COVER STORY • 2

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Roundtable with Prof. Asei Ito, Prof. Kazuto Suzuki, Prof. Yasuyuki Todo & Yo Okada

oundtable on the White Paper on International
Economy & Trade 2022: Economic Impacts ofRussia’s Aggression Against Ukraine

By Japan SPOTLIGHT
In our Roundtable discussion on the White Paper on International Economy and Trade 2022, the main
issue was the economic impacts of Russia’s aggression against Ukraine. Our participants were Prof.
Kazuto Suzuki of the Graduate School of Public Policy at the University of Tokyo, an expert oninternational politics, Prof. Asei Ito of the Institute of Social Science at the University of Tokyo and Prof.
Yasuyuki Todo of Waseda University, both distinguished economists. The Roundtable was moderated by
Mr. Yo Okada, former director of the Policy Planning and Research Office at the Trade Policy Bureau of
METI, who authored this White Paper, and now counsellor of the Japanese government’s Secretariat of
New Form of Capitalism Realization Headquarters.
(Online Roundtable on July 12, 2022)
ParticipantsProf. Asei Ito

Prof. Kazuto Suzuki

Introduction of White Paper on International
Economy & Trade 2022
Okada: The theme of the White Paper 2022 is economic risk caused
by geopolitical uncertainty and the challenges and opportunities forinternational trade in responding to the changes brought about by
this risk to economic structure, technology, geopolitics and values.
We analyze in particular as a central subject the “economic impactsof Russia’s aggression against Ukraine”. On the challenges andopportunities for international trade, we analyze issues relating to theconstruction of resilient global supply chains reflecting common
values as well as economic growth opportunities through innovation,and consider four particular trends that are accelerating globally.

Global economic impacts of Russia’s aggression against
UkraineAfter Russia’s invasion of Ukraine, the G7 and other developed
countries promptly enacted unprecedentedly large-scale economic
https://www.jef.or.jp/journal/

Prof. Yasuyuki Todo

Yo Okadasanctions and have very quickly promoted reconsideration of theireconomic and political relations with Russia.
In contrast, most emerging and developing countries refrained
from decisive action, including economic sanctions against Russia,
and have been neutral in considering their economic and political
relations with Moscow. China, presumably believing there would be
no area where China-Russia cooperation is prohibited, continues tocollaborate with Russia, and among the other G20 members,
Indonesia, this year’s chair nation of the G20, is opposed to
excluding Russia from the gathering in 2022, insisting that all themembers are to be invited. Turkey, though condemning Russia’s
invasion of Ukraine, is not joining EU-led economic sanctions against
it. Mexico, though also condemning the invasion, maintains
neutrality and is refraining from sanctions. Brazil is also staying
neutral and has opposed sanctions, which could possibly have anegative impact on the Brazilian economy, though ready tocollaborate with developed countries that have imposed sanctions
against Russia. Brazilian Foreign Minister Carlos Alberto Franca
Japan SPOTLIGHT • September / October 202213

