Japan's Semiconductor Industrial Policy from the 1970s to Today
By: Hideki Tomoshige
The revival of interest in Japan’s semiconductor industrial policy reflects not only recent legislation meant to ensure long-term growth of the U.S. semiconductor manufacturing industry but also the potential for new alliances to strengthen supply chains and address strategic challenges from China.
The history of Japan's semiconductor industry can be divided into three phases: the rise of Japanese semiconductor companies from the 1970s to the 1980s, their gradual decline from the 1990s to the 2000s, and a period of renewed national attention paid to Japan's semiconductor industry from the 2000s to the present.
The Rise of Japanese Semiconductor Companies: 1970s-1980s
Japan’s global market share of semiconductor manufacturing and other sectors of the semiconductor industry, including chip design, materials, and manufacturing equipment, gradually grew from the 1960s to the 1980s. Coinciding with a dramatic increase in domestic demand for semiconductors used in consumer electronics, the government made efforts to establish Japan as a leader across all domains of the chip sector. According to a report published by Osaka Keizai University, along with soaring private investment into the sector, the 1970s and 1980s was a period of international competitiveness and success for the Japanese semiconductor industry.
Japanese industrial policy helped semiconductor companies gain global market share. Notably, funding for research and development (R&D) in semiconductor manufacturing equipment grew to 26 percent of Japan's total R&D spending in 1977, up from just 2 percent at the beginning of the 1970s, according to a report published by Ritsumeikan Business School.
In addition, the Japanese government invested $300 million towards the establishment of a public-private joint technology research project called the Super LSI Technology Research Association with Japan's six main computer companies: Fujitsu, Hitachi, NEC, Mitsubishi Electric, NTT, and Toshiba in 1976. Together, these companies managed a joint laboratory in Japan's Kanagawa prefecture that focused solely on researching fundamental technology for semiconductors and avoiding technology leakage to competitors. As a separate project, two other laboratories conducted advanced and applied research on design and device technology among smaller subsections of the industry.
This joint research project, featuring collaboration among rival companies, contributed to the development of a common technology platform for companies to work collaboratively and share information to drive innovation. Beyond the six companies originally involved in the research consortium, other Japanese companies involved in producing equipment and raw materials for semiconductor manufacturing also joined Super LSI Technology Research Association projects. This resulted in the development of a wide variety of new inventions related to semiconductor design and manufacturing.
After four years of collaborative work, the Association developed the technique of electron beam lithography (EBL), a revolution in chip-making equipment technology, which paved the way for the manufacturing of even more complex semiconductors at scale. EBL was eventually commercialized by ASML, Nikon Corporation, and Canon Inc. This technological leap helped facilitate Japanese dominance in the global semiconductor market, with Japanese firms accounting for 51 percent of worldwide sales by 1988.
The Decline of Japan’s Semiconductor Industry: 1990s-2000s
U.S.-Japan Trade Friction
As Japan entered a period of economic dynamism in the 1970s, U.S. policymakers began to see Japan as a growing market competitor. Specifically, there was a concern among American policy makers that export-subsidized Japanese firms were "dumping" chips and consumer electronics into the U.S. market in an attempt to crowd out U.S. domestic firms while denying foreign access to the Japanese domestic market. Amid growing dissatisfaction in the U.S. with perceived unfair trade practices from Japanese industry, the United States began pushing for trade concessions from the Japanese government. The Japanese, concerned over the risk of being shut out from the U.S. market entirely, made concessions under the U.S. Japan Semiconductor Agreement in 1986.
The agreement gave the U.S. government the authority to set minimum fair market prices for chips in the U.S., while also increasing the foreign share of the Japanese semiconductor market from 10 percent to 20 percent. These two stipulations simultaneously eroded Japanese competitiveness in foreign as well as its own semiconductor market and enabled semiconductor companies in the U.S., South Korea, and other countries to gain most of the world semiconductor market share.
Japan’s Failure to Adapt
By the late 1990s, the dominant business model for the semiconductor industry was shifting in most countries from vertically integrated firms which both designed and manufactured semiconductors, towards highly-specialized firms which either designed or manufactured chips. Taiwan Semiconductor Manufacturing Co. (TSMC), the first ‘pure-play’ foundry business founded in 1987, began the industry’s march towards specialization.
The Japanese government led several initiatives in the 1990s-2000s to encourage companies to transition towards specialization, arguing that firms should curb their duplicative investment in manufacturing infrastructure and move their excess capacity to strengthening high-value design capabilities. In 2001, the Japanese government allocated more than $300 million to establish the Hinomaru Foundry, a joint domestic fabrication facility involving 11 companies which aimed to shift Japan's semiconductor industry from a vertical integration model to a fabless model.
There were also several government initiatives which attempted to advance Japanese leadership in design and manufacturing technology for new generations of smaller, more advanced semiconductors, such as the "ASKA" Project for the 65 nanometer (nm) generation of semiconductors, or the "MIRAI Project" which targeted process technology for the 45nm generation, in addition to other initiatives.
However, many Japanese semiconductor firms were unable or unwilling to adapt to emerging trends in the global industry. One of the reasons why Japanese semiconductor companies lost their competitiveness is that sales of digital products in Japan were stagnant, which in turn meant that they had less capital to invest in research and development activities. With less capital to invest, firms were disincentivized from divesting from any of their high-revenue departments (e.g., a semiconductor design operations), even if doing so could lead to greater profits in another department. This undermined efforts to incentivize the transition towards specialization.
Also, the Japanese government’s promotion of joint initiatives, although initially beneficial to the semiconductor industry, eventually diminished diversity among Japanese semiconductor manufacturers due to the standardization of their technology and the leveling of technology among their companies. This resulted in an industrial structure that made it difficult for companies to adapt to changes in the competitive environment.
The post-Decline Period: 2000s-Today
Responding to the relative decline of Japan’s semiconductor industry, the Japanese government has renewed its efforts to encourage the nation’s semiconductor industry towards a more globally competitive business model.
In December 2005, the government called on Hitachi, Toshiba, and Renesas to build joint advanced process semiconductor foundries for the 65nm generation of semiconductors, meaning that these three semiconductor companies would share a single fabrication plant. Instead of each company having their own fabrication plant under the traditional vertical business model, the three companies tried to organize their resources so that each could specialize in a specific step of the manufacturing process. However, the three companies concluded that the fabrication could not be commercialized and ended this project in 2006.
More recently, Japanese government agency officials, members of Prime Minister Kishida’s cabinet, and Diet representatives have been working to address this issue. In 2021, the government approved $7.7 billion in funding as part of a strategy to support domestic semiconductor manufacturing at home.
From the 1970s to the 2000s, Japan’s semiconductor industry experienced three distinct periods, each with its own policy legacy. During the 1970s-1980s, Japan established technological superiority and was the world’s leader, but its success declined due to a combination of factors, including trade friction with the U.S. and shifts in global semiconductor market trends.
Understanding Japan’s policy successes and failures in the semiconductor manufacturing industry is of value to U.S. policymakers as they work to implement the CHIPS and Science Act, and as they collaborate with their Japanese, Taiwanese, and South Korean allies through various economic and trade initiatives to bolster strategic supply chains.
Hideki Tomoshige is an intern with the Renewing American Innovation Project at the Center for Strategic and International Studies in Washington, DC.
The Perspectives on Innovation Blog is produced by the Renewing American Innovation Project at 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).