The current chip promotion campaign may be the nation's "last chance" to establish a significant foothold in the global chip market
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Despite the global nature of chip production, it is also highly specialised: Japan produces three important chemicals, the Netherlands manufactures extreme ultraviolet (EUV) lithography equipment, and Taiwan and South Korea are known for producing cutting-edge chips. The supply chain is structured with the United States (US), Europe, and Japan at the upstream end, Taiwan and South Korea in the middle, and China at the downstream end, where chips are incorporated into final goods before being exported. The tech rivalry between the US and China, compounded by COVID-19 supply chain disruptions, is prompting a shift in regional integrations. With the advent of advanced technology, the US is joining forces with key allies like Japan, the Netherlands, South Korea, and Taiwan to form a "value-sharing" chip alliance, recognising the vital role of advanced chips in both military and commercial applications.
Currently, Japan holds a 10 percent share of the global semiconductor market. In contrast, in the late 1980s, Japan held a 50 percent share, which steadily declined due to intense pressure from Washington to limit its exports of semiconductors, particularly Dynamic Random Access Memory (DRAM) chips. These trade restrictions, combined with a price war with China and shifts in global semiconductor market trends towards specialised models, severely impacted Japan's chip manufacturers. Once a leading manufacturer, Japan is now striving to revive its semiconductor industry after losing ground to South Korean, Taiwanese, and US rivals.
Japan's semiconductor industry may have lost its competitive edge over the years, but its indigenous capacity as a supplier of chemicals, materials, and equipment has remained remarkably resilient. Japanese firms control a significant global market share, holding 56 percent in materials and 32 percent in manufacturing equipment—both critical for semiconductor development. Tokyo supplies nearly all of the world's photoresist coating and premium aluminium electrolytic capacitors, essential for producing advanced chips. Additionally, the country holds a substantial global market share for another 70 advanced materials, most of which are supplied to major manufacturing hubs like Taiwan and South Korea, with the remainder being used domestically.
Semiconductor production equipment accounts for almost 60 percent of Japan's semiconductor equipment exports, with components making up approximately 20 percent. Tokyo Electron (TEL), the third-largest equipment maker worldwide, is the biggest semiconductor equipment manufacturer in Japan. Other notable Japanese manufacturers ranking in the global top 10 include SCREEN, Advantest, and Hitachi High-Tech. Furthermore, Shin-Etsu Chemical and Sumco, two Japanese companies, together control 60 percent of the global market for silicon wafers.
Semiconductor production equipment accounts for almost 60 percent of Japan's semiconductor equipment exports, with components making up approximately 20 percent.
Despite past instances of government support failing and multiple failed attempts to restructure the industry, such as the bankruptcy of Elpida Memory in 2012 (despite receiving government funding and later being acquired by American Micron in 2013) together with the failure of projects like “AKSA” and “MIRAI,” Japan is now taking a new approach. The renewed interest in Japan's semiconductor industrial policy is driven not only by recent laws aimed at ensuring the long-term growth of the US semiconductor manufacturing industry, but also by opportunities for new partnerships to strengthen supply chains and address strategic concerns posed by China, natural disasters, and the COVID-19 pandemic. To adapt to external security challenges, Japan’s Ministry of Economy, Trade and Industry (METI) began negotiations in 2019 to invite Taiwan Semiconductor Manufacturing Company (TSMC) to invest in Japan, even before the pandemic hit.
Due to the strategic importance of semiconductors in both military and economic contexts, domestic semiconductor production has become a national security concern for Japan and an economic opportunity for enterprises. Japan's national security strategy aims to enhance self-reliance and secure a technological advantage. To achieve this, Japan is implementing measures to collaborate with allies and like-minded countries on the one hand and offering generous government subsidies on the other, while continuously assessing industry-specific risks.
In 2021, METI designated semiconductor and digital industries as national projects, formulating a support strategy and approving US$ 7.7 billion in funding to bolster domestic semiconductor manufacturing. This strategy, aimed at achieving carbon neutrality, focuses on the development and application of semiconductors as the foundation for electrification and digitisation across various industries.