announced a clear objection to excluding Russia from the G20.
South Africa has been also supportive of Russia in proposing a“Humanitarian Resolution” in the United Nations without actuallyreferring to Russia.
Among ASEAN countries, Singapore is the only one designated as
an unfriendly country by Russia because of its announcement ofsanctions against Moscow. Except for Singapore, the countries incooperation with the G7 in imposing economic sanctions against
Russia are Australia and South Korea in the Asia-Pacific area, and alimited number of other countries.
It is also true that Russia’s invasion of Ukraine has
unprecedentedly added to mounting concerns about the division of
economies in the world since the end of the Cold War era.
Polarization has already been occurring and the war has accelerated
this trend, and thus the structural changes in the international
economy. I think this event could be a historical turning point in theinternational economic order.
In terms of the ranking of the percentage of a country’s nominal
GDP to the global total, Russia is 11th and Ukraine is 54th. Russian
nominal GDP accounts for only 1.8% of the global total and issmaller than South Korea’s; however, it is a major supplier of many
important staple commodities such as wheat and corn, as well as
fertilizers and energy in general. Depending on the degree of acountry’s reliance on trade in such products with Russia andUkraine, the impacts of economic sanctions will differ significantly.
Russia’s exports of wheat rank first in the world, and Ukraine’s
exports of wheat and corn rank fifth and fourth respectively.
Developing countries in the Middle East and Africa are particularly
dependent upon imports of these products from the two countries.
In extreme cases, Kazakhstan, Qatar, Armenia, and Lebanon rely
nearly 100% on Russia and Ukraine for their consumed wheat
imports. In addition, sub-Saharan countries depend on imports for
85% of their wheat, mostly from Russia and Ukraine, and the rise inglobal food prices is likely to be reflected in domestic price rises ofabout 30% in those countries, which could also suffer from supply
shortages.
Given that the Ukraine crisis is not expected to be resolved soon
and we cannot tell how long it may continue, its economic impact
will be expanded to the whole world through cost-push inflation due
to restricted supplies of commodities and soaring prices, as well asinterest rate hikes in developed countries to cope with inflation.
Prices of oil and natural gas are rising as well as the forward pricesof wheat and corn. Since the Russian invasion, prices of fertilizers
such as urea or potassium chloride have also risen and we are now
facing a food security threat.
The predicted economic growth of emerging and developing
countries and the euro area, which is highly dependent on Russian
14 Japan SPOTLIGHT • September / October 2022

energy, will be much lower in 2022, and growth in the countries atwar, “both Ukraine and Russia”, is plummeting drastically, needlessto say. In particular, with the effect of the sanctions, we have alreadyseen signs of economic stagnancy in the monthly economic datafrom Russia, which is blaming any negative effects on the wider
global economy precisely on these sanctions by the West. Thispassing of the buck seems to be working to some extent.

Four trends accelerating globally
The geopolitical environment has been deteriorating, supply
restrictions and rising prices of commodities and natural resources,
accelerated by both the Covid-19 pandemic and the Ukraine crisis,
have resulted in global inflation and a worsening economic situationin emerging countries, and the Chinese economy has been slowing
down with its zero Covid policy initiatives. All these factors haveincreased uncertainty in the global economy. Real global economic
growth has slowed down drastically compared with 2021, with
commodity prices soaring and inflation rates increasing.
The digital transformation, increased geopolitical risks such as thegreater need for economic security, enhanced global commitment tocommon values such as the environment, climate change andhuman rights, and a shift in public policy to an industrial policy haveall been accelerating in response to this heightened uncertainty. I
think these four trends will influence the future trajectories ofinternational relations and the global economy, and create further
uncertainty in business management while changing the sources ofcorporate value-added.
In particular, on geopolitical risks and commitment to common
values, differences in policy stances have been producing bloc-based
rule-making especially on the issues of climate change and humanrights. Rule-making has been affecting the structure of costs, capitalprocurement and conditions of business transactions andcompetition. With this, the global market has become progressively
divided into blocs.
Furthermore, with the trend of strengthened national industrial
policies, large-scale markets have been built up in specific sectors
such as green-related industries, aviation and aerospace, or
semiconductors in the United States and the EU. Thus, there will bevarious opportunities for businesses trying to gain a market share,depending upon the host country’s policy initiatives.
Under such circumstances, it would be desirable for a company toorient its business towards raising its profits and earning capacity byactively promoting reform of its business model, encouraging
product differentiation or enhanced value-added as well as efficientbusiness operations, instead of cost savings or provision of lowpriced goods as previously pursued. In addition, I think it will be
important to realize a new business model and industrial structure tocreate higher value-added by taking advantage of the four trends
mentioned: prompting corporate transformation by digitalization,
exploiting the opportunities created by the public sector, and turning
economic security and the common values into core business value.
As for the Japanese government, it needs to engage in discussions
on the international economic order at the G7 and other venues at an
early stage to help achieve an environment where Japanesebusinesses can be engaged in the social implementation of newtechnologies in the US and European markets. This would be
encouraging support for Japanese businesses. It is also important
for the Japanese government to play a bridging role between Asian
countries and advanced countries for comprehensive rule-making toachieve common values, while considering current conditions ofAsian countries. Japan should also promote common values rooted
in its own experience, such as with medicare or caregiving in an
aging society, for the rest of the world’s interest and set up an
agenda for a market to be born from these challenges.

