Supply Chain Dynamics in the Japan-Europe Relationship

Japanese Prime Minister Kishida Fumio’s attendance at the NATO summit in Lithuania last month sparked a wave of commentary about Japan’s growing convergence with the security alliance, driven by shared concerns about China. But that is only the tip of the iceberg when it comes to Japan’s broader cooperation with Europe. In particular, cooperation on economic security – and especially semiconductor supply chains – is arguably at the forefront of Japan-Europe cooperation.

Japan and the European Union (EU) inaugurated their Digital Partnership in May 2022, and held the first Japan-EU Digital Partnership Council meeting on July 3, 2023. At the meeting, Japan and the EU signed a “Memorandum of Cooperation on semiconductors.” On July 6, the Japan Organization for Metals and Energy Security (JOGMEC) and the European Commission signed an “Administrative Arrangement on cooperation in critical raw materials supply chains.”

Ursula von der Leyen, president of the European Commission, explained the rationale for these recent developments:

Economic security is a common concern for Japan and the EU. We share similar dependencies, and we both need to de-risk our supply chains. One of our objectives is to reduce overreliance for products that are vital for our economies, like critical raw materials and semiconductors on a handful of suppliers – many of them based in China. I am very pleased that we have concluded cooperation agreements on both topics. We have so much to gain by working together on this.

The next meeting of the Japan-EU Digital Partnership Council is expected in 2024, when the parties will review progress over the past year and agree on next steps.

Both the recent memory of the COVID-19 pandemic and immediate trepidation over a possible Taiwan contingency give impetus for Japan to work on improving its supply chain resiliency.

Kristin Vekasi, associate professor of political science at the University of Maine’s School of Policy and International Affairs, traced the origins of Japan’s anxiety over supply chain resilience further back – to 2010 and China’s politically motivated rare earths embargo. However, she noted that such concerns became more acute in recent years. As Vekasi wrote, “Although Japan’s first major wakeup was 2010, it was the start of the U.S.-China trade war during the Trump administration that initiated serious examination in Tokyo of what is now called ‘economic security,’ and the holistic reconsideration of how integrated supply chains might clash with geopolitical concerns.”

Matthew Gooding, managing editor for Tech Monitor, likewise pointed to 2021 as a turning point in Japanese – as well as American, British, European, and Chinese – thinking on economic security. Leaders around the world had the epiphany that “the nation which does not control the supply chain for semiconductors will suffer during a global shortage. That’s precisely what happened in 2021, when the perfect storm of U.S.-China rivalries and the COVID-19 pandemic saw chipmakers fail to service global demand for their products, and industries around the world falter thanks to a lack of key components.”

In regard to semiconductors, Japan and the EU want to cooperate in research and development, developing the advanced skills for the semiconductor industry, greater transparency around related subsidies, and an early warning system. The early warning mechanism is meant to alert each other of critical disruptions in the semiconductor supply chain and share supply and demand data. The goal is to prevent supply chain disruption by making it possible for companies to take proaction actions, such as lining up additional suppliers.

Japan declared semiconductors a product essential to daily lives and economic activity under an economic security law enacted in 2022. Not only is there greater consideration of de-risking the supply chain, but Japan is also seeking to bolster Japan’s domestic semiconductor industry. In late June, Japanese semiconductor equipment maker JSR accepted a buyout offer of 909.3 billion yen from the Japanese Investment Corp., a fund backed by the Japanese government. This could provide the government greater control over a key step in the semiconductor manufacturing process.

In April, the Japanese government pledged to invest 70 billion yen to develop and make next-generation chips in Japan, including a deal with Rapidus. While Leading-edge Semiconductor Technology Center (LSTC) will take the lead in open R&D, Rapidus will focus on mass production. To that end, Rapidus has signed an agreement with IBM to build 2 nanometer semiconductors, a cutting-edge technology.

Tetsuro Higashi, chairman of Rapidus, has said that this is Japan’s “last chance” in semiconductors. He described how and why the Japanese industry lagged behind: “Japan stayed at 40nm. Japan is too much in the full in-house policy, developing materials and equipment in Japan.” Higashi noted that, ironically, Japan’s competitiveness in the industry was damaged by previous trade competition with the United States: “Of course the trade friction between the U.S. and Japan has a big influence as it was very risky for Japanese companies to do business with overseas companies. Then like a caged bird suddenly set free, they cannot live in the outside. That is the situation that Japan is now facing.”

In the semiconductor sector, Japan dropped from 50 percent of global market share in 1990 to 10 percent today.

In early June, the Japanese Ministry of Economy, Trade, and Industry (METI) made it a goal to increase sales of semiconductors to more than 15 trillion yen by 2030. To put that into context, that is triple Japan’s 2020 sales – but given the rapidly expanding industry, even that will only be enough to maintain Japan’s remaining market share through 2030.

Japan’s export restrictions and tough competition from Taiwan and South Korea could make it difficult to meet this target. However, Japan will have some advantages, as seven of the world’s largest semiconductor makers have proposed plans to increase manufacturing and deepen technological cooperation with Japan, including Taiwan Semiconductor Manufacturing (TSMC) in Kumamoto, South Korea’s Samsung Electronics in Yokohama, and Micron in Hiroshima.

In mid-May, Nishimura Yasutoshi, Japan’s minister of economy, trade, and industry remarked on these developments: “Japan’s role has risen as like-minded nations work to strengthen their supply chains. We reconfirmed the strong potential for Japan’s semiconductor industry.”

Although it is far too soon to judge the success of the Japanese government’s domestic and diplomatic initiatives, this is an important space to keep an eye on for anyone who wants to understand Japan’s approach to security, which includes economic security and de-risking the semiconductor supply chain.