In August 2022, President Joe Biden signed into law the US Chips and Science Act, which allocated $53 billion in government funding to revitalize the US semiconductor industry. After decades of industry decline behind the world’s current leading semiconductor manufacturer, Taiwan, rising US-China tensions provided the bipartisan political impetus necessary for a renewed investment and innovation in the field. In November of the same year, Japan signed into law several measures intended to drive semiconductor manufacturing in response to global supply shortages faced by COVID. Japan’s Ministry of Economy, Trade, and Industry (METI) framed its grand strategy for semiconductors the June prior (2021) as a high priority for public and private support, and especially out of a concern for strategic independence “amid the conflict for technological hegemony between the US and China.” The framing of semiconductors as a national security interest was likewise informed by a growing sense of urgency to reverse its decades-long trend of outsourcing cutting-edge semiconductor production and failing strategically to adapt to changing market conditions and technological trends through the late 1990s and 2000s. 

Japan, like the US, thus faces significant challenges in its journey to reclaim its place at the cutting edge of the semiconductor industry. Its national security and economic interests are highly intertwined with regional giants vying for semiconductor dominance, and it must scale up the manufacturing and technical capacities necessary in order to develop the high quality chips required for AI and advanced computing systems. Japan’s movements in the sector deserve particular interest because overcoming its demographic, economic, and technological challenges will in any case provide an important learning experience for middle powers making the leap into digitalized society.

A Brief History of the Rise and Fall of Japan’s Semiconductor Industry

The story of Japan’s semiconductor industry is closely intertwined with its postwar economic growth miracle and its former leadership in exports of consumer electronics. From the invention of the transistor in 1947 by Bell Laboratories, the US and Japan led innovation and expansion of manufacturing capacity in the semiconductor industry through 1986, the year Japan’s market share surpassed the US for the first time. With juggernaut firms NEC, Toshiba, and Hitachi leading production, over 50 percent of the world’s chips—high-quality and low-cost—owed its origins to Japanese manufacturers, which benefited from export-driven government policy and large firm-coordination via the Very Large Scale Integrated Research Project (VLSI). The pooling of government R&D subsidies and imposition of firm reorganization—in order to compete with IBM—led to an explosion in industry-related patent applications and cross-firm research collaboration. 

US lawmakers and chip producers, however, began to sound the alarm in the 1980s and pressured Japan into signing trade agreements that protected American firms and raised the costs of Japanese imports—especially those of the latter’s dynamic random access memory (DRAM) chips, which would be crucial for the 1990s PC revolution. By 1993, the US overtook Japan’s leadership in industrial market share and regional competitors South Korea and Taiwan forged ahead innovation-wise as Japanese firms suffered from underinvestment (in the aftermath of the economic bubble burst) and inefficient vertical management structures.

The Semiconductor Industry Today

Current and future advancements in AI, robotics, automobiles, and defense technologies all require high capacity advanced memory chips. At the cutting edge, Taiwan today produces almost 100 percent of the world’s most advanced chips—largely via Taiwan Semiconductor Manufacturing Company (TSMC). High levels of government investment and a business model characterized by concentrated R&D investment on wafer design and an efficient foundry model won it powerful clients such as Apple and technical dominance as its fabrication process out-competed rival firms. 

While Japan still holds significant market share in some semiconductor categories, its current capabilities (40 nm fabrication process) are far from the most advanced standards (TSMC, by contrast, is producing at the 3 nm node level). The smaller the process mode, the more transistors can fit onto a chip, which corresponds to higher performance and power efficiency. In order to stay competitive in important markets, such as the automotive industry, and consumer electronics—all of which require advanced chips—Japan’s pivot towards onshoring production capacity rests on two strategic approaches. One, via partnerships, whereby TSMC fabrication plants built in Kumamoto prefecture in collaboration with Sony and Denso lessen supply chain risk. Two, via a capital-intensive bet—amounting to billions of dollars in government subsidies and R&D—on Rapidus, a Japanese start-up launched in 2022. 

Rapidus: Bold Bet or Reckless Endeavor?

Based in Japan’s northern island of Hokkaido, Rapidus’s aspirations are to break through to the 2 nm fabrication process by circumventing costly production advancements in fin-field effect transistor (FinFET) architecture. Because firms like TSMC, Samsung, and Intel now pursue logic chip development on an alternative architecture, known as gate all-around (GAA) technology, Rapidus believes concentrating on GAA development for its logic chips will offset its competitive disadvantage in FinFET-designed chips—which it failed to pursue previously. The GAA architecture reorients conducting channels so as to increase logic cell area density and reduce power consumption—all of which make for higher-quality chips. 

With a present-day market share of 15 percent in global semiconductor manufacturing, Japan is still well-positioned to utilize its existing network of fabrication plants and industrial firms in order to power its renewed semiconductor aspirations. Exceptional cross-firm collaboration culminating in millions in private capital contributions from Sony, Denso, Softbank, Toyota, Kioxia, NEC, and NTT harken back to the VLSI-driven cooperation of the 1980s. 

In contrast to TSMC’s mass-scale industrial production model, Rapidus’s approach is to serve as a foundry producing bespoke chips in small quantities—aiming at profitability by avoiding incurring the large costs of operating at scale. Skeptics reasonably question the prudence of pinning national hopes on such a high-stakes endeavor that will require—enormous levels of investment aside—a highly skilled labor force and the advanced technology and industrial processes required for vaulting from the 40 nm process (which yields general-purpose logic chips) straight to the 2 nm process (which is intended for production of specific-purpose computing such as those required by AI). 

There is reason to believe, however, that Rapidus is currently undertaking the necessary measures to attract and retain labor talent. Partnerships with regional universities to build technical curriculum and current hiring rates (30 to 40 engineers per month) bode well for its initial stage efforts. Its single-wafer production approach, if able to prove more efficient than the industry standard’s large-batch production approach, may allow the firm to fulfill consumer demand dissatisfied with TSMC’s speed and capacity limitations. 

While investors, consumers, and competitors wonder if Rapidus’s unorthodox approaches will allow it to achieve its goal of 2 nm semiconductor mass production by 2027, there are notwithstanding important implications in Japan’s resurgent pursuit of semiconductor industry development. With respect to government policy, METI has developed new regulations that open channels for direct government subsidies towards collaborative international research, which is a unique and radical approach to facilitate joint projects with foreign intellectual property rights. Japan’s success in attracting and facilitating a partnership with TSMC, a direct beneficiary of this policy, underscores the long-term pay-offs of capacity-building via foreign expertise in strengthening its overall manufacturing ecosystem. Rapidus, which relies on advanced extreme ultraviolet (EUV) lithography machines (supplied only by ASML in the Netherlands) and its partnership with US integrated circuit giant IBM, likewise illustrates the dependency of technological innovation on global-friendly government subsidies. 
Most importantly, the concentration of capital investment and institutional partnerships embodied by Japan’s bet on Rapidus create the conditions and attitude necessary for revitalizing a beleaguered economy, attracting foreign investment, and creating a reason for hope among an emerging youth workforce. Beyond a society resigned to the fate of salarymen or disillusioned service workers, Japan’s last-ditch efforts to return its semiconductor industry to state-of-the-art production promises to engage future generations of engineers, innovators, and tech-savvy citizens equipped to navigate an increasingly digital world.