Trade policy based on the four trends and challenges andopportunities for Japan
In this White Paper, we made an analysis and policy proposals
largely on two issues: construction of resilient global value chainsreflecting common values, and Japan’s retarded innovation and how
it could gain growth opportunities against such a background.
On the first issue, our analysis of the current status of global value
chains concludes that Japanese businesses have been working
steadily on diversification of production sites and suppliers in Asia as
their response to geopolitical risks, the pandemic and natural
disasters, and resilient supply chain construction is making good
progress.
For example, the share of the Japanese manufacturing industry’s
foreign direct investment in China to the total in Asia had been kept
high, but since 2012 when the Senkaku Islands issue emerged again,
it has been declining steadily and its investment in so-called China+1
countries like Thailand, India and Vietnam has increased.
On the second issue, it is becoming important to consider
economic security seriously and in this regard a reduction in
dependency on specific countries for key strategic items likesemiconductors or batteries, appropriate management of sensitiveand emerging technologies and prevention of their leakage are vital.
Also in terms of stable energy supply, it is becoming more important
to develop upstream natural resources, including domestic
resources.
On the third issue, supply chain management is now extremelycomplicated, as businesses are increasingly forced to meet a varietyof requirements, such as decarbonization, other environmental
issues and human rights, with a firmer interest in common values.

Digitalization of such complicated supply chain management andenhancing its visibility by using data would lead to the build-up of acommon database not only in Japan but also in the whole of Asia
where Japanese businesses have a network of supply chains. It will
be important to lead this to value creation.
On the fourth issue, we made an analysis on start-up companies
on the issue of Japan’s retarded innovation and their way of gaining
economic growth opportunities. While global venture capital
investment from 2020 until 2021 almost doubled, Japanese
investment, though increasing, was much smaller than othercountries, in particular other Asian countries such as China andIndia. It is also true that facilitation of ecosystems to support startups in terms of human resources, capital and place in Japan is far
behind the global standard. It is important to promote such
ecosystems to achieve mutually beneficial relations among start-ups
and their supporters. Japanese businesses should build up active
digital transformation (DX) alliances with the Asian countries withhigh growth potential and invest in Asia and collaborate with them increating value. This is important for them to get new growth
opportunities.
For example, Mitsui & Co. has been investing in IHH Healthcare, a
Malaysian large hospitals group, since 2011. Sumitomo Corp. also
invested in a large Vietnamese managed care group in 2021. These
are both cases of supporting Asian DX in the domains of medicare
and caregiving, and I hope support in these areas will expand.
On the fifth issue, although Japan has been investing in R&D
substantially, investment in intangible assets, especially in humancapital and in organizational reforms, has been low compared withother developed countries. For example, the calculated percentage ofintangible assets to the total value of listed companies is 80% in the
US and 70% in the EU, but in Japan it is only 30%. Japan muststrengthen efforts to raise investment in intangible assets, inparticular, in human capital.
Finally, with the accelerated development of new technologies
such as AI and robots, we increasingly need to cope with challenges
like greater unemployment or expanding income gaps and inequality.
It is important for Japan to fully utilize new technologies while
responding to these challenges and promote social implementationof these technologies, drawing on the experience of Asian countries
undergoing rapid growth.

Increasing the Effectiveness of Economic
Sanctions Against Russia
Okada: Prof. Suzuki, what do you think is to be done to increase theeffectiveness of economic sanctions against Russia while it isoccupying global choke points in energy and food?
Japan SPOTLIGHT • September / October 202215

