboard sensors, navigation systems and cloud-based fleet management for short-haul and autonomous transport. The company is leveraging both Japan and the United States for development, Sugie said, using Japan to improve hardware and address the needs of an aging population and the United States to accelerate software development and test large-scale commercial models.
From pilot to actual deployment
The government is putting money behind this push. Under Prime Minister Sanae Takaichi, Japan has invested approximately $6.3 billion to strengthen core AI capabilities, advance robotics integration, and support industrial deployment.
The transition from experimentation to real-world deployment is already underway. Industrial automation remains the most developed sector, with Japan installing tens of thousands of robots every year, especially in the automotive sector. New applications are also starting to gain interest, Doh said.
“The signals are simple: deployments paid for by the customer rather than vendor-funded trials, reliable operations across the entire workday, and measurable performance indicators such as uptime, human intervention rates, and productivity impact,” Doh said.
In the logistics field, automated forklifts and warehouse systems are being introduced, and in the facility management field, inspection robots are being used in data centers and industrial sites.
Companies like SoftBank are already putting physical AI into practice, combining vision language models with real-time control systems to enable robots to interpret their environment and execute complex tasks autonomously.
In the defense sector, where autonomous systems are the foundation, competitiveness depends not only on the platform but also on operational intelligence powered by physical AI, Terra Drone CEO Toru Tokushige told TechCrunch. Tokushige added that Terra Drone is working to combine operational data with AI to enable autonomous systems to operate reliably in real-world environments and support the development of Japan’s defense infrastructure.
Investments are moving beyond hardware, with companies allocating more capital to orchestration software, digital twins, simulation tools and integration platforms, according to investors and industry sources.
The rise of hybrid ecosystems
Japan’s physical AI ecosystem is also evolving in a different way from the traditional technological innovation model. Rather than a winner-take-all dynamic, industry participants expect a hybrid model where established companies provide scale and stability and startups drive innovation in software and systems design.
Large incumbents, including Toyota Motor Corporation, Mitsubishi Electric, and Honda Motor, maintain significant advantages in manufacturing scale, customer relationships, and distribution capabilities. However, startups are playing a significant role in new areas such as orchestration software, recognition systems, and workflow automation.
“The relationship between startups and established companies is a complementary ecosystem,” Yamanaka said. “Robotics requires massive hardware development, deep operational know-how, and significant capital expenditures. By fusing the vast assets and domain expertise of large corporations with the disruptive innovation of startups, we can strengthen the global competitiveness of the entire industry.”
Terra Drone’s CEO said Japan’s defense ecosystem is also transitioning from dominance by large corporations to greater cooperation with startups. While large corporations remain focused on platforms, scale, and integration, startups are driving the development of smaller systems, software, and operations, with speed and adaptability becoming key competitive factors.
Companies like Mujin are developing platforms that sit on top of hardware, enabling multi-vendor automation and faster deployment across industries. Other companies, including Terra Drone, are applying similar approaches to autonomous systems, combining AI and operational data to power real-world applications at scale.
“The most defensible value lies with those who own deployment, integration and continuous improvement,” Doh said.
