The semiconductor market is one of the sectors that power the tech industry. Taiwan, the US, and South Korea are the countries that come first to mind when we hear the word "microchip." However, Japan was never seen in the equation, but it was once a dominant force in the field, holding more than 50% of the market share.

With several unexpected changes, Japan's position in the global chip supply chain performed weaker. At the time, the Netherlands rose to the ranks with ASML which is popular when it comes to cutting-edge chips.

Now, Japan is looking to revive the chip business so it could compete with other chipmaking countries.

Japan's Renewed Focus on Semiconductor Dominance

In response to its diminished role in the semiconductor industry, Japan is now on a mission to revitalize this critical sector. The Japanese government has unlocked billions of dollars in subsidies to bolster the semiconductor industry.

At the center of these efforts is Rapidus Corporation, a company founded in 2022 by the Japanese government and eight domestic companies. Rapidus aims to develop and manufacture advanced semiconductors, with an ambitious goal of producing 2-nanometer chips by 2027, as it seeks to catch up to industry giants like TSMC and Samsung.

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The Importance of Semiconductors in Modern Technology

Semiconductors are essential components found in everything from smartphones to advanced AI systems. In the 1980s, Japan dominated the global semiconductor market. However, shifts in the industry led other countries to secure their supply chains, leaving Japan behind. Now, with government and business backing, Japan is determined to regain its position by developing the world's most advanced microchips.

Japan's Past Semiconductor Leadership and Its Decline

Japan was once a pioneer in global semiconductor research and development. By the late 1980s, Japanese companies controlled over half of the global semiconductor market. This success was due to breakthroughs in electron beam lithography technology and substantial state support. However, Japan's market share began to decline in the 1990s due to several factors.

Fei Xue from the Economist Intelligence Unit (EIU) told Tom Chitty and Arjun Kharpal in an episode of CNBC's Beyond the Valley that one significant reason was the political landscape, particularly the Reagan administration's tariffs on Japanese semiconductors and the 1986 U.S.-Japan Semiconductor Agreement. This agreement imposed price limits on Japanese semiconductors sold in the U.S. and increased the share of foreign semiconductors in the Japanese market, reducing the competitiveness of Japanese chipmakers.

Another major shift in the semiconductor industry was the rise of specialization. Traditionally, companies handled both chip design and manufacturing, a model that Japan excelled in. However, starting in the 1990s, companies began to specialize in either design or manufacturing.

TSMC, for instance, focused solely on manufacturing semiconductors designed by other companies, allowing it to leapfrog Japanese firms by investing heavily in specific segments of the industry.

Japan's Strategy to Revive Its Semiconductor Industry

To revive its semiconductor industry, Japan is adopting a comprehensive, state-led initiative that combines private sector resources and development capabilities.

The government is collaborating with international partners, including IBM in the U.S., to step into the chip design sector. Japan has also attracted significant international investment, such as TSMC's decision to establish fabs in Kumamoto Prefecture on Kyushu Island. Additionally, eight Japanese electronics companies have pooled resources to create Rapidus, with state funding support, aiming to produce 2-nanometer semiconductors by 2027.

Despite these efforts, Japan faces challenges. By 2027, when Rapidus hopes to commercialize 2-nanometer chips, competitors like TSMC and Samsung may already be producing 1.5-nanometer chips. Nevertheless, Japan's strategy includes developing advanced chip packaging technology to improve chip performance and exploring markets for legacy chips, which are still in high demand.

Navigating Geopolitical Challenges

Geopolitics plays a significant role in Japan's semiconductor strategy. The U.S. has imposed restrictions on semiconductor exports to China, affecting Japanese companies. However, Japan is exploring new markets and focusing on domestic demand to mitigate these challenges.

The Japanese government's semiconductor revival efforts are not just about economic growth but also national security, as semiconductors are critical to advanced technologies like AI and EVs.

While Japan may no longer lead in overall semiconductor production, it remains strong in niche areas such as semiconductor materials and precision equipment.

Japanese companies dominate global market shares in segments like photoresist materials and coating techniques. By leveraging these strengths, collaborating with international companies, and investing in cutting-edge technology, Japan aims to reestablish itself as a key player in the global semiconductor industry.

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