Suzuki: Economic sanctions would differ according to their objective,
such as a change from the regime of Vladimir Putin leading to theend of the war or creating a situation that makes it difficult for Russia
to continue its military actions even without regime change. The
current sanctions are aimed at achieving whatever is possible now. If
the sanctioning nations try to enhance their effectiveness, they would
have to impose sanctions that would be rather painful for themselves
as well. In short, there would be rising prices of gas and other fuels
and food items that will have a certain negative impact on theireconomies. So I think it will be difficult for the West to change theRussian regime without stricter sanctions, and worrying about their
negative impact on their economies or political objections to them.
The current sanctions against Russia are aimed at raising the cost of
maintaining the war, but they could result in provoking Russia totarget choke points for the West before they can work effectively. It is
important for the West to build up economies that could be resilient
to shocks as well as domestic political negative reactions.
Okada: Russia has promoted the narrative that economic sanctions
by the West are responsible for rapidly rising energy and food prices
in emerging and developing countries. I guess those countries facing
price increases may understand such a narrative to some extent andask Russia or China for help. To avoid a divide in the global economy
possibly caused by the Russian narrative, what do you think must be
done by the West, in particular Japan?
Suzuki: The main factor behind the current rise in energy prices iscertainly the import ban on coal and oil from Russia. As for foodprices, the main reason for their rise is Russia’s blockade of theBlack Sea to ban exports from Ukraine. So we cannot simply say the
economic sanctions of the West are the reason for rising food prices.
There are a large number of emerging and developing nations
dependent on food and energy sources from Russia that officiallyaccept this Russian narrative, but with a better understanding ofwhat is happening today I believe this narrative would not leaddirectly to a division in the global economy.
A total of 141 countries supported the UN General Assembly
resolution blaming Russia for the war. There are also many emerging
and developing nations depending on imports from the West andthose nations will maintain this interdependency hereafter regardlessof their relations with Russia. This narrative was created by Russia to
identify whether a nation is on its side or not. Russia is certainly
intentionally provoking confrontation between the West and the
supporters of Russia by making a clear distinction between the two.
The West should organize a foreign policy strategy to clarify thatrising prices of food items are due to Russia’s invasion of Ukraine.

16 Japan SPOTLIGHT • September / October 2022

Okada: In the international economy where networks ofinterdependency among trade, investment and finance are prevalent,some countries occupying nodal points could weaponize thisinterdependency by using its leverage. At this moment, it seems theWest and Russia are trying to weaponize their interdependency oneach other. Japan does not occupy any nodal points or have muchleverage, so what do you think Japan should do in this situation?
Suzuki: Japan is a net importing country of food and energy
resources and it is important for Japan how to overcome such
vulnerability. It is rather difficult for Japan to achieve self-sufficiency
completely in food and energy. I think the policy to be adopted by
Japan should be storage of minimum natural gas supplies andstrategic stockpiling of food, and also demand-side control of energy
and food distribution, such as saving electricity, rather thanrationing. More importantly, as a country with such vulnerability,
Japan should do its best to consolidate the free trade system inorder to secure stable supplies of energy and food. Diplomacy will
also be important in order to prevent a country like Russia from
abruptly starting another war.
Okada: Since the invasion of Ukraine, we have seen growing
concerns about economic divisions in the world economy. As ourWhite Paper describes, this could accelerate structural changes in
the international economy on the back of multipolarization, withrising unilateralism and concerns about economic security. This
could eventually lead our international economic order to thehistorical turning point. How do you think the international economicorder will change in the aftermath of the Russian invasion of
Ukraine?
Suzuki: I think it will be difficult for us to maintain an international
economic order on the basis of optimism about free trade. There
would be rising risks of self-centered foreign policies or theweaponization of economic interdependency. To avoid them, it will be
important to ensure economic security. If a nation is economicallyvulnerable, it will need policies to protect its economy that issensitive in terms of economic security with certain limitations on
free trade and carefully manage exports of goods which have theirown technological advantages.
But I do not think economic security measures should be adopted
in all the aspects of trade. In the future international economic order,
I think restoration of a malfunctioning WTO is less likely and regional
economic cooperation frameworks such as the CPTPP or RCEP
would be more likely at its center. In this way, there is a possibility ofa free trade-oriented economic order built up in feasible areas oramong economic partners with mutual trust instead of the WTO. Free

trade may be narrowed geographically from a global scope toregional ones.
Another direction would be to focus on distinctions between theitems relevant to free trade and those that are not. For example, toysor clothing do not affect a nation’s economic security and thus
should be traded freely. But specific crucial items in certain limitedareas such as rare earths or semiconductors designated by the
Economic Security Promotion Law in Japan should be subject togovernment management. We will have such a two-layered structureof trade – free trade and managed trade – but the managed trademust be minimized as much as possible.

