BY BRAD GLOSSERMAN *
The quest to master the development of new technologies has been a defining characteristic of modern Japan. Commodore Matthew C. Perry’s 1853 visit demonstrated the necessity of technological superiority to secure the nation’s defense; the naval officer’s “invitation” to open to the outside world was issued by the guns and cannons with which his fleet was armed. It was a compelling request.
Recognition of Japan’s backwardness prompted the Meiji Restoration and frantic efforts to catch up. Among the goals of the Iwakura Mission to the United States and Europe between 1871 and 1873 was a study of national industrial structures and the technologies that they produced.
While the link between technology and national defense was clear when Perry’s fleet sailed into Edo Bay, it has only strengthened in the years since. The destructive power of modern weapons has been magnified by the development and application of technologies that permit faster, more immediate use and more precise targeting. The penetration of those technologies into the fabric of daily life and the infrastructure of society — from banking and communications to transportation — means that the ability to disrupt their smooth operation is another source of vulnerability and concern.
In recent years, however, there has been a newfound appreciation of the foundational role that technology plays in national security. Technology is no longer understood as a mere application of a country’s strength, but as a source of it.
Japan’s new National Security Strategy, published in December, identified “technological capabilities” as the fourth element of the country’s comprehensive national power, noting that “the creation of science, technology and innovation is the source of Japan’s own economic and social development.” That capability “plays a crucial role in improving Japan’s national security environment and is also indispensable in addressing global issues such as climate change.”
Mastery of technology will be key to future economic success. The McKinsey Global Institute ran the numbers and concluded that new and emerging technologies will “affect billions of consumers, hundreds of millions of workers and trillions of dollars of economic activity across industries.”
Companies that lead in those fields will secure revenue that facilitates a virtuous cycle of investment, research and development that boosts their dominance. They will set international standards that lock in their leading position. In addition, mastery will confer legitimacy on a country’s innovation model, reinforcing its soft power.
It’s hard to appreciate how important those successes can be. The U.S. National Intelligence Council argued in its last Global Trends Report that “some technological areas appear to offer the potential for transformative change … advances in these areas will combine with other technologies, such as energy storage, to shape societies, economies and perhaps even the nature of power.”
Japan gets it. In June 2020, the ruling Liberal Democratic Party established the Strategic Headquarters on the Creation of a New International Order, which was headed by Fumio Kishida, then-chair of the party’s Policy Research Council. Its report, issued in December of that year, focused on two concepts: “strategic autonomy,” or being free from coercion that could result from reliance on foreign countries, and “strategic indispensability,” which pretty much means getting other countries to be reliant on Japan.
These two concepts provide the conceptual pillars for Japanese thinking about economic security, and surfaced in the newly published National Security Strategy when it asserted that “Japan will ensure the self-reliance of its economic structure, as well as advantages over other countries and, ultimately, the indispensability of its technologies.”
Japan has already managed the second half of that equation. According to a 2017 survey commissioned by the Ministry of Economy, Trade and Industry that looked at key nodes of high-tech supply chains, Japanese companies had more than 50% of global market share in 309 products, over 75% in 112 products and 100% in 57 products. Japanese businesses dominated at least 478 distinct global high-technology product markets.
More recently, attention has turned to “resilience” and ensuring that Japan’s economy is not susceptible to coercion by foreign competitors. Once upon a time, the world was enamored with globalization, just-in-time delivery systems (a Japanese idea that germinated) and interdependence. No longer. The impetus for this reversal was the realization during the COVID-19 pandemic that critical supply chains — most evidently for personal protective equipment, but subsequently just about every major product — ran through China, giving that government leverage to be wielded against those that did not heed its preferences by shutting down supplies. The global disruptions that followed Russia’s invasion of Ukraine in February — fuel, fertilizer and energy shortages — confirmed the need to rethink global production networks, potential bottlenecks and the resulting vulnerabilities.
Supply chains have been a first focus. The government adopted the “domestic investment promotion project subsidy for supply chain measures” in its fiscal 2020 supplementary budget. It aimed to reduce the risk of supply chain disruptions for products and materials for which production is highly concentrated in a specific country (unnamed, but targeting China); crucial products in short supply due to the COVID-19 pandemic; and a third category for small and midsize enterprises. (A supply chain diversification support project was also launched. Smaller in scale than the first effort, it seeks to prevent the concentration of Japanese supply chains in China by helping them reroute through Southeast Asia.)
By March 2021, when the second round of subsidies began, the focus of all three sets of domestic subsidies appeared to have shifted to semiconductors. This makes some sense. Semiconductors are the oil of the 21st century, the essential innards of virtually all modern technology.
The global semiconductor market surpassed $500 billion in 2021 and the McKinsey Global Institute reckons it will become a trillion-dollar industry by 2030. Japan has long appreciated the industry’s importance. Japanese manufacturers accounted for more than half of global chip production in 1988, but their share has fallen to less than 10% today.
