Will Japan see a Renaissance in the semiconductor race?
Semiconductors are indispensable to modern life for aiding advancements in finance, telecommunications, and healthcare, among others. These are crucial components of most devices that make modern life comfortable, including mobile phones and vehicles. As the fourth most traded good overall, the global semiconductor industry is estimated to be worth USD 611 billion and projected to go beyond USD 1 trillion by 2030.
Although the US is said to have pioneered the use of semiconductors, it now features a sophisticated value chain that is dominated by a handful of countries such as Taiwan, South Korea, China, Germany, and Japan. However, having few major players makes the industry susceptible to supply disruptions. For instance, the COVID-19 pandemic caused a chips supply shortage that led to USD 60 billion in losses for carmakers in 2021. This vulnerability to shocks underscores Japan’s new view that semiconductor security is paramount to overall economic security.
Once a frontrunner
Historically, Japan was a semiconductor powerhouse that challenged US dominance between 1970-1980. By 1988, Japan commanded a 51 per cent market share in semiconductor production, an increase of over 20 per cent from the early 1970s driven by substantial government support and rising domestic demand for consumer electronics. The then-Ministry of International Trade and Industry provided interest-free loans and increased funding for product research and development (R&D) from a share of 2 per cent in 1970 to 26 per cent of total R&D expenditure by 1977.
Despite this promising start, Japan’s market share has waned to about 10 per cent between the 1990s and has since fallen behind new giants like Taiwan and South Korea. This decline is partly attributable to the 1986 US-Japan semiconductor trade agreement that required Tokyo to allow foreign firms to gain a 20 per cent market access after Washington accused Japan of exporting artificially cheap semiconductor products. Moreover, the resistance of Japanese firms to specialize in chip production, such as separating chip design from manufacturing, further diluted its foothold in the global supply chain. Despite its decline, Japan still leads in the supply of semiconductor materials and equipment. As seen in Graph 1, the country accounted for 30 per cent of global semiconductor exports from 2014-2018.
The semiconductor value chain is highly specialized and complex, making it inherently difficult for one country to secure an absolute advantage throughout the chain. For example, Taiwan and Korea, despite their advancements in the industry, are only dominant in the front-end manufacturing phase. The US plays a major role in the product design phase while China dominates back-end manufacturing, giving it an edge in semiconductor-based technological goods exports as seen in Graph 2. China’s recent growth trajectory makes it one of the highest importers of semiconductors and the largest exporters of semiconductor-based devices.
Shifting the goalpost
Today, Japan realizes the strategic importance of the semiconductor industry and aims to revive it despite the intensified US tariff war and geopolitical tensions in the region. Following the increasing relevance of semiconductors for national security, meeting demand for consumer electronics, aiding public transport, supporting an ageing society, and avoiding of another natural disaster-led disruption in the semiconductor value chain, the Japanese government has initiated massive funding plans as well as strategic partnerships to boost investments into the sector.
The Japanese government has allotted JPY 4 trillion (USD 26.7 billion) to semiconductor projects, with plans to mobilize JPY 10 trillion (USD 67 billion) in public and private investments over the next decade. Targeted investment has increased to JPY 50 trillion over the next decade. Other initiatives include the Green Innovation Fund worth JPY 2 trillion (USD 13.3 billion) for sustainable technologies and the post-5G fund worth JPY 200 billion (USD 13.3 million) to develop next-generation communications chips. These financial commitments are expected to generate returns of JPY 160 trillion (USD 1 trillion).
Japan also recognizes the importance of collaboration to achieve its objective, with the US seen as a strategic partner in building the next-generation semiconductor technology. The Japanese Ministry of Economy, Trade and Industry notes the collaboration will aid in “strengthening semiconductor production capacity, promoting workforce development, increasing transparency, coordinating emergency responses to semiconductor shortages, and enhancing R&D cooperation.” So far, Japan has signed cooperation agreements with the US, EU, Netherlands, and India, emphasizing the importance of cross-border collaboration to secure supply chains and advance semiconductor technologies.
These financial and partnership strategies are yielding immediate results. The leading Taiwan Semiconductor Manufacturing Company is now constructing a USD 7-billion facility in Kumamoto. Additionally, Rapidus, a consortium of Japanese firms including Toyota and Sony, aims to mass produce 2-nanometer semiconductors by 2027 in its Hokkaido plant, leveraging the expertise of IBM and European partners.
Japan’s semiconductor renaissance is a national project, similar to energy and food security and seen as essential for further social and economic development. However, challenges remain ahead. For instance, while an ageing population serves as a motive to advance semiconductor production, it also limits the availability of skilled workforce. With a not-so-lenient migration policy, Japan is at a disadvantage compared to China in attracting human capital for effective semiconductor R&D. While initiatives like IBM’s training program for Japanese engineers in advanced chipmaking techniques improve workers’ skillsets, more effort is needed from the government to fully address this gap. Japan must also identify niches where it can excel, such as advanced manufacturing processes or green semiconductor technologies, and focus production there.
Nonetheless, Japan’s renewed semiconductor strategy is not merely a return to its 1980s dominance. By leveraging its strength in manufacturing equipment and forging global partnerships, Japan aims to secure a unique position in the sector’s ecosystem. Japan’s government is taking an active role in this resurgence, and this renewed drive presents an entry point for investors looking for strong growth opportunities in Japan’s economy.
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.