Responses to Digitalization & Global
Commitments to Common Values
Okada: Entering the 21st century, especially after the 2010s, theexponential growth and development of digital technology and global
data flows under the Fourth Industrial Revolution driven by IoT or AI
have been changing economic rules. Innovation is being encouraged
with newly emerging technological development and free data flows
have become crucial as sources for tech start-ups or value-added.
DX is a key for business success in expanding customers, providingthem with value, and increasing investment in intangible assets suchas human capital, as well as enhancing DX or R&D investment andachieving business reforms and raising productivity. The White
Paper mentions that it will be important to create new businessmodels and industrial structures producing more value-added withthe utilization of data analytics of cross-border data flows, formationof digital ecosystems, alliances among start-ups and Asia DX.
On commitment to common values, climate change, circular
economy, biological diversity, environmental protection, health,human rights and equality are among those that feature significantly
in public policy, as well as consumers markets and financial markets.
Against this background, businesses are expected to pursue not only
added value for shareholders but also for all kinds of stakeholders
such as customers, employees, local communities, the public sector
and the natural environment in alignment with their purposes. Youngconsumers today are starting to buy goods and services inaccordance with social and environmental concerns. I think it will be
increasingly important for a company to create core added value
from respect for such common values and build new comparativeadvantages instead of pursuing only corporate social responsibility
activities, incidental ones annexed to the company’s main business.
For example, Unilever is expanding sales of detergents for dishwashing enabling the saving of water as an environmentally friendly
product.
It is also important to make rules on common values since theywould affect a company’s cost structure, capital procurement andconditions of competition. Prof. Ito, what do you think about theseissues, in particular the challenges and opportunities born from themfor both the government and business to tackle?
Ito: Digital terminals have become prevalent these past two decades
among developing and emerging nations and this completelychanges the whole world. According to the International
Telecommunication Union (ITU), the number of mobile phone
contracts in Japan was 66 million, the third-largest in the world 20
years ago, but it is now eighth in 2020 when in Japan more than 200
million terminals are working, much more than its population. In
Nigeria, they already have 200 million digital terminals in use.
In 2005 Thomas Friedman, a well-known columnist, introduced an
episode in his book The World Is Flat that discussed how American
white collar jobs were being outsourced to India. So digitalizationfrom the perspectives of developing and emerging nations at thattime was nothing but the informationalization of developing
economies to become subcontractors for American white collar
labor.
However, the situation has significantly changed in this decade. I
call it “digitalization of the South for the interest of the South” where
human resources, capital funds, entrepreneurs and challenges are allon the side of the emerging and developing nations. Even without
help and support from the North, their own entrepreneurs andtechnologies are starting to resolve the challenges. In suchcircumstances, digitalization is commonly set as a goal to beachieved in any country’s mid and long-term plan of national
economic development. It is a new challenge for Japan to explore
what to do in the future under these circumstances. We will need tostart thinking about a strategy on the assumption that Japan is “notan advanced nation in terms of digital economy” but is possibly “apartner for collaborative creation”.
In other words, Japanese businesses need to develop their
expansion into emerging markets through investment in the hostcountry’s business firms or strategic alliances with them, as theycannot achieve it on their own like the giant IT software companies
such as Google, Facebook, Apple and Amazon. It should also be
noted that Japan itself is behind the global trend in its domestic
digitalization. In this light, I think we must think about utilizing digitalcollaboration with emerging nations. Meanwhile, Japan’s presence in
ASEAN is extremely limited in terms of investment amounts or
M&As. For example, the acquisition of ventures in Southeast Asia byJapanese firms was smaller than that of Thai companies between
2017 and 2021.
On Japanese companies’ engagement in promoting common
values, I think the issue is whether they can promote what they haveJapan SPOTLIGHT • September / October 202217

