William Sposato
The new initiatives are part of a broader strategy of greater “economic security” under Prime Minister Fumio Kishida’s administration, a need driven home by the massive supply chain disruptions that occurred globally under the weight of shifting supply and demand amid COVID-19.
It is also part of what is, in effect, a broad-based defense mobilization program to contain an increasingly ambitious China—one that fits nicely in with the Biden administration’s own plans. Washington has put increasingly tight limits on U.S. companies’ involvement in Chinese chip manufacturing, seeking to keep control of the advanced electronics vital to modern warfare—and the economy as a whole—within its wider sphere of allies like Taiwan and Japan.
Other segments of the Japanese plan range from more advanced weapons systems, an ability to strike an enemy’s bases back at home (despite Japan’s constitution forsaking warfare), and roughly doubling military spending to 2 percent of GDP by 2027. It is a very full agenda, especially for a government that is now teetering from various scandals that always seem to befall Japanese administrations that are seen as already weak.
Whatever the fate of the Kishida government, this combination of security and economic nationalism appears set to remain, driven by a new generation within the long-ruling Liberal Democratic Party. This more hard-line group of lawmakers, who coalesced under Shinzo Abe, Japan’s first postwar prime minister, appears keen to abandon much of the caution that has underscored Japan’s economic and diplomatic policymaking.
Part of this new mood is because the risk-averse nature of leadership in both the public and private sectors has consistently failed to find a new path for Japan after the collapse of the bubble economy in the early 1990s. Instead, the country is a leader in many of the wrong areas: slow growth that now besets most developed economies, an aging society, and no clear path to break out of this relative decline as the rest of Asia gets richer.
Japan rose to global prominence from the 1960s to 1980s—and the No. 2 slot in the global economy—through a largely state-organized program that combined economic planning, corporate cooperation instead of competition, and a healthy dose of trade barriers to stop foreign rivals. Its success was remarkable in many respects. From an initial reaction in other markets to “cheap Japanese products,” Sony, Panasonic, Toyota, and others became the industry standard in high-end consumer products.
Those success stories were just the tip of the iceberg. In 1990, Nippon Steel Corporation was the world’s largest steelmaker, and six of the world’s 10 largest banks were from Japan, including the top three. Behind all of this was the careful hand of Japan’s Ministry of International Trade and Industry (MITI). Japan seemed unstoppable, with bureaucrats in central Tokyo seemingly able to outperform the market.
A key element to this success was a different perception from the U.S.-led free market consensus on the role of government. Instead of being seen as a regulator trying to hobble free enterprise, companies and ministries were on the same side. The government could force cooperation, keep out foreigners, and help ensure corporate success. The companies in turn offered the lifetime employment model that was a key element to social stability. China borrowed heavily from Japanese ideas (though without any promise of long-term employment) when it came to shifting from a fully planned economy to a government-led one.
However, a sharply stronger Japanese yen designed to stop unfair competition, coupled with less-expensive products from South Korea and especially China, soon left the Japanese scrambling for a new role in life. If they couldn’t compete for the end product, how about the high-value elements, especially semiconductors and later flat-panel screens? In 1988, Japan accounted for 51 percent of worldwide semiconductor sales.
Even this proved relatively short-lived. Today, the global market is dominated by Taiwanese and South Korean manufacturers, especially for the most-sophisticated chips. Within this, Japanese companies still produce many of the complex chemicals that are needed in chip-making. While Japan has been moving down the food chain, it has moved up the value chain. A major player in this area is Ajinomoto, better known for its monosodium glutamate seasoning and other food products. The group’s specialty chemical, Ajinomoto Build-Up Film, which is now widely used in chip manufacturing, garners a profit ratio of nearly 48 percent, according to Japanese financial magazine Diamond, compared to the company average of 10.5 percent.
But are such niche areas enough to sustain the world’s third-largest economy in the longer term? With some whiffs of nostalgia, the government wants Japanese industry to at least play in the big leagues even if global dominance is an impossibility. Growing uneasiness with a newly aggressive Beijing has proved a useful spur.
In the buy rather than build school of business, it helped bring the world’s most successful microchip company, Taiwan Semiconductor Manufacturing Company (TSMC), to Japan with a planned $8.6 billion manufacturing plant. The Ministry of Economy, Trade, and Industry (METI) (successor to the old MITI) will put up 40 percent of the cost for the venture, which also brings in Sony.
“It is hoped that Japanese companies will absorb the know-how from TSMC, but the feasibility of this is unclear,” said Takahide Kiuchi, an economist at the Nomura Research Institute in Tokyo. “Attracting TSMC’s factory will be a burden on the public, and it may end up being expensive.” One potential benefit, he noted, is if TSMC’s domestic capacity gets put out of action due to a Chinese invasion, an eventuality that would entail a lot more risk for Japan and the world than just a lack of computer chips.
In addition, METI has corralled some of Japan’s biggest tech names, including Sony, Toyota, and SoftBank, to create the aspirationally named Rapidus with a mission to develop and eventually manufacture the next generation of advanced chips, known as the 2-nanometer chip. The consortium is teaming up with IBM, which is considered one of the world leaders in such technology. They plan to make investments totaling $36 billion over the next decade, with the government offering around $500 million in subsidies.
The plan follows failed initiatives over the years that each started with high hopes only to end in bankruptcy when it became clear the various partners couldn’t work together or backed the wrong technology. The most notable failure was the 2012 collapse of Elpida Memory, created in 1999 through a government-backed merger of the NEC Corporation and Hitachi’s memory chip operations. It started off well but ran into trouble during the global financial crisis of 2008. The government threw in yet more money, but as debts soared to around $5.5 billion, it became the biggest bankruptcy by a Japanese manufacturer since World War II.
This burden of the past is not lost on the Rapidus team. The president of the new venture, former Western Digital executive Atsuyoshi Koike, called the company Japan’s “last chance” to make a comeback in the field. Those involved in the project say lessons have been learned and that by turning to foreign expertise, they are building a truly international consortium—save, of course, for China.
“It is generally a bad idea for the government to intervene in the free and fair global trade of industry,” said Tadahiro Kuroda, a professor at the University of Tokyo, who is contributing research work to the Rapidus project. “However, it is not from that point of view that the government is intervening now but from the point of view that this semiconductor has become extremely important as a strategic commodity.”
Japan’s efforts are a part of the much bigger standoff between China and the United States over advanced semiconductors as all major economies shift from the “just in time” philosophy that led to expanded global supply chains to the necessity of having products nearby “just in case.” “This is not only the case in Japan,” said Hideki Wakabayashi, a professor at the Tokyo University of Science. “I believe the entire world will be moving in this direction.” COVID-19 made governments acutely aware of the fragility of supply chains and the critical dependence on countries that might later prove wartime foes.
But the broader question remains of whether a government-led program can bring back past glories. China’s own top-down efforts to create a domestic semiconductor industry have largely flopped. “Attempts to revive Japan’s semiconductor industry through government intervention have repeatedly failed in the past,” Kiuchi said. The problems, he added, center around the lack of massive investments required and a brain drain of necessary talent over the years. “Under such circumstances, even if the government supports it, it will not lead to the revival of the Japanese semiconductor industry,” he said.
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