Japan's semiconductor industrial policy leverages strong technology alliances, unlocks private investment, and diversifies strategic risk. METI is supporting both a high-risk, high-return project in Rapidus, and a low-risk, low-return project in the Japan Advanced Semiconductor Manufacturing (JASM)/TSMC Kumamoto. Since the creation of JASM towards the end of 2021, at least 46 semiconductor-related manufacturers have announced new investments in the Kyushu region, promoting local economic development and strengthening Japan's competitive position in advanced semiconductor manufacturing. Additionally, the JOINT2 initiative, launched in 2021 with the participation of 13 enterprises, including equipment and material manufacturers, aims to collaboratively develop and assess next-generation packaging materials for semiconductor production post-processes. These approaches aim to make industrial policy more effective by unlocking private investment.
Japan's semiconductor industrial policy leverages strong technology alliances, unlocks private investment, and diversifies strategic risk.
Recognising the increasing importance of data sharing, Japan aims to reduce disparities in the ability to control and secure sensitive information, particularly in dual-use technology fields. Industry-specific assessments, including security clearance processes, will be conducted to enhance information security. This effort aligns with the recent activation of a real-time North Korea missile warning data-sharing mechanism with the US and South Korea, which could intersect with semiconductor industrial cooperation.
Following the 2022 CHIPS Act, Washington and Tokyo have strengthened their ties and built synergies in the semiconductor industry. Additionally, Japan has also signed a Memorandum of Cooperation with the European Union, the United Kingdom, the Netherlands, and India. Japan is a member of the US-East Asia Semiconductor Supply Chain Resilience Working Group (commonly known as "Fab 4"), which includes Taiwan and South Korea, alongside the bilateral agreement on Basic Principles between the US and Japan.
While US-owned companies dominate semiconductor design globally, Washington still lags in manufacturing capacity. Currently, only 12 percent of the world's modern semiconductor production capacity is accounted for by fabs (chip manufacturing units) located in the United States. Despite its higher costs, Japanese semiconductor manufacturing is increasingly seen by American officials and business leaders as a viable alternative to China.
Tokyo has signed an agreement with India as well to jointly grow the semiconductor ecosystem. In July 2023, India and Japan signed a Memorandum of Understanding (MoU) on semiconductor development, covering design, manufacturing, equipment research, and talent development. This partnership aims to overcome obstacles such as high labour costs and resource constraints in Japan. India has proposed to support semiconductor and display manufacturing projects by covering up to 50 percent of project expenditures.
Tokyo has signed an agreement with India as well to jointly grow the semiconductor ecosystem. In July 2023, India and Japan signed a Memorandum of Understanding (MoU) on semiconductor development, covering design, manufacturing, equipment research, and talent development.
At present, Japan faces significant challenges in the chip industry, with its most advanced factories lagging behind global giants Samsung and TSMC by nearly a decade. The country's most technologically advanced DRAMs are produced by Micron Technology, an American company, as Japan's DRAM manufacturers, who dominated international markets in the 1980s, have exited the industry. Despite these challenges, Japan remains competitive internationally in certain semiconductor device categories, such as NAND memory, power semiconductors, microcontrollers, and CMOS image sensors. While it may be too early to determine whether Japan’s semiconductor industrial policy will succeed in reviving the country’s chip industry, as the government has recently acknowledged, the current chip promotion campaign may be the nation's "last chance" to establish a significant foothold in the global chip market.
Pratnashree Basu is an Associate Fellow at the Observer Research Foundation.
Namisha Binaykiya was a research intern at the Observer Research Foundation.
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Pratnashree Basu is an Associate Fellow, Indo-Pacific at Observer Research Foundation, Kolkata, with the Strategic Studies Programme and the Centre for New Economic Diplomacy. She ...
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Namisha Binaykiya was a research intern at the Observer Research Foundation. ...
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