All That Glitters May Not Be Gold For Japan’s Semiconductor Revival – Analysis
By Joseph Negrine
In the new age of industrial policy, advanced economies are driving public–private partnerships and abandoning notions of laissez-faire competition. As of September 2024, the Japanese government has spent over US$25 billion on subsidising semiconductors, the ‘new oil’ integral to civilian and military technologies. While the potential economic gains from Japan’s semiconductor manufacturing revival are colossal, Japan must not overlook the potential negative economic and security externalities.
Semiconductor dominance is a crucial aspect of geopolitical and economic superiority in the US–China ‘technological cold war’. Global disruptions like the Russia–Ukraine war and the COVID-19 pandemic have underscored the need for resilient supply chains. In 2021, chip shortages that increased semiconductor lead times cost the global automotive industry over US$200 million. The United States is attempting to stifle China’s semiconductor industry through coordinated export controls with the Netherlands and Japan. Both countries are crucial because they specialise in producing lithography equipment and associated materials that are chokepoints in China’s chip supply chain.
Japan, which dominated semiconductor markets in the 1980s, seeks to regain strategic autonomy. Its subsidies between 2021–23 accounted for 0.71 per cent of GDP — a higher proportion than all other countries. The potential gains, much like the subsidies, are not insubstantial. The semiconductor market is projected to be worth US$1 trillion by 2030. Japan can capture significant parts of industry revenue by providing superior products.
A successful semiconductor strategy could be very good for Japan. Japan’s Economic Security Promotion Act, passed in May 2022, recognised a stable semiconductor supply and domestic industry as urgent national tasks. This is being achieved by coordinated onshoring and offshoring efforts that promote public–private collaboration. The Ministry of Economy, Trade and Industry’s Domestic Investment Promotion Project subsidises companies to domestically relocate, while its Overseas Supply Chain Diversification Project is expanding production facilities across Southeast Asia.
But the economic gains from subsidising semiconductors are far from a done deal. Successful industrial policy at the frontier, where Japan’s Rapidus intends to produce, is fundamentally different to the historic use of industrial policy for ‘catch-up growth’ in developing countries. Subsidies that fail to ignite breakthrough technologies sacrifice government resources without providing a long-term benefit.
Industrial policy is economically justifiable where interventions in international oligopolies lead competitors to retrench production. But Japan’s competitors show no signs of scaling back their semiconductor ambitions at the frontier. Despite having the largest semiconductor subsidy to GDP ratio, Japan’s investments pale in comparison to the US$52.7 billion in subsidies over five years under the 2022 US CHIPS and Science Act. China’s state-led semiconductor subsidies, while hard to calculate due to a lack of public data, are estimated to exceed US$150 billion.
A compounding issue is that, in a constantly evolving environment, companies may demand further government support to maintain technological leadership. Given its dreams of fiscal consolidation, Japan must clarify whether its subsidies will be timely and temporary in this dynamic area.
Game theory indicates that retaliatory policies that further distort economic efficiencies lead to worse collective outcomes. International Monetary Fund analysis points to a ‘tit-for-tat dynamic’ in the new era of industrial policies. Whether a subsidy arms race will avoid a ‘race to the bottom’ then becomes a question of whether these industrial policies have positive cross-border effects. The OECD suggests that tit-for-tat policies could magnify negative international spillovers and undermine the rules-based trading system.
Due to the billions of dollars being invested into semiconductor manufacturing, major countries are at risk of a deepening talent shortage. Though Japan’s labour markets are beginning to mobilise, its semiconductor strategy will be buffeted by an expected shortage of 40,000 semiconductor engineers.
Whether the United States can successfully disable China’s advances in AI may be neither possible nor desirable for Japan. Even with significant cooperation, there are criticisms that these efforts ‘can only slow China, not stop it’. Attempts to alienate China may intensify its commitment to developing semiconductor manufacturing capabilities, as it leads to stronger commercial partnerships within China.
It is also doubtful that Japan desires to stop China’s AI developments. The government has emphasised the importance of diversifying supply chains beyond China. But this does not mean a complete decoupling from the nation’s largest trading partner and the world’s largest semiconductor consumer. In May 2024, then Japanese prime minister Fumio Kishida made a joint declaration with China and South Korea at the Ninth Trilateral Summit Meeting, reaffirming a commitment to ‘strengthening supply chain cooperation and avoiding supply chain disruption’.
Japan’s position in the US–China conflict is somewhat paradoxical. Its incoherent engagement with China is also seen in discussions concerning regional economic integration. The relative positions of the three nations in this economic security dilemma may fluctuate amid the election build-up in Japan in late October 2024 and the United States in November 2024.
Japan’s semiconductor strategy is just one part of an interdependent system. Beyond questions of economic efficiency, the subsidies raise concerns about backsliding free markets, US–China tensions and regional stability. In this setting of considerable uncertainty, Japan must take a serious look before it leaps into further investments in its semiconductor revival.
- About the author: Joseph Negrine is a Bachelor of Laws (Honours) student and Tuckwell Scholar at The Australian National University.
- Source: This article was published by East Asia Forum