Japan is boosting its chip-making but it's still at a strategic crossroads

Japan is a land of paradoxes. It’s steeped in tradition and is sometimes resistant to change. But it is also a bastion of technological dynamism, which could prove useful as it seeks to find its place in the emerging brave new world. Amid an ongoing global “chip war”, Japan has rapidly positioned itself as a semiconductor hub. Seeking to enhance its economic security and dominate the next phase of technological innovation, it has poured $67 billion into bolstering its chip production capacity. Chip producers such as Taiwan Semiconductor Manufacturing Company and Alchip Technologies are flocking to the North-East Asian nation, encouraged by its robust industrial policy. Japan’s semiconductor king, Renesas Electronics, is on a multi-billion-dollar acquisition drive to consolidate its position in core industries such as defence and infrastructure. This technological dynamism is partly an upshot of Japan’s proactive bureaucracy, especially its Ministry of Economy, Trade and Industry, which oversaw its economic miracle after the devastation of the Second World War. During a recent visit to the ministry, I was struck by the sophistication and nimbleness of its bureaucrats, who were among the world’s first to develop an integrated concept of “national economic security” amid growing uncertainties in global supply chains. At the same time, it’s hard to overstate Japan’s relative stagnation. A country whose economy was the second largest throughout the first decade of the 21st century was dethroned by Germany last year, and is expected to be surpassed by India by 2030. Meanwhile, it is confronting myriad geopolitical uncertainties. Based on conversations with current and former officials, concern about China’s ascent is clear, as is the political dysfunction in the US, its sole treaty ally. Japan is also grappling with acute political and demographic crises at home. After almost three centuries of relative stasis during the Edo Period, the country embraced a “Century of Transformation” that began during the Meiji Restoration in the late-1800s and culminated in its emergence as America’s biggest economic rival in a hundred years’ time. But even at its peak, post-war Japan was never a fully independent power. International relations expert Peter Katzenstein notes that “Japan’s grand strategy aimed at gaining power and prestige and sought to leverage its economic prowess to a position of regional and perhaps global leadership [that] would complement rather than rival that of the United States”. This was especially so because Tokyo primarily “relied on the continued protection by the US military”. Japan’s strategic subordination was further reinforced by an acute economic crisis in the late-1980s that presaged the so-called “Lost Decades” of the 1990s and 2000s. During his second stint as prime minister, from 2012 to 2020, the late Shinzo Abe embarked on a transformative policy agenda that aimed to make his country more militarily capable, economically dynamic, and a global force for good. Current Prime Minister Fumio Kishida , Mr Abe’s protege, has built on his legacy by adopting an increasingly muscular national strategy. During a keynote address at the 2022 Shangri-La Dialogue in Singapore, Mr Kishida launched a “realism diplomacy”, under which Japan is doubling its defence spending; developing “counterstrike” and offensive military capabilities; and co-developing next-generation fighter jets and defence technology with likeminded powers. Deepening security co-operation with the West and India has gone hand-in-hand with Japan’s emergence as a major source of defence aid. Last year, Tokyo launched the Official Security Assistance package, under which key South-East Asian states are expected to receive maritime security assistance. Crucially, Tokyo is also pursuing high-stakes defence deals with regional states, most notably a Visiting Forces Agreement-style pact with Manila, thus portending expanded Japanese military presence on Philippine soil and increasingly sophisticated joint drills. The shift in Japan’s outward orientation, however, is also driven by a deepening strategic anxiety among its leadership over Beijing’s rise. China overtook Japan as the world’s second-largest economy in 2010. Between 1990 and 2014, China’s share of East Asia’s gross domestic product increased from 10 per cent to 50 per cent, while Japan’s shrank from 70 per cent to 20 per cent. Meanwhile, Beijing’s defence budget – smaller than Tokyo’s in the early-2000s – is said to be five times bigger than that of its arch-rival today. But just as worrying for Japanese elites is China’s increasingly sophisticated economy and military capabilities. Last year, China surpassed Japan as the world’s leading car exporter, while consolidating its position as a leader in cutting-edge technologies in areas such as renewable energy, quantum communications, 5G telecommunications and electric vehicle production. As one former Japanese official put it to me, “China has used the [international trading] system against us”, referring to how Beijing has drawn on global trade with, and investments from, the West and Japan to transform itself into a technological superpower. A major concern for Tokyo is China’s potential “weaponisation” of global supply chains amid a brewing conflict with the West, which explains Japan’s frantic drive to build up its own tech production capacity and diversify its supply chains. But Tokyo’s strategic elite also worries about its sole ally, America, particularly over its unstable domestic politics. There is growing anxiety about a potential major foreign policy shift should former president Donald Trump return to the White House next year. Mr Trump has threatened to impose even bigger tariffs on its Asian competitors and has warned allies to “pay their dues” or face dire consequences. The long-term trajectory of the Japan-US alliance is an existential issue for Tokyo, given the latter’s concerns about a potential conflict with China over either Taiwan or maritime disputes in East Asia. Japan’s sense of insecurity is so acute that, one former official put it to me that “for the first time we are talking about [hosting American or developing our own] nuclear weapons in Japan”, referring to an ongoing debate over whether Tokyo needs a nuclear deterrent. What makes these external headwinds especially troubling for Japan is its own domestic situation. Mr Kishida has one of the lowest approval ratings of any leader in recent history, yet there are no clear alternatives on the horizon. Political passivity and cynicism are common among voters, who have little confidence in their political class. Add to this, the shrinking population that will only exacerbate economic stagnation. In many ways, Japan is at a strategic crossroads, forcing its leaders to rethink its post-war grand strategy in order to survive, if not thrive, in a new era of geopolitical uncertainty.