Japan set aside ¥774 billion ($6.8 billion) to support semiconductor investments in November 2021. Those funds have supported the construction of a foundry in Kumamoto Prefecture by Taiwan Semiconductor Manufacturing Co., the world’s leading chip manufacturer, as well as a new TMSC research and development center for advanced semiconductor packaging and testing in Ibaraki Prefecture. Rapidus, which includes Toyota, NEC and Sony among its partners, has been set up with government support, and will partner with IBM to produce cutting-edge 2-nanometer chips by 2027.
Japan is not an outlier in this effort. The world’s other major semiconductor manufacturing nations are doing the same.
The United States passed the Chips and Science Act, which includes $52.7 billion in incentives and tax breaks. The European Union aims to double its share of the global semiconductor market to 20% by 2030 with a plan worth €43 billion (about $45.7 billion) that is designed to entice the world’s biggest chipmakers to set up factories there.
South Korea is debating legislation that would provide $450 billion for investment in semiconductor production over the next decade. And China, which launched the subsidy competition with its Made in China 2025 plan — Beijing set aside about 340 billion yuan (more than $50 billion) in an effort to increase domestic chip production from less than 10% of domestic demand to 70% by 2025 — is reportedly preparing another support package for its semiconductor industry that exceeds 1 trillion yuan.
Compared to those initiatives, Japan’s efforts look almost miserly. Yet even the most generous looks inadequate given a Boston Consulting Group study that concluded that fully “self-sufficient” local semiconductor supply chains in each region that would meet current levels of consumption would require at least $1 trillion in incremental upfront investment. Moreover, the more advanced the chip, the more expensive the process.
Compounding those difficulties is a personnel shortage. The number of people working in electronic components, devices and circuits in Japan fell by more than one-third from 2010 to 2021, from 380,000 to 240,000, according to the Statistics Bureau of Japan. In June, the Japan Electronics and Information Technology Industries Association reckoned that eight large producers will need to hire about 35,000 engineers over the next decade to keep up with the pace of investment.
Even checking all those boxes — money, personnel and government support — isn’t likely to be enough. Most industry professionals are skeptical that a country can “leapfrog” to the cutting edge of semiconductor production.
A flourishing chip sector requires an entire ecosystem that demands attention to an extraordinary range of details — not just manufacturing, but assembling components, packaging and managing the entire process.
Chris Miller, author of “Chip War,” a new history of the industry and its geopolitical implications, points to ASML, the Dutch maker of multimillion-dollar machines that make not chips, but the tools needed to manufacture them.
“They describe their job as managing a complex supply chain,” he says. “They’re brilliant engineers. But in some ways the real brilliance is actually in assembling components.”
Assessing Japan’s plans, TMSC CEO C.C. Wei was reportedly unimpressed. Interviewed by the Financial Times, he said, “I won’t say it’s impossible to jump into the chip industry and suddenly overtake other players on the bend and race ahead, but I would say it could be a very difficult task.”
Japan shouldn’t have to. It should be able to rely on like-minded countries — its ally, the United States, topping the list — for semiconductors and other critical materials. Rather than re-shoring production, Japan would be smart to take U.S. Treasury Secretary Janet Yellen’s advice and pursue “friend-shoring,” by which supply chains remain multinational but use criteria other than cost — namely ideological or geopolitical affinity — to determine their routes.
That approach would also align with the call in the National Security Strategy for Japan to “actively capitalize on its advanced technological capabilities … without being bound by its conventional way of thinking.” While the meaning of “conventional” is unclear in this case, I’d like to think it means the predilection for promoting domestic manufacturing even if it means antagonizing trade partners, friends and allies.
The problem with that approach is that allies can be difficult. While Tokyo and Washington have repeatedly emphasized the centrality of technology to their alliance and the need for cooperation and collaboration — their chief concern is keeping adversaries (principally, but not exclusively, China) from accessing tech that can hone their military capabilities — they are not aligned on the range of sanctions that are needed.
Japan is less convinced that trade controls can slow China’s rise. While views are not monolithic, Japanese businesses are not as ready as U.S. counterparts to write off the Chinese domestic market. In a 2020 JETRO survey, 92.8% of the companies located in China had no plans to review their production sites.
The result is growing tension in the Japan-U.S. alliance as Tokyo refrains from joining the tech embargo the United States has imposed on China.
Washington imposed unilateral sanctions in October after months of fruitless negotiations with Japan and European allies that failed to get them to join the effort. The United States has not abandoned hope that both will change course; Japan and European allies are likely to eventually line up behind Washington. But the sales in China that U.S. companies lose to allied competitors in the interim — estimated to top $3 billion — will be a source of friction, however.
Managing those tensions will be a useful lesson as access to technology becomes an ever more critical element of national security and a dividing line in geopolitics.
* Brad Glosserman is deputy director of and visiting professor at the Center for Rule-Making Strategies at Tama University as well as senior adviser (nonresident) at Pacific Forum. He is the author of “Peak Japan: The End of Great Ambitions” (Georgetown University Press, 2019).