In addition to OODA Senior Advisor and OODA Network Member Chris Ward’s brilliant analysis of Japan’s Stunning Advancements in National Defense Investments, here are five additional geopolitical maneuvers and fiscal and industrial policy signals emanating from the East China Sea.
1 – The Strengthening of Japan’s Defense-Industrial Base and Cybersecurity
Christopher B. Johnstone, Japan Chair at the Center for Strategic and International Studies (CSIS) in Washington, D.C. expands further on the implications of the strategic national security investment by Japan contextualized in Chris Ward’s analysis:
Both the national security and defense strategies are likely to include an emphasis on strengthening cybersecurity to protect Japanese government networks as well as critical infrastructure. New initiatives are likely to include efforts to strengthen the authorities of the National Center of Incident readiness and Strategy For Cybersecurity (NISC), which today nominally sets cybersecurity standards and oversees incident response—or the creation of an entirely new organization, to better integrate cyber defense capabilities in the Defense Ministry and National Police Agency. The Ministry of Defense reportedly is planning to increase personnel responsible for cyber defense by a factor of five to around 4,000 personnel, from just over 800 today by 2027. A focus in Japan on strengthening cybersecurity will be welcome by the U.S. government; weak cybersecurity practices across the Japanese government have been a critical impediment to deeper alliance cooperation and expanded information-sharing.
Finally, the defense strategy will also place a heavy emphasis on strengthening Japan’s defense-industrial base. Despite steps to loosen restrictions on defense equipment exports under Abe, Japan’s defense industry is largely uncompetitive internationally and remains focused on the small domestic market. A recent exodus of second and third-tier suppliers from the sector has further alarmed Japanese leaders. The defense strategy is therefore likely to advance a number of steps to strengthen the industry, including increased funding for research and development; further loosening of export rules, in particular, to allow more flexibility for transfers to countries that could be parties to a conflict (current rules make it difficult for Japan to provide equipment to Ukraine, for example); and exploring new institutions, perhaps modeled on the Innovation Unit, to support and capture emerging dual-use high technologies.
This is an urgent area for the Japanese government—but also a challenging one to address, given the existing structure of Japan’s industry, in which defense is a small side business for even the largest firms. The imminent announcement of a partnership among Japan, the United Kingdom, and Italy to develop a common fighter aircraft will signal Tokyo’s intent to move toward a co-development and co-acquisition model that diverges from the past practice. will signal Tokyo’s intent to move toward a co-development and co-acquisition model that diverges from the past practice.
The Kishida government’s new national security strategy represents an inflection point—one that sets in motion a material transformation in Japan’s defense posture that builds upon the policy and legal reforms that Abe put in place. These changes were unimaginable only a few years ago and represent a vast opportunity for the U.S.-Japan alliance. (1)
2 – Japan is a Partner in Efforts to Tighten Chip Exports to China
Curbs will affect chipmaking gear firms ASML, Tokyo Electron
In December 2022, Japan and the Netherlands…agreed to join the US in tightening controls over the export of advanced chipmaking machinery to China, according to sources. The two countries are likely to announce they will adopt at least some of the measures the US rolled out in October to restrict the sale of advanced semiconductor manufacturing equipment. The Biden administration said the measures were aimed at preventing Beijing’s military from obtaining advanced semiconductors. Japan had to overcome opposition from domestic firms that would prefer not to lose sales into China. The three countries are the world’s top sources of machinery and expertise needed to make advanced semiconductors.
“The three-country alliance would represent a near-total blockade of China’s ability to buy the equipment necessary to make leading-edge chips. The US rules restricted the supply from American gear suppliers Applied Materials Inc., Lam Research Corp. and KLA Corp. Japan’s Tokyo Electron Ltd. and Dutch lithography specialist ASML Holding NV are the two other critical suppliers that the US needed to make the sanctions effective, making their governments’ adoption of the export curbs a significant milestone.
‘There’s no way China can build a leading-edge industry on their own. No chance,’ said Sanford C. Bernstein analyst Stacy Rasgon.