achieved so far to the rest of the world. For example, resource
recovery in Japan has been greater than the global average, but it isanother question whether Japan can promote this wellinternationally.
Human rights due diligence is one of these common values. But
there is concern that a strategic partnership between China andRussia will be strengthened in the wake of the Russian invasion of
Ukraine. Of course, China will have to maintain its close trade andinvestment relations with the West, but on the other hand it isworking on strengthening its partnership with Russia. In a way thisis a strategic ambiguity.
At the same time, I think there is a possibility of China’s permanent
support for Russia financially and materially. I am very concerned
about what will happen then. Japanese companies did notnecessarily exit from China when the territorial dispute over the
Senkaku Islands reignited. Most Japanese companies stayed in
China and remained patient. Even with the US-China confrontation
worsening, Japanese companies have not largely exited from the
Chinese market. The reality is that many companies will wait and see
what happens.
Okada: It is certainly true that Japanese companies have not been
completely leaving China, though they are trying to diversify theirmarkets and host countries. According to one survey, only a few
percent of respondents said they would need to exit China or reduce
their business activities there. So the exiting companies remain very
few. What do you think is the best way to deal with the gigantic
Chinese market and production sites?
Ito: I think there is a misunderstanding of China due to the lack ofprecise information and policy dialogue. For example, there are
extremely simplistic arguments about China’s protection of
intellectual property rights, such as China’s claim that it has a market
friendly intellectual property rights system or Western nations’argument that such rights are stolen from confidential businessinformation.
Though it is true that various regulations in China are devised toencourage foreign firms to invest in China or procure local contents
or promote R&D in the Chinese market, it is far from the reality that
all foreign companies in China have had their business secrets
stolen. It is also true that China’s intellectual property rights system
has recently been developed quite well. I think we need a precise
understanding and dialogue to overcome such simple and prejudiced
arguments.
On policy dialogue, have there been any venues for exchanges ofviews over China’s application for membership of the CPTPP
between the Japanese and Chinese governments since China applied
18 Japan SPOTLIGHT • September / October 2022

in September 2021? I have been wondering whether the Japanese
government has ever mentioned its specific concerns to the Chinese
government about its membership of the CPTPP. Different opinions
could always emerge and exchanges of different policy views should
be arranged at any time.
Okada: What do you think the government and businesses careabout most in promoting the ideas advocated by the White Paper
such as the creation of an Asian-wide database, active DX allianceswith Asia and joint value creation?
Ito: There is an argument that data sharing in supply chains will benecessary for surveillance of the regulations for the businessenvironment on human rights. If it is necessary to have precise
observation of forced labor or child labor in global supply chains,then I think it is desirable to accommodate a low-cost database. On
the other hand, for data sharing to create new businesses by using
health and medicare data or business transaction data, we will need
a completely different database system. So in my view, depending
upon the goals for database sharing, there would be divided plural
blocs for such an Asian-wide data base construction idea.
On the issue of DX alliances with Asia, we should develop a market
for the digital products of Japanese companies mainly in Southeast
Asia, especially in medicare, health care and caregiving. These
domains are interesting, since Japanese companies already haveknow-how in the domestic market due to the aging society in Japan.
So such know-how could work to some extent in helping Japanesebusiness survive in a time of digitalization. However, judging fromthe speed of investment or business development by Japanese firms
at this moment, there is a risk of Japan failing to be even a “partner
for collaborative creation of values for Asia” from the perspective ofSoutheast Asia. Now is the time to restart efforts for businessdevelopment in Southeast Asia that were disrupted by the pandemic.
Okada: It is certainly true that the presence of Japanese businesses
has been reduced by the disruption of investment andcommunications during the pandemic, according to Southeast Asian
countries. A Japanese Foreign Affairs Ministry survey tells us that
more countries in Southeast Asia refer to China as a more importantpartner than Japan. So I believe we should seriously redouble ourefforts to consolidate relations with Southeast Asian countries.

Active Role of Industrial Policy
Okada: Among large countries like the US, China, European
countries and Japan, in advanced technology areas such as green
technology, the role of active industrial policy is being reconsidered.

