Japan’s Economic Security and the Role of the Private Sector
By Mariko Togashi
'New Perspectives on Asia' highlights the research of junior CSIS staff and interns on issues that are quietly shaping the world's most dynamic region.
Given its pacifist constitution, Japan relies on economic policy tools to pursue its strategic goals, which have become more salient in light of U.S.-China competition. In April 2020, the Japanese government added an economic division to the National Security Secretariat (NSS). The new division will manage the expanding intersection of economics and national security, in particular regarding China’s rising influence and recently announced civil-military fusion. Although the results of this decision remain to be seen, the establishment of the division in and of itself is a critical step for Japan to use economic measures for its strategic goals.
Economic security, which broadly refers to the area where national security and economics intersect, is an urgent issue for Japan today. In July 2020, Tokyo included the phrase “economic security” for the first time in its policy guideline, “Basic Policy of Economic and Financial Management and Reform 2020.” While lacking a clear definition of economic security, the policy guideline articulated that it will establish new rules to create supply chains with like-minded countries in the context of economic security. The ruling Liberal Democratic Party is currently working on identifying the key issues in economic security, including the restructuring of critical supply chains, and is planning to make a policy proposal by the end of this year.
As the focus on supply chains indicates, the expanding intersection of national security and economics has highlighted the importance of public-private sector cooperation to ensure Japan’s economic security. There are several issues Tokyo must address before it can effectively leverage the private sector to advance economic security.
Technology is the Key in Japan’s Economic Security
Technology is at the core of the various focus areas listed under the new economic division of the NSS, such as telecommunications, export control, and digital currency (as well as pandemic response). Underlying this focus is China’s rise in the technology field. Beijing has been explicit about its ambitions to become a global technology leader. In addition to “Made in China 2025,” Beijing recently unveiled “China Standards 2035,” a new 15-year plan aimed at influencing the design and development of next-generation technologies. As the chart below shows, China’s research and development (R&D) spending long ago surpassed Japan’s and has almost caught up with that of the United States. Beijing’s ambitions in advanced technologies have helped China surpass the United States as the world's largest source of scientific papers, releasing 19.9 percent of the global total between 2016 and 2018, ahead of the United States at 18.3 percent, according to data compiled by Japan's National Institute of Science and Technology Policy.
In response to China’s technological advancement, Tokyo is rushing to protect and develop its advanced technology. For instance, Japan became one of the first countries to follow U.S. policy on Huawei in 2018 by banning the Chinese telecommunications giant from Japan’s 5G networks. In June 2019, Tokyo announced a new guideline for universities and research institutions to manage risks of unintentional technology drain. In October 2019, the Ministry of Economy, Trade and Industry (METI) provided concrete plans to protect sensitive technologies in universities and research institutions, in cases such as research collaboration and accepting international students. In November 2019, Tokyo revised the Foreign Exchange Law to tighten screening of in-bound foreign direct investments in security-related fields, such as nuclear energy, electronics, and telecommunications (the revision was enforced in May 2020). Tokyo is discussing further measures and researching options, including looking into the U.S. case of visa restrictions for international students. Moreover, Tokyo is planning to establish a new think tank to apply commercial technologies, such as quantum technology and AI, to the national security field in FY 2021.
Japan’s Private Sector in the Technology Field and Its Implication
Japan’s technology field is dominated by the private sector. Japan’s R&D funding composition, high weight of commercial technologies in its science and technology budget, historical technology policy focus on commercial industries, and large market share in dual-use technologies suggest that the private sector plays an essential role in the technology sector, and, by extension, in the effectiveness of Tokyo’s economic security policy.
In terms of R&D funding, Japan’s private sector accounted for 78 percent of total national R&D in 2017, the highest among G7 economies (the comparable figures are 66 percent in Germany and 62 percent in the United States). Moreover, 97 percent of Japan’s total national science and technology budget was used for commercial technologies in 2018 (3 year average), while U.S. commercial technologies consisted of 55 percent of the total science and technology budget in 2019.
Japan’s history may explain the outsized role of the private sector in the technology sector. After World War II, Japan shifted its technology policy focus from military to commercial industries. The 1970s saw two critical trends that led to the dominance of commercial industries over defense industries. One trend was Japan’s defense industry policy shift to “spinning on” from commercial industries to the defense sector, recognizing the importance of dual-use technologies and budget constraints. Another trend was “interdiffusion,” meaning that military-related R&D helped companies build a business base in commercial technologies.
The expansion of dual-use technologies and the blurring line between commercial and defense technologies make the Japanese private sector even more important for Japan’s security. For instance, machine tools used in the cutting process in the production of automobiles and other machinery can also be used in the production of centrifuges for uranium enrichment; Japan’s global market share in machine tools was 16.8 percent in 2018. Another example is carbon fiber, which can be used for aircraft as well as missiles; Japan had a global market share of 54 percent in 2019.
One example that shows the direct impact of economic security policy on companies is the Japan-South Korea trade dispute of 2019. The dispute led Japan to tighten export controls on chemicals that are used for semiconductor production, of which Japan is estimated to have more than 50 percent of the global market share. These controls continue to threaten the competitiveness of Japanese chemical companies as the policy may impact global supply chains of semiconductors, which can already be seen through Seoul’s decision to support the nationalization of chemicals production.
Despite the importance of the private sector, there are several issues Tokyo must address before it can leverage the private sector for its economic security policy. First, stove-piping of government bureaucracy has complicated Tokyo's efforts to understand the overall picture of sensitive technologies. Although Tokyo recognizes the importance of knowing the overall science and technology field in its 2018 Integrated Innovation Strategy, the Ministry of Defense is not necessarily aware of the latest developments in commercial technologies, and METI is not necessarily aware of certain national security applications of dual-use technologies. Second, there is a wide gap between the view of the government and companies. Although the Japanese business group Keidanren hosted a meeting regarding economic security in July 2020, the conversation between the public and private sectors on this issue is still at its early stages. Third, Japan lacks systems to protect sensitive data, including a system of security clearances that encompasses private-sector employees involved in national security work. Japan’s lack of ability to secure sensitive information is one of the reasons why the Japanese defense industry has not been able to sell its products to allies and why Japan has not joined the Five Eyes intelligence-sharing arrangement. Tokyo is currently moving towards establishing a security clearance system, including the private sector, and is aiming to submit a bill in the ordinary Diet session next year.
Although Tokyo has made significant progress in developing its economic security policy, it has not yet effectively engaged the private sector. Businesses are at the forefront of strategic competition in the economic security sphere, but the dynamics are very different from those of national security, as demonstrated in Qualcomm’s lobby to sell their advanced components to Huawei. If Japan fails to incorporate business dynamics, not just national security, into its economic security policy, all the efforts that have been made so far may be in vain.
Mariko Togashi is an intern with the Economics Program.
'New Perspectives on Asia' is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).