When Prime Minister Yoshihide Suga’s administration approves Japan’s new growth strategy later this month, it’s likely there will be a whole chapter dedicated to a topic that had not been given much attention until recently: economic security.
The new focal point reflects the rising tension between the United States and China in recent years, with U.S. President Joe Biden seeing geoeconomic risks as a key issue for his administration.
“I doubt there were growth strategies in the past that played up economic security as a pillar like this one does,” said a government official who briefed reporters earlier this month.
And with the pandemic having a significant impact on supply chains for various products and materials, Japan is now scrambling to shore up its economic security to mitigate risks to its economy.
“The tough geopolitical landscape mainly due to competition between the U.S. and China is expected to last for quite a while. This makes it difficult to promote free trade and the transfer of data in the same way as under neoliberalism policies,” Masaya Sasaki, senior economist at Nomura Research Institute.
“Japan is looking to shift its direction” as the situation evolves, he said.
Sasaki explained that more products, services and technologies — such as artificial intelligence, chips and 5G communication — developed by the private sector are susceptible to national security concerns accelerated by global protectionism in recent years.
In the new growth strategy, the chapter on economic security states that Japan:
- aims to secure technological advantages by analyzing, identifying, fostering and protecting technologies in which the country has a competitive edge
- will focus on reducing risks of supply chain disruptions for some vital products, such as semiconductors, medical items, batteries and rare earths
- pledges to prop up the competitiveness of the chip industry
- seeks to attract cutting-edge production bases to the country
- plans to build more domestic data centers to store sensitive data within the country
The draft of the growth strategy states that the changing international environment has prompted other nations to make “unprecedented scales of investment to secure production bases that are vital in terms of economic security within their home countries.”
“Japan needs measures that are clearly different from conventional policies to ensure its independence and aim for dominance (in the market),” it said.
Traditionally, economic policies usually come with numbers, but it is difficult to calculate exactly how many jobs these economic security policies will create or how much they will contribute to boosting the country’s gross domestic product.
“Rather than a direct impact on growth, it’s probably more legitimate to think of them as an economic strategy with risk scenarios in mind,” Sasaki said.
He added that some of the economic policy goals, such as the aim to build more chip production bases, indicate that Japan is cooperating with its key ally — the U.S.
In an executive order on supply chain risks issued in February, the Biden administration referred to the need to increase communication with allies to enhance supply chain resilience.
Based on the executive order, the White House released a report Tuesday saying it has come up with a series of recommendations that include working with allies, as the U.S. cannot create a robust supply chain for microchips alone.
“The interagency should continue to collaborate with allies and partners on supply chain concerns. This includes through the Quadrilateral Security Dialogue (the United States, India, Australia, and Japan), which recently announced a dialogue on semiconductor supply chains, and through bilateral engagement with the Republic of Korea to facilitate mutual and complementary investment in semiconductors,” the report said.
In that regard, a central government official has said Tokyo aims to have foreign semiconductor foundries, such as Taiwan Semiconductor Manufacturing Co. (TSMC), team up with domestic chipmakers to jointly launch production bases in Japan. Thus, Japan’s intention to attract cutting-edge chip production bases in the country is in line with the U.S. policy to beef up international supply chain resilience through allies, Sasaki said.
The changing political climate is not just pushing the government to brace for the policy shift — the private sector will also likely face issues tied to economic security that it is not used to dealing with.
Last month, the Nikkei business daily reported that the government is considering asking companies in specific fields — such as semiconductors, communications and nuclear energy — to appoint an executive in charge of economic security.
Although companies typically pursue efficiency with their business strategies, that line of thinking may not be the best option when considering economic security.
For instance, as the Biden administration prioritizes human rights and as consumers increasingly consider ethical practices when buying items, sourcing cotton produced in China’s Xinjiang region, where Beijing’s treatment of the Uyghur population has come under international criticism, has become a risk to companies.
To hedge economic security risks, companies will need to have a more thorough grip on supply chains and how they make products, which could require extra work and costs, said Sasaki of Nomura Research.
When establishing optimal supply chains and production bases, “companies need to assess risks based on diplomatic relations and the direction of economic security,” Sasaki said, adding that they may have to make decisions that would not be the best option economically but would make sense politically.
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