Also in December, China filed a dispute over the US export controls with the World Trade Organization, the country’s Ministry of Commerce said in a statement. Beijing said the restrictions threaten the stability of the global supply chain and that America’s national-security justification is dubious.” (2)
3 – The US-Japan Led, EV Battery-Fueled Economic Partnership Roadmap Emerges
“…a larger network of…countries united in staving off Chinese coercion by reorienting supply chains is expected to advance further.”
“Trade used to be the biggest source of friction between the United States and Japan. But trade is now emerging as concern that binds the world’s biggest and third-largest economies. As shared concerns about supply chain resiliency and over-dependence on China increase, the two countries have concluded a trade deal signed to bolster the supply chain of critical minerals for both by preventing either side from imposing export duties on lithium, cobalt, nickel, graphite, and manganese on the other. That, in turn, will allow the United States and Japan to work together to push back against China dominating the electric vehicle battery sector. The longer-term political significance of the deal that is enhancing U.S. relations with Japan, however, cannot be underestimated.
First, it demonstrates the Biden administration’s willingness to work together with key allies on the trade front. While the White House has enhanced coordination efforts on security in the Indo-Pacific, its trade policies have been seen as more in line with that of the Trump administrations and increasingly protectionist.
Secondly, trade relations between Japan and the United States are no longer defined by addressing trade imbalances and pressing for market access. At the same time, countries have focused more on averting being hit by the protectionist measures by Washington as the United States focuses on boosting greater domestic resilience and the competitiveness of its own companies.
Thirdly, while China is the single largest trading partner for Japan as well as for the rest of Asia, a consensus about China as an economic threat is clearly emerging. Keeping away advanced technology from China and curtailing Beijing’s emergence as a technology competitor is a foreign policy objective that has bipartisan support on Capitol Hill, and a goal that is increasingly shared by US allies as well. (3)
The Wilson Center’s Goto concludes:
“As Japan prepares to host the G7 summit meeting in May, Prime Minister Fumio Kishida is expected to advance efforts for greater cooperation amongst the world’s richest nations to push back against Chinese economic coercion that goes beyond leveraging its dominance in the critical minerals sector. From keeping away advanced semiconductor technology from Beijing to decreasing dependence on China in critical industries, a larger network of like-minded countries united in staving off Chinese coercion by reorienting supply chains is expected to advance further.” (3)
4 – In a March 2023 visit to India, Japanese PM Kishida pledges $75 Billion to Indo-Pacific
“…a new framework for granting aid to armed forces in like-minded countries.”
“Japan’s government plans to mobilize more than $75B of public and private funds to invest in infrastructure across the Indo-Pacific by 2030. Prime minister Fumio Kishida made the commitment on March 20 during a visit to India.
He said the investment will comprise “private investments, yen loans, and other means; to help meet the major demands in each country’ across the region. He also pledged to improve security assistance, including maritime security, and highlighted the government’s establishment of a new framework for granting aid to armed forces in ‘like-minded countries’ (4)
5 – A Wave of Digital Change Hits Japan
Check out these metrics from FDi Intelligence (a service of the Financial Times):
- Japan aspires to become a technology leader in the digital economy despite having one of the least digitised government systems among developed economies.
- The IMF wrote that Japan’s digitalisation efforts “can add momentum to its economic rebound post-pandemic”.
- “Japan has tried to digitize many times before, but this time the pandemic has provided a real push, particularly in digital services related to Covid testing,” says IMF economist Rui Xu.
- However, the country’s ageing population may slow down the country’s effort to digitise its economy and society.
- In the 21st century, Japan possesses two digital reputations: it is known as both the innovator and the laggard.
- In November, the government unveiled a new chip company called Rapidus. Backed by a consortium of eight major Japanese companies, it is slated to mass produce cutting-edge two-nanometer logic chips over the latter half of the 2020s. These are semiconductors that process data and are vital in sectors such as 5G communications, artificial intelligence (AI), green energy, and quantum computing.
