Greetings from Tokyo. Our strange state of purgatory continues: the Covid-19 situation is not too bad, but Japan’s vaccine rollout is only now gaining momentum, so normal life remains suspended for now. The big news event, of course, is the Olympic Games, which are due to start in 25 days. It is now all but certain the games will take place. Whether anyone manages to enjoy them is another matter.

Away from the Olympics, Prime Minister Yoshihide Suga has rolled out his first growth strategy, which has significant implications for the semiconductor industry — the subject of today’s note. In essence, Japan has made it a priority to rebuild sovereign capacity in semiconductor fabrication, and to maintain tighter control over cutting-edge technologies where it is still an important player, marking another step away from the globalisation of the chip industry.

In the glory days of the 1980s, Japan dominated the chip industry, with a global market share that peaked at more than 50 per cent. It was the era of Ezra Vogel’s book Japan as Number One, Japan-bashing films from Hollywood and a US-Japan Semiconductor Agreement designed to hobble the Japanese industry, a goal it achieved, although more to the benefit of South Korea and Taiwan than the US.

The Japanese chip industry’s heyday was as brief as it was glorious. From about 1988, Japan’s market share entered a relentless decline, marked by the growing importance of microprocessors made by Intel; South Korean success in memory chips; and the emergence of the foundry business model in Taiwan, where the fabrication of semiconductors is separated from their design. Japan’s global market share now stands at about 10 per cent.

Even that, however, overstates the health of the Japanese industry. As the new growth strategy points out, Japan has more semiconductor plants than any other country — 84 of them, in fact, which is eight times as many as Taiwan and four times as many as South Korea. The problem is they are small and old. All of Japan’s market share relies on processes a decade or more behind the cutting edge.

Bar chart of number of fabrication plants per country or region showing Japan

Apart from Kioxia, one of the world’s biggest makers of flash memory, used for data storage in mobile phones, and Sony, which has a top market share in image sensors for digital cameras, Japan mainly makes the less glamorous chips, used for specific roles in cars and other devices.

A fire at the Naka plant of Renesas Electronics, north of Tokyo, contributed to the global shortage of chips that has affected Japanese carmakers as well as their EU and US rivals this year. Those global shortages have sparked discussions in various capitals, including Washington and Berlin, about how government can better shield manufacturers from an over-reliance on a select group of chipmakers, notably Taiwan’s TSMC, which dominates the production of smaller chips. Meanwhile, Nikkei reports that more than 160 Chinese semiconductor companies received a combined $6.19bn in funding during the first five months of 2021, as Beijing looked to not only meet global demand, but also lessen its own reliance on imports.

Bar chart of location of manufacturer by chip size showing Japan

The new growth strategy sets out Japan’s own ambitions to change that. Most strikingly, its discussion of semiconductors forms the substance of a chapter on “economic national security”, suggesting Japan’s plans are less about boosting output than about avoiding being caught in the crosshairs of global tensions, notably the fierce competition between the US and China for dominance of future technologies.

“The fabrication of advanced semiconductors is highly concentrated internationally, so we will speedily develop a framework to rival other countries, and promote the establishment of cutting-edge facilities in Japan, in order to create security of supply,” says the strategy. Specifically, Tokyo hopes to lure TSMC to build a local factory, as well as conducting research and development in Japan.

The new strategy also takes a leaf out of the US playbook, suggesting Japan will make it harder for security rivals — most obviously China — to acquire semiconductor technology. The report states that Japan will “rapidly create a new framework” to supplement existing export controls, and strengthen its examination of inward investment in sensitive technology industries. What that means in practice has not yet been spelt out, but one official said semiconductor technology had been under-controlled compared with items that were more directly regarded as dual-use, with both civilian and military applications.

The new strategy also has big implications for Japan’s semiconductor equipment industry, which remained successful even as its chipmakers declined. Companies such as Tokyo Electron are important suppliers of equipment to all the main global chipmakers while Shin-Etsu Chemical and local rival Sumco are the biggest producers of silicon wafers. A host of smaller companies occupy vital niches, as South Korea discovered when Japan suddenly imposed tougher export controls on fluorinated polyimide, photoresists and hydrogen fluoride in 2019. All three are crucial for making chips.

The big question is, will any of this will work? Foundries are expensive and take time to build, as does the knowledge base required to produce cutting-edge technology. Given the extreme concentration observed in parts of the semiconductor industry, most analysts think it will be all but impossible for Japan to regain much of its lost share. What has changed compared with previous decades, however, is that it plans to try.

One of the big fears in the run-up to Brexit was that the English county of Kent would become one giant car park, owing to delays in shipping goods from Dover and other Channel ports to the continent. Surprisingly, that hasn’t happened. This fascinating read, from Peter Foster and Anna Gross, explains why.

The excellent Trade Talks podcast is talking paperwork and blockchain in its latest episode.

Two stories on one of the big topics right now: making trade compliant with environmental, social and governance criteria. Only 12 per cent of major Japanese companies polled in a Nikkei survey ($, requires subscription) said they screened for human rights violations at indirect suppliers, such as the use of forced labour in China’s Xinjiang province. EU member states, meanwhile, agreed reform of the Common Agricultural Policy, but it has been immediately branded by environmental campaigners as “greenwashing”.

Australia has formally launched action at the World Trade Organization against China for antidumping and countervailing duties on wine, as part of the wider diplomatic conflict between the two.