This is justified by economics too, given that private sector
investment alone based on private returns would be insufficient,while decarbonization is a global public good and the green
technology that could contribute to it would produce larger social
returns than private returns. Technological progress is pathdependent and thus promotion of industrial policy will be needed to
impact the technological revolution in the green industry and makeexisting technologies causing pollution obsolete. In these respects,
industrial policy can be justified.
Prof. Todo, what do we need to keep in mind to achieve thesuccess of active industrial policy? In particular, what do you think
about strengthening industrial policy in the semiconductor industry?
Todo: In principle, industrial policy in the narrow sense – promoting
specific policies to support limited industrial sectors – seems to havebeen ineffective so far and this may be true hereafter as well. For
example, it is said that China’s industrial policy has achieved
success, but data analysis shows us that while an industrial policy
assuming value creation by collaboration between the private andpublic sectors is successful, a protectionist-oriented policy is notnecessarily so. China’s industrial policy supporting semiconductors,
though implemented on an extremely large scale, cannot be
considered very successful as it fails to promote nationalization of
production. It should be noted too that industrial policy to encourage
competitiveness in limited sectors would also not be so effective.
The second point is that there seems to be a focus on production
rather than innovation in the current industrial promotion policy, but
this is not so effective in terms of industrial development. I think
China should give more thought to innovation, as it is a source ofindustrial development.
In reality, the so-called policies for strengthening supply chain
resiliency of the US or EU contain not only policies to attract
production sites but also to strengthen the capacity for innovation.
This is not included in Japanese industrial policy.
Concerning R&D in Japanese companies, the level is high but theeconomy is nevertheless weak. There are issues to be tackled, and I
think one of them is alliances with partners overseas. According to
my research, international joint research would enhance a country’s
innovation capacity. In the area of research on the pandemic,international cooperation has played an extremely important role.
According to the OECD, as Japan made little contribution to suchcooperation, its achievements have been fairly limited. I thinkpromoting international joint research or strengthening knowledgebased alliances will be increasingly important in the wider sense ofindustrial policy.
Looking at Japan’s semiconductor sector-related policies today
from this perspective, the main recent development has been to

attract a factory of the Taiwan Semiconductor Manufacturing
Company (TSMC) to Kumamoto Prefecture, but as it is a productionoriented policy I am afraid that we cannot value it very highly. Japan
has developed lots of policies to attract high-technology companies
to Japanese regions so far, but they have had little effect.
However, taking advantage of the TSMC factory’s introduction to
Kumamoto, Japan could enhance its innovation capacity by adopting
the following two policy measures. The first one is to strengthen thelink between the TSMC factory and Japanese suppliers and enhance
its innovation capacity. There are many research outcomes telling us
technology prevails through supply chains, and with this policy the
TSMC’s impact would be much larger.
However, in order to achieve a smooth alliance, we would needpolicy intervention such as information provision for finding relevant
partners or preventing leakage of confidential information from them.
Okada: In the US and EU, there are some government-led initiatives
to enhance the resilience of supply chains by reshoring or friendshoring (alliances with friendly countries) in the light of recent
geopolitical risks, such as the US-China conflict, the pandemic andRussia’s invasion of Ukraine, though the build-up of business-led
global supply chains has been progressing so far along with free
trade principles. Japan will have to join such renewed global supply
chains. What do you think about this development? Suchgovernment initiatives could distort business decisions and harm
efficient management. Could you tell us what the government andbusinesses need to consider in order to promote the resilience of
supply chains while maintaining their efficiency?
Todo: It is certainly true that the risk of supply chain disruption isincreasing. But I do not think it is relevant to promote reshoring(bringing back overseas production sites to Japan) to cope with it.
Reshoring is not an efficient business decision and would becontrary to globalization, which Japanese businesses have been
taking advantage of in pursuing the most efficient means of
production. In addition, there are so many risks in Japan as well,such as natural disasters like big earthquakes. They may have to do
it to some extent, but reshoring alone would not fix the issue. Friendshoring would be much better and I believe that encouraging
diversification of business directions would be most effective infixing this issue.
It is crucial to lower the dependency of Japanese businesses on
China by this diversification of business partners and enable them toreplace a partnering country with another country in cases of
emergency. This diversification would have costs for a Japanesecompany as it would need information about replacement countries.
To reduce these costs, JETRO or Japanese local governments would
Japan SPOTLIGHT • September / October 202219

