Japan is often seen as the motherland of the photovoltaic industry. Back in 1993, the government started its New Sunshine Project, a massive subsid program that helped to equip 300,000 Japanese houses with solar panels over the following decade. During that time Japan became the undisputed world market leader for the production of photovoltaic systems. Still in 2006, three of the world's largest five firms were Japanese ones: Sharp, Kyocera and Sanyo. Their combined production capacity of solar cells amounted to 922 megawatts, clearly outweighing No. 2 Germany with 508 MW.

However, this dominance is changing, and it is changing very rapidly. Other countries are catching up fast, and in particular, Germany threatens to overtake Japan. Back in 2003, the volume of newly installed solar panels in Japan was 223 MW, much higher than Germany with 157 MW. However, in 2006 this figure had increased to 750 MW for Germany while Japan only installed 300 MW of new capacity. For 2007, observers even expect Germany to add one gigawatt, or 1,000 MW. The total volume of all installed panels for Germany meanwhile amounts to 2,500 MW, or 10 times more than just four years ago. Germany now exceeds the former "land of the rising sun" with only 1,700 MW installed from Hokkaido to Okinawa by the end of 2006.

Hence it comes as no surprise that Japanese firms are losing global market share. In 2006, the share of market leader Sharp dropped from 24 percent to 17 percent while Kyocera and Sanyo also lost a part of the global pie. The winner by contrast was the German company Q-Cells. Last year, Q-Cells increased its production by 50 percent and its global market share climbed to 10 percent; with these gains, the company took the global No. 2 position behind Sharp. And other competitors are eating into the global market such as SolarWorld from Germany and Suntech from China, which was the world's fourth-largest solar firm in 2006. In its July 19 economic analysis, the Nikkei Shimbun even wondered whether Japan will lose its technological edge in a key industry as it did before with semiconductors and mobile phones. Germany by contrast is attracting many investments in the solar-energy industry due to its strong home market.

Led by Germany and California, Western countries have embarked on massive support and subsidy programs for the solar industry since the early 2000s. For example, German households with solar panels are guaranteed 50 cents (roughly 80 yen) for each kilowatt of electricity they generate for the next 20 years. Compared to a market price of currently about 20 cent/kwh, this works as a much higher incentive to install solar panels than in Japan, where the government offers only about one-fourth of that subsidy to solar-panel owners.

It is difficult to understand why the Japanese government did not follow up on the successful New Sunshine Project and its successor, Advanced PV Generation, which ran out in 2005. Despite the heated discussions about how to reduce carbon dioxide emissions, solar energy has obviously fallen from the main radar of Japanese policymakers. Likewise the Ministry of Economy, Trade and Industry seems to have underestimated the speed of foreign markets and firms catching up, and threatening the global dominance of the Japanese solar industry.

Japanese solar firms are lobbying the government to restart a targeted promotion of the solar industry at home. And the chances are good that these efforts will not fall on deaf ears. Officials at METI are carefully examining the subsidy programs for the solar industry in Germany and California. And they received another wake-up call two months ago: In June, Q-Cells became the first foreign photovoltaic maker to open a branch in Japan, a fact that underlines the increasing strength of non-Japanese firms.

One fact is clear to all players and observers. Without a fast and effective promotion of the use of solar energy in Japan, the country will drop further in the ranking of the respective markets from its current No. 2 position. The United States might overtake Japan as early as this year, but also markets in other countries such as Spain and even South Korea threaten to become larger than in Japan. In addition, global competition is expected to increase sharply with the market entry of many newcomers. A global price war might start as early as 2008.

In absolute terms, the solar industry is still very much in its infancy. All global solar panels installed at present only generate the same amount of power as one or two atomic power stations. However, some estimates foresee the share of photovoltaic and solar-thermal power stations to rise to more than 50 percent in the global energy mix by 2080. As of now, oil, gas and coal dominate global primary energy consumption at about 90 percent. However, this share is expected to decline to just one-fourth by 2080.

But even now solar energy should be appealing to policymakers in Japan. And this is not only to support Japanese firms but to provide a carbon dioxide-free alternative to nuclear energy in an earthquake-prone country such as Japan. The July 16 Niigata earthquake exposed major safety problems at the Kashiwazaki-Kariwa plant of Tokyo Electric Power Co. — it might even be necessary to shut down this plant for a full year. The exposed dangers might eventually provide additional support for the Japanese solar-power industry and ensure that the sun will continue to rise in the east.

Jochen Legewie is president of German communications consultancy CNC Japan K.K.