- The Rapidus deal coincides with a broader push from the Japanese government to protect critical infrastructure and supply chains following the passing of its economic security bill earlier this year. Despite not being at the forefront of chip production, it is still a notable player in the global chip supply chain, with a share of more than 30% of semiconductor manufacturing equipment and 50% of semiconductor materials, according to US government statistics.
- The country is getting serious about digitization. In September 2021, the government set up the Digital Agency, which aims to strengthen Japan’s digitalization and coordinate between national governments, local governments and business interests. In a report earlier this year, the IMF wrote that Japan’s digitalization efforts “can add momentum to its economic rebound post-pandemic”.
- “Japan is reforming”, citing…pursuit of economic security and the digitization of Japan are both “positive for foreign direct investment (FDI)” flows into the country. On top of that, the depreciation of the yen can only help, he says.
- FDI has already been flowing into digital technology in Japan. A record estimated capital expenditure of $2.4bn went into ICT and internet infrastructure in Japan in 2021, according to fDi Markets — up from a yearly average of $663m in the 2010s.
- Alongside major Japanese companies of the likes of Toyota, NTT, Sony and NEC, US IT giant IBM is set to partner with Rapidus, according to the Financial Times. IBM declined to comment further. The government is set to give Y70bn ($504m) in research and development (R&D) subsidies to establish the manufacturing base.
- Last November, Taiwanese chip giant TMSC announced a $7bn factory in southern Japan, in partnership with Sony, on which construction has already begun. Production is due to begin by the end of 2024, although this is to make legacy, rather than cutting-edge, chips.
- Tokyo and its surroundings have become something of a hot spot for data centers. Equinix announced an investment of $115m in a data center in November, following Google’s announcement in October that it will establish its first data center in Chiba in 2023, as part of its $730m infrastructure investment in Japan. Last year, Princeton Digital Group invested $1bn in a data center in Tokyo.
- According to the independent research firm Structure Research, Tokyo’s data center colocation is set to grow by 9.2% compound annual growth rate between 2021 and 2026, with the hyper-scale and retail data center markets projected to be worth a total of $3.4bn by 2026. (5)
The Post-pandemic growth trajectory of Japan
In a recent report, the IMF points out that the impact of the Covid-19 pandemic has also forced the acceptance of technology in a country that has been slow to digitise.
“The pandemic underscored Japan’s uneven embrace of technology,” the report reads. “Even though it’s one of the world’s biggest users of industrial robots and home of a major electronics industry, it still lags other economies in the adoption of digitalisation by businesses — for example, continued reliance on legacy IT systems — government and the financial sector.”
Rui Xu, another IMF economist, says that the pandemic was a “wake-up call” for Japan as it emerged from the pandemic, even if an ageing population undoubtedly changes the nature of digital transformation.
“Japan has tried to digitise many times before, but this time the pandemic has provided a real push, particularly in digital services related to Covid testing,” she says. “But as Japan’s society is much older, the government is very cautious about moving digitisation along [and] leaving behind their senior citizens.”
Part of the government’s plan for societal transformation is Society 5.0 — harnessing AI, big tech, robotics and the Internet of Things (IoT) to address the country’s falling birth rate and ageing population. Elsewhere, METI wants to double the IoT market from $500m in 2020 to $1tn by 2030.
But the country’s demographic woes are not getting any easier. As of January 1, 2022, Japan’s population had fallen by some 726,000 to 125.9 million — its sharpest drop in both absolute number and as a percentage since records began in the 1950s, according to government data.
Reflecting on the Japanese government’s ambitions, Mr Mitchell points out that “there are macro-determinants that you cannot ignore, such the declining population and a small talent pool”. Based on government data, Japan will have a shortage of 270,000 AI and IoT posts by 2030, according to Nikkei.
All things considered, 21st century Japan looks likely to remain in the shadow of its former glory.
“It is a mixed picture. Japan is likely to continue to dominate the supply of materials used in semiconductors, but many observers here believe it is unlikely that Japan is going to repeat the big splash it made in the 1980s with memory chips with logic chips,” Mr Mitchell says.
“It’s very hard to make radical changes to catch up with leading companies,” he stresses. (5)
Japan’s Stunning Advancements in National Defense Investments
