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Japan's semiconductor sector: What's behind the chip reboot?

Julian Ryall in Tokyo
April 29, 2024

Japan was once the world's leading chip manufacturer. Now, concerns over supply chains and geopolitical tensions have prompted the government to go on a massive investment spree.

An image of a PC circuit board
While Japan produced around 50% of all chips in the 1990s, that has contracted to a mere 9% now, experts pointed outImage: Imaginechina-Tuchong/imago images

Japan is dramatically ramping up its support for the semiconductor industry. Between the financial years 2021 and 2023, which ended on March 31, the country invested 3.9 trillion yen (€23.17 billion, $24.8 billion) in the sector.

That is a higher proportion of its GDP than that invested by the US, Germany, France or the UK over the same period.

Analysts say the Japanese government has been stung into action as a consequence of significant geopolitical changes involving tech in recent years, as well as lessons learned from the COVID-19 pandemic and the impact of a worldwide crisis on supply chains that were previously considered to be adequate.

Tokyo has also been motivated to get back into the semiconductor manufacturing business to support domestic industries that consume vast numbers of chips and protect its economy more generally.

Taiwan, the semiconductor superpower

Japan's semiconductor investment push

"Semiconductors are one of the most capital-intensive investments, and Japan, after dominating in the 1990s, gradually got out of the sector and left it largely to South Korea and Taiwan," Martin Schulz, chief policy economist for Fujitsu's Global Market Intelligence Unit, told DW.

"But in more recent years, there has been a push from the government because they realized that semiconductors had been neglected and were critically important."

Schulz pointed out that while Japan produced around 50% of all chips in the 1990s, that has now contracted to a mere 9%.

According to statistics from the Ministry of Finance, the Japanese government's funds sunk into the sector accounted for 0.71% of GDP between 2021 and 2023, surpassing the corresponding figures for countries like Germany, which stood at 0.41%, the US, at 0.21% and France, at 0.20%.

And that financial support is expected to continue to grow.

With government financial support amounting to 476 billion yen (€2.81 billion), around one-third of the total cost, industry giant Taiwan Semiconductor Manufacturing Company (TSMC) completed a fabrication plant in Kumamoto, southern Japan, in February. Production is expected to commence at the end of the year.

Chip market contest: Who will win the race?

Similarly, Kioxia and Western Digital have jointly built a plant in Yokkaichi, in Mie Prefecture, to produce 3D NAND Flash memory products, with the government contributing 92.9 billion yen in subsidies. The same companies are also building a plant in Iwate Prefecture, in the northeast, which should be operational by the end of the year.

The Trade and Industry Ministry is also supporting domestic chip firm Rapidus to the tune of 590 billion yen to construct a manufacturing facility in Hokkaido in partnership with IBM. The plant is due to start production in 2027.

Japan's sudden but necessary change toward semiconductors

The Japanese government's change in direction has been sudden but necessary, said Kazuto Suzuki, a professor of science and technology policy at Tokyo University.

"The primary reason is the rising competition in the semiconductor sector, with the government really starting to pay attention to problems in global supply chains during the pandemic," he said.

Industries around the world suddenly found themselves short of chips for everything from cars to microwave ovens, and it dawned on policymakers that as a large percentage of the world's semiconductors are manufactured in Taiwan, any emergency in the Taiwan Strait would make Japanese users "vulnerable," he said.

"A shortage in chips would be extremely serious to Tokyo, which moved to attract foreign firms and reshore production to meet the needs of domestic firms."

Japan is also supportive of the US policy of restricting China's access to the most advanced technology, including state-of-the-art microchips, out of concern that it will give its economic rival an edge in AI and other emerging technologies and potentially enable Beijing to develop more advanced weapons.

China-Taiwan conflict: How it could ruin the global economy

Japan's history with semiconductors

Japan used to be a world leader in manufacturing chips but opted to focus on the more lucrative development of next-generation semiconductors and the machinery required to make them, leaving the actual fabrication to companies in other countries, Suzuki said.

In 1989, six Japanese electronics companies, including Toshiba, Hitachi, NEC and Fujitsu, were in the top 10 in the world for chip sales before gradually opting to shift away from production.

Some companies attempted to recapture their heyday — NEC and Hitachi set up Elpida Memory in 1999, but it went bankrupt in 2012.

Significantly, the government was not willing to invest to a degree that would guarantee the venture's success.

"But things have changed now, and the government here sees this as perhaps their last opportunity to use the know-how and experience of engineers to revitalize the industry before they retire," Suzuki added.

Rebuilding the sector will require more than fabrication plants, however.

In an editorial published on April 22, the Yomiuri newspaper emphasized the need to educate a new generation of skilled workers to produce even more advanced semiconductors, declaring that stable procurement of the components is "essential to the nation's economic security."

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Edited by: Srinivas Mazumdaru

Julian Ryall
Julian Ryall Journalist based in Tokyo, focusing on political, economic and social issues in Japan and Korea