Published 16 July 2024
As early as 2005, the Japanese government proposed the China Plus One strategy to hedge against the risks of chilling bilateral relations between Beijing and Tokyo. At the time, the response of Japanese companies was lukewarm. Things are different now. Washington’s friendshoring strategy has elevated Japan’s role in the global supply chain reshuffle, providing fresh impetus and momentum for Japan to re-industrialize.
Global value chains have become integral for manufacturing and trade in the 21st century but their efficiency has been undermined by shocks emanating from the United States–China trade war, the Covid-19 pandemic, the war in Europe and rising geopolitical tensions. In the post-pandemic era, a focus on strengthening the resilience of supply chains and protecting national security has been driving the reconfiguration of global value chains.
As early as 2005, the Japanese government proposed the China Plus One strategy to Japanese multinational companies to hedge against the risks of chilling bilateral relations between China and Japan. At the time, the response of Japanese companies to the proposal was lukewarm. This time is different. Shocked by the contagious effects of the Covid-19 lockdowns in China, the administration of former Japanese prime minister Shinzo Abe budgeted JP¥245.6 billion (US$1.56 billion) to help Japanese firms relocate production on shore or to Southeast Asia.
By 2022 Japanese foreign direct investment in China had reached US$127.6 billion, the largest among Asian countries. Many Japanese multinational enterprises used the country as an export platform for the US market. The 25% punitive tariffs imposed by the US on Chinese exports and the possibility of escalation in the trade war raised the costs and uncertainty of operating in global value chains where China is the manufacturing and assembly base, and the US is the destination market. The ongoing US–China trade war has further motivated Japanese firms to diversify their supply chains.
In Japan the Ministry of Economy, Trade, and Industry (METI) assists Japanese companies to reshore supply chains while the Japan External Trade Organization (JETRO) supports Japanese firms to shift their supply chains to Association of Southeast Asian Nations (ASEAN), India, and Bangladesh. Between May 2020 and March 2022, METI subsidized 439 onshoring projects covering a range of sectors including medical equipment, auto parts, electronics and semiconductors. During the same period, JETRO approved 104 nearshoring projects and provided up to JP¥5 billion (US$32 million) to each project. It has also coordinated with Association of Southeast Asian Nations (ASEAN) to implement the nearshoring strategy to strengthen the supply chain resilience of Japanese companies.
In 2023, China accounted for 17.6% of Japanese exports. It is also one of the largest hosts of Japanese foreign direct investment. Supply chain diversification aims to reduce Japan’s economic dependence on China and mitigate the risks of unstable political relations between the two nations.
The Covid-19 pandemic disrupted semiconductor supply chains and caused a severe shortage of semiconductor chips for the automobile industry, a pillar of Japan’s industrial economy. In 2021, the Japanese government published its ‘Strategy for Semiconductors and the Digital Industry’ which aims to rebuild the semiconductor industry with government subsidies. In 2022 the Japanese Diet passed the Economic Security Promotion Act, mandating the government to secure the supply chains of critical materials and maintain the stability of key infrastructure and national security.
The US has designated China as a competitor and is attempting to reorganize global supply chains in semiconductors, electric vehicles and other high-tech industries with partners and like-minded nations. The dominance of global value chains in the world economy makes it unlikely for one country to build a sophisticated industry completely independent of foreign suppliers. Friendshoring is more realistic than onshoring.
Given its geopolitical significance and technological capacity, Japan is regarded as the United States’ most capable and reliable partner to jointly reconstruct global supply chains in strategic industries. In March 2023 the US and Japan signed the Critical Minerals Agreement to strengthen cooperation in critical material supply chains and ensure that electric vehicle battery materials processed in Japan are not discriminated by the US Inflation Reduction Act. In May 2023, US Secretary of Commerce Gina Raimondo and then Japanese Minister of Economy, Trade, and Industry Yasutoshi Nishimura issued a joint statement advocating cooperation in creating a more resilient semiconductor ecosystem and developing the next generation of semiconductors. Japan has joined the US semiconductor alliance and has adopted export controls on 23 semiconductor technologies.
The Japanese government is seizing on the momentum of supply chain reorganization and US–China rivalry to revitalize its domestic semiconductor industry. Building resilient supply chains for national security also justified the Japanese government’s promotion of strategic industries through lavish subsidies.
The Japanese government has allocated JP¥4 trillion (US$25.4 billion) to subsidize investment in the semiconductor industry—the largest among Organisation for Economic Co-operation and Development (OECD) countries in terms of gross domestic product. Both Japanese and foreign semiconductor firms are eligible for subsidies. Taiwan’s TSMC received JP¥1.2 trillion (US$7.6 billion) for its first two factories in Kumamoto enabling the production of more advanced 28- to six-nanometer chips.
Even the South Korean company Samsung, the archrival of Japan’s Sony, received a subsidy of JP¥20 billion (US$127 million) to build a semiconductor research center in Yokohama. With a subsidy of JP¥920 billion (US$5.8 billion), Rapidus, a new chip venture founded by seven Japanese companies including Toyota and Softbank, aims to manufacture two-nanometer chips in collaboration with the US company IBM in 2027.
The friendshoring strategy has strengthened coordination in industrial policies between Japan and the US and elevated Japan’s role in global supply chain reorganization, providing fresh impetus for Japan to re-industrialize and regain growth momentum. Japan can take advantage of its involvement in multilateral free trade initiatives, including the US’s Indo- Pacific Economic Framework for Prosperity (IPEF) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), to strengthen its regional leadership in building sustainable and resilient global supply chains.
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