The industry ministry said on Tuesday it would extend subsidies worth as much as ¥242.9 billion ($1.64 billion) for Bain Capital-backed Kioxia and Western Digital to expand memory chip production in Mie and Iwate prefectures.
The funding provides underpinning for the two companies, which have been hammered by a slump in the market for NAND flash chips and whose merger talks stalled late last year following opposition from Kioxia investor SK Hynix.
Japan's powerful industry ministry aims to reclaim the country's lost position as a major chip center by extending subsidies to domestic and foreign chipmakers and secure chip supply amid trade tensions between China and the United States.
"The memory market is expected to grow significantly in the future, including for generative AI (artificial intelligence)," industry minister Ken Saito told reporters.
"The joint investment by Kioxia and Western Digital brings together Japan and the U.S. to fulfill our responsibility to supply the memory the world needs," he said.
SK Hynix has emerged as a major beneficiary from investment in generative AI, with U.S. chipmaker Nvidia using the South Korean firm's high bandwidth memory (HBM) chips.
Kioxia was spun off from Toshiba, which invented NAND in the 1980s when Japan was a dominant player in global chipmaking.
"The more data is used, the more memory consumption will increase, so in that sense global demand will surely grow in accordance with NAND's characteristics," an industry ministry official said.
Western Digital, whose shares have gained 12% year-to-date, has said it plans to spin off its flash memory business.