Japan’s Economy and Chip Industry: Challenges and Opportunities
Japan, the world’s fourth-largest economy, is facing a double challenge: to revive its stagnant economy amid a recession and to regain its competitiveness in the global chip industry. The country, which once dominated the semiconductor market, has seen its share decline in recent years due to fierce competition from Taiwan, South Korea, China, and the US. The coronavirus pandemic and the chip supply shortage have further exposed Japan’s vulnerability and dependence on foreign chipmakers.
According to the latest official estimates, Japan’s fiscal deficit for the current financial year ending March 31 will reach 9.5% of the gross domestic product (GDP), mainly due to the sharp decline in revenues from land sales, profits tax, and stamp duty, as well as the increase in expenditure on anti-pandemic measures and relief packages. The government forecasts a GDP growth of 3.8% for 2023 and 4.2% for 2024, with an average annual growth rate of 3.3% from 2025 to 2028. However, these projections are subject to high uncertainty and downside risks, as the Omicron variant of COVID-19 poses a new threat to the global and domestic recovery.
Japan’s economic recovery is struggling to gain momentum, as inflation continues to run above the Bank of Japan’s (BoJ) 2% target, eroding consumer purchasing power and business profitability. Inflation in Japan was 3.3% in October on a year-ago basis, driven by rising food and energy prices. Although monetary policy remains highly accommodative, inflation is outpacing wage growth, causing real spending to fall. Until inflation comes down or wages move up, domestic demand is expected to remain subdued or even continue to decline.
To stimulate domestic demand, the government unveiled a 17 trillion-yen (approximately US$117.7 billion) fiscal package in December 2021, which includes temporary tax cuts, rates waivers, electricity subsidies, and extra allowances for low-income and elderly people. The government also proposes to implement a consumption voucher scheme of 5,000 yen per eligible Hong Kong permanent resident aged 18 or above, to boost local consumption and support businesses. By the second half of 2022, moderating inflation and accelerating wages should allow for a stronger recovery to take hold.
Export growth, which has been a key driver of Japan’s recovery, will also likely come down as global growth slows and pent-up foreign demand for Japanese goods eases. Japan’s goods exports were up just 1.6% from a year ago in October, with a surge in motor vehicle exports being the main reason for the positive growth. However, other major export categories were all lower on a year-ago basis, reflecting the impact of supply chain disruptions, chip shortages, and a strong yen. The strength seen in motor vehicle exports is unlikely to last, as the US autoworker strike has ended and pent-up demand for autos seems to be waning as high interest rates make financing vehicles more expensive.
To address its vulnerability and dependence on foreign chipmakers, Japan has launched a series of initiatives to boost its domestic chip production and attract foreign investment. One of the most notable moves is the collaboration with Taiwan Semiconductor Manufacturing Co (TSMC), the world’s largest contract chipmaker, which has opened its first plant in Japan and plans to build a second one in the Kumamoto region. The Japanese government has provided substantial financial support to TSMC, totaling more than $10 billion, to encourage the Taiwanese firm to invest in Japan.
The TSMC plants in Japan are expected to create 3,400 high-tech jobs and meet the increasing demand for advanced chips in electric vehicles, artificial intelligence, and other fields. The partnership with TSMC is also seen as a strategic move to strengthen Japan’s ties with Taiwan, a key US ally and a rival of China, which claims the self-governing island as its own territory.
In addition to the collaboration with TSMC, Japan has also announced a budget of $33 billion to revive its chip industry, which includes subsidies, tax incentives, and loans for domestic chipmakers and research institutes. The government hopes to increase Japan’s share of the global chip market from 10% to 15% by 2030, and to achieve self-sufficiency in key chip components.
Japan’s chip ambitions are not only driven by economic and security considerations, but also by a sense of pride and innovation. The country has a long history of excellence in chip technology, especially in areas such as memory, sensors, and power devices. Japan also has a strong base of chip customers, such as Sony, Toyota, and Panasonic, which are global leaders in their respective industries.
However, Japan’s chip industry faces many challenges, such as a shrinking and ageing population, a lack of skilled workers, and a high cost of production. To overcome these obstacles, Japan is determined to leverage its unique advantages under the “one country, two systems” principle and the national development strategies, such as the Guangdong-Hong Kong-Macao Greater Bay Area and the Belt and Road Initiative.
Japan is confident that it can overcome the current challenges and restore its fiscal health, as it has done in the past. It also believes that it can become a global leader in chip manufacturing, as part of its vision to achieve a digital transformation and a green recovery.
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