need to provide them with the necessary information for suchdiversification as well as support them by business matching.
In addition, assuming that friend-shoring will be important in the
future, Japanese businesses would have to seek partnerships withnations that Japan has few concerns about, as a strategy fordiversification. Therefore, Japanese businesses will now have to takefull advantage of international cooperation frameworks such as theFree and Open Indo-Pacific (FOIP), the Indo-Pacific Economic
Framework for Prosperity (IPEF) and the Quadrilateral Security
Dialogue (QUAD) in order to achieve business matching.
Opacity and unpredictability would be extremely harmful in doing
business. As Prof. Suzuki mentioned, there will be two types ofgoods in the coming days: goods for free trade and goods for
managed trade. If the distinction between the two is not transparent,
it will be harmful for business. So we need clear rules on this
distinction. For example, the Economic Security Promotion Law
adopted in Japan needs to designate specific crucial products interms of economic security on the basis of rules and dialogue
between the government and private business.
Furthermore, it will be necessary to apply international rules as
widely as possible. The WTO would be the best venue for such rulemaking, but it would be difficult. Rule-making could be achieved byutilizing a regional cooperation framework such as the IPEF, and I
would like the Japanese government to take a leading role in thisrule-making.
Okada: With many countries strengthening industrial policies, there
will be large markets created in specific sectors in the US or
European countries in particular, such as semiconductors, greenrelated areas and defense and space-related sectors. Though Japanis also working on creation of such markets by joint funding by thegovernment and private business to develop new technologies, theUS or European markets in these sectors are so huge that Japanesecompanies would also have to get a share of them. How do you think
the Japanese government and businesses can work to resolve theseissues?
Todo: Private companies must have an incentive to enter such hugemarkets in the US and Europe even without government help. There
should not be any role played by the government in helping thesecompanies. The only exception could be information provision by thegovernment regarding the ambiguity of rules for those markets, ifany. Subsidizing businesses designated by the government would
not be a good solution. But the government could set up a dialogue
with the private sector and get a good understanding of what private
businesses would need and then release their message to the rest of
the world.
20 Japan SPOTLIGHT • September / October 2022

Responding to Rising Geopolitical Risks inthe Long Term
Okada: Geopolitical risks are rising, as shown in the pandemic, theUkraine crisis and the US-China confrontation. This increases
uncertainty worldwide. It is therefore very important to learn about
the future prospects of geopolitical risks and the government’s
economic security strategy. Japanese businesses will need todevelop supply chain strategies to enhance the resilience of their
supply chains to be prepared for unexpected changes in the businessenvironment or rules, for example by diversifying production sites ormaterial procurements or increasing stockpiles in a flexible manner,
while the government will need to work on international rule-making
appropriately to reduce these risks. Prof. Suzuki, what do you think
about these challenges that the government and businesses must
work on?
Suzuki: It is true that we cannot expect the continuation of the stabletrading environment that we have benefitted from so far, given thecontinuing rise in geopolitical risks. In this situation, I think theJapanese government and businesses would be expected to promote
structural reform continuously and gradually change our country’s
economy.
Even with the US-China conflict intensifying, sometimes
ideologically and sometimes militarily, both nations’ economic
interdependency will not disappear and probably the economic
interdependency between Japan and China would not disappear
either. Even though China is considered hostile to the US and Japan,
they cannot separate their economies from the Chinese economy.
Under such circumstances, it is difficult to reduce risks to zero.
Therefore, I think we should aim at surviving with these risks to acertain extent. It will be important to think about what is necessary
for survival and prioritize what needs to be protected in the case of
emergencies. For example, we should have a risk scenario taking theworst case into consideration to clarify what should be given up andwhat should be kept for survival in the case of an unexpected decline
in sales or suspension of imports due to intensified confrontation
between the US and China.
Without such a risk scenario and business continuity plan, it will
be difficult to respond to an emergency quickly. We need to think
about what to protect in our list of priorities among business
operations and how much we would spend to protect them, inconsidering how to balance the size of the risk and the cost of raising
resilience to reduce the risk.
Written by Naoyuki Haraoka, editor-in-chief of Japan SPOTLIGHT, with theassistance of TapeRewrite Corporation.