Japan's Semiconductor Renaissance – Is it for Real?

Back in the 1980s, Japan produced more than 50 percent of the world's semiconductors. But today, Japanese semiconductors account for less than 10% of the global semiconductor market. What happened? And can Japan regain its semiconductor mojo?

In an article recently published by the National Bureau of Asian Research (NBR) titled "The Japanese Semiconductor Renaissance – Will It Be Successful?" Kazuto Suzuki confidently asserts, "Japan is in the midst of a semiconductor renaissance."

Evidence of that seems to be everywhere these days. Take, for example, the February 2024 start of operations at the first Japan Advanced Semiconductor Manufacturing (JASM) plant in Kumamoto and the start of trial production of 2-nanometer logic semiconductors at a new Rapidus Corporation foundry in Chitose City, Hokkaido, in April.

Suzuki, a professor of Science and Technology Policy at the University of Tokyo's Graduate School of Public Policy and director of the Institute of Geoeconomics, offers a word of caution. He says Japan will need to learn from past mistakes and overcome significant challenges if it hopes to become a major semiconductor powerhouse again.

Lessons from the VLSI Era

Many observers point to the 1986 US-Japan Semiconductor Agreement as the prime reason for the rapid decline of Japan's semiconductor sector. That agreement came about because of accusations that Japan had engaged in unfair trade practices, which allegedly devastated United States competitors. There was no denying that in the postwar years, the Ministry of International Trade and Industry (MITI) had fostered Japan's semiconductor sector through various incentives.

For example, starting in 1978, the MITI led the very-large-scale integration (VLSI) project. Working with major tech firms like NEC, Toshiba, Hitachi, and Fujitsu, Japan surged ahead in developing cutting-edge technologies, particularly dynamic random-access memory (DRAM) chips. By 1983, Japan had surpassed the US in terms of DRAM production, and Japanese companies were not stinting on investment to boost production yields and reduce costs.

Indeed, the semiconductor agreement certainly drained much of Japan's momentum. Contributing further to the decline in the 1990s was something more internal: the very corporate culture that had once powered Japan to become the world's second-largest economy by 1968 had begun to hold it back.

*Toshimitsu Motegi, the former Minister of Economy, Trade and Industry (second from right), visits the planned site for Rapidus' factory in Chitose, Hokkaido, on June 18, 2023. (© Kyodo)*

Stuck in the IDM Model

Dr Suzuki points out that one of the biggest reasons Japan's semiconductor strategy failed was its attachment to the integrated device manufacturer (IDM) model. Under this vertical system, each of the country's giant electronics makers handled everything — from design to manufacturing and packaging — within its own keiretsu group.

Manufacturing semiconductors is a capital-intensive business that requires huge investments on an ongoing basis. In the 1990s, independent, dedicated fabrication plants (fabs) emerged, including foundries that supplied semiconductor companies that designed but did not produce their own chips.

In fact, the "fabless" model pioneered by Taiwan's TSMC (Taiwan Semiconductor Manufacturing Company), established by Morris Chang in 1987, revolutionized the semiconductor industry. (TSMC held a roughly 65% share of the global semiconductor foundry market in 2024.) This new model wreaked havoc on Japanese firms that stuck to the IDM approach.

*Taiwan Semiconductor Manufacturing Company (TSMC) headquarters*

A Late Pivot and Ongoing Vulnerabilities

Suzuki adds that competing Japanese semiconductor makers only half-heartedly took part in a government-backed "all Japan" consolidation effort. As a result, none were left with the resources to make the massive, ongoing investments needed to stay competitive in cutting-edge chip production. In other words, the Japanese semiconductor industry fell victim to structural problems largely of its own making.

Only belatedly did Japanese companies finally abandon their fixation on IDM and opt to become part of an international division of labor based on cooperation. Increasingly, having access to the most advanced semiconductors seems a national priority, especially with the enormous and ever-growing demands of artificial intelligence (AI). But the absence of a strong semiconductor manufacturing base leaves Japan vulnerable to supply disruption.

Strategic Autonomy and Financial Gaps

Suzuki writes that the Japanese government now views its new semiconductor strategy as an effort to ensure "strategic autonomy" as part of its economic security policy. The government has provided ¥1.2 trillion JPY (approximately $7.74 billion USD) to JASM for its first and second factories in Kumamoto and ¥920 billion ($5.94 billion) to Rapidus.

JASM is a majority-owned subsidiary of TSMC and Sony Semiconductor Solutions Corporation, from which it receives much of its funding. Rapidus, however, finds itself in a more precarious financial position. Eight companies have invested in it, but the total amount of investment to date is only ¥7.3 billion ($47.1 million).

The Development Bank of Japan and three major banks intend to invest ¥25 billion ($161.29 million) into Rapidus. However, the question is whether that investment will be sufficient, considering the enormous amount of money needed to keep a foundry going even before it begins mass production.

A Race Against Time

Much may depend on the amount of support the Japanese government is willing to offer. Mass production of 2-nanometer chips may require up to ¥5 trillion ($32.26 billion). Former Prime Minister Fumio Kishida's administration was eager to provide guarantees for investment in Rapidus with an eye to attracting more private investment as well as skilled labor.

Legislation to enable the provision of such guarantees through revision of the Act on Facilitation of Information on Information Processing and other rules is now pending in the Diet. Suzuki warns, "The (Shigeru) Ishiba cabinet will need to commit with the same level of passion as the previous administration."

Then, too, there is the question of how to recruit the human capital needed if Japan's semiconductor sector is to prosper once again. There is, in fact, a global shortage of qualified people with the necessary skills. The weak yen and relatively low salaries in Japan complicate efforts to recruit foreign talent.

Meanwhile, there are already indications of softening demand for older chips, leading to underutilization of existing factories. And no one knows what effect tariffs, trade wars, and a possible recession might have on this already complicated situation.

Author: John Carroll