AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies
NPIRIPS

Nakasone Yasuhiro
Peace Institute

The Japan Institute ofInternational Affairs(Secretariat)

Research Institute for
Peace and Security

No. 293
3 February 2022

JAPAN’S ECONOMIC SECURITY ANDSEMICONDUCTOR INDUSTRY

Kazuto Suzuki

・ Economic security is defined to improve strategic
autonomy and indispensability, but these concepts
may be implemented without serious consideration ofcosts and put pressure on domestic businesses.
・ Improving the security and resilience of supply chains
may infringe on the principle of free trade and mayundermine Japan’s attempt to construct a “rule-basedinternational order”.
・ The Japanese semiconductor industry has lost its
competitiveness because of a lack of investment andbecause of its structure. Inviting TSMC to build afactory in Japan may not boost the industry, whichshould instead focus on strengthening those parts ofthe semiconductor supply chain where it remains
competitive.
The views expressed in this piece are the author’s own and should not be
attributed to The Association of Japanese Institutes of Strategic Studies.

AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies“Economic security” is a popular buzzword in Japanese political and businesscircles today. Although this concept is less familiar than those of “economic statecraft” or“economic coercion” in the English language, Japan is leading efforts to develop such a
concept by setting up a new ministerial post for economic security and planning tosubmit a bill on “boosting economic security” in 2022. What exactly is Japan trying to doby proposing the concept of “economic security”?

Defending national interests by economic means
The LDP’s proposals in December 2020 define economic security as “ensuringthe nation’s independence, survival and prosperity in economic terms” and put forward
two concepts to achieve it.i One is “securing strategic autonomy” by strengthening thefoundations indispensable to maintaining Japan’s social and economic activities andavoiding excessive dependence on other countries. The other is “maintaining, boostingand obtaining strategic indispensability” by expanding areas where Japan is considered
indispensable by the global community. In order to realize these objectives, theproposals highlight the need to ascertain and analyze the vulnerabilities of strategic
infrastructure industries and take necessary measures.
Having vulnerable strategic industries means a country will not only become
subject to intentional attacks on its supply chains by other countries but also be greatly
affected by natural disasters and supply-demand fluctuations in the global market. An
effective way to cope with this problem is to reduce the vulnerabilities and improveautonomy by lowering dependence on other countries as much as possible. As it would
be impossible to realize this in all industrial sectors, it is necessary to carefully considerhow much should be spent on which sectors to reduce vulnerabilities and to what extent
risks can be taken in other sectors. To reduce vulnerabilities, it is also important to thinkof how to cooperate with allies and partner countries to establish supply chains basedon trust.

Collaboration with industries
To secure strategic autonomy, the government will have to take measures tomaintain and strengthen strategic industries through subsidies and regulations.
However, this means the government will have to use its authority and rules to makei

Liberal Democratic Party of Japan, Recommendations Towards Developing Japan`s“Economic Security Strategy” (Tokyo, December 2020),
https://jimin.jp-east-2.storage.api.nifcloud.com/pdf/news/policy/201021_5.pdf

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AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies

industries shift from procuring cheaper items produced overseas to buying
domestically-made products. Such a move could result in reducing some industries’competitiveness. The government and the private sector should work together toachieve economic security, with the government involving companies in policyimplementation by promoting extensive communications. The government must takebalanced policy between industrial competitiveness and national security.

Economic security and a rule-based international order
Production networks and supply chains have expanded globally under theprinciple of free trade but, as a result, they include countries that can pose strategic
threats. Economic security policies are aimed at reducing dependence on such supply
chains. In order to achieve strategic autonomy, Japan might thus end up taking
measures that go against the principle of free trade.
The World Trade Organization has a national security exception clause in
Article 21 of the General Agreement on Tariffs and Trade that allows member states tobreach their WTO obligations for the purpose of protecting essential security interests.
However, the security exception stated in the GATT rules is very narrowly defined and itis hard to interpret it as including economic security.
A rule-based international order and economic security have many
contradictory features. Japan should take part in international rulemaking so that it canachieve its own economic security while setting rules to limit interpretations of security
exceptions to prevent the exception clause from being misused by countries like China.

Economic security in the semiconductor industry
As its first attempt to improve economic security, the government has claimed
success in inviting the Taiwan Semiconductor Manufacturing Company (TSMC) to builda factory in Japan by reportedly providing a significant subsidy of 800 billion yen (US$7billion), half of the entire cost of building the factory.
There had been expectations that Japan would revive its semiconductor
industry, which led the world in the 1980s, but these hopes have been dashed by a lackof continuous investment and structural problems arising from the industry’s failure toswitch from its traditional vertical integration to an international division of labor.
Companies such as Toshiba, Fujitsu and Hitachi were the industry giants during the1980s, but they were too small to compete with a company like TSMC that specialized
in manufacturing chips for a wide range of other companies. Japanese companies

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AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies

continued to design and develop chips solely for their own products and, when
Japanese electronics lost their competitiveness, the semiconductor industry declined aswell.
Inviting TSMC to produce in Japan will secure supplies of chips for companies
such as Sony and Dentsu, the electronic arm of Toyota. However, it is not clear how
many Japanese companies will be involved in the production and whether TSMC will
stimulate the Japanese semiconductor industry.
The government explains the reason why Taiwanese companies to produce inJapan is due to possible confrontations between Taiwan and China. However, if amilitary confrontation takes place, Japan would certainly be affected. Furthermore,
Japan itself is not risk-free. Kumamoto, where the TSMC factory will be located, hasrecently been hit by a large earthquake and flooding. The government’s intentions forthis invitation does not seem to justify a huge subsidy to foreign company.
What, then, should Japan do? Japanese firms should focus their investment onother types of semiconductors such as D-RAM

and energy-saving

power

semiconductors, instead of logic chips of which TSMC has overwhelming
competitiveness, and concentrate on expanding their presence in fields where they arestill competitive. Japanese companies can create products that use cutting-edge
technology but they are not as proficient at creating attractive products for outside
customers because they have heretofore been making semiconductors exclusively for
their own products. Unless it changes its way of doing business, Japan's semiconductor
industry will decline further.

Kazuto Suzuki is Professor of the Graduate School of Public Policy at The University ofTokyo.

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