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Home World News Asia

Japan’s 2 Trillion Yen AI Stimulus – The Diplomat

November 16, 2024
in Asia
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It is no secret that Japan has lost ground in the artificial intelligence (AI) and semiconductor markets over the last five years. The COVID-19 pandemic convulsed Japanese production lines and supply chains, leaving innovation hubs and industrial complexes heavily reliant on offshore resources to fulfill demand, both for domestic consumption and for exports.

To revive its next-gen tech capabilities, the Japanese government plans to roll out a 2 trillion yen ($12.8 billion) stimulus package incentivizing investors to ramp up funding in the semiconductor and AI industries. The package, to be released by the end of November, shows Japan’s strategic preference for large-scale policy support from the government to advance economic goals. This is not an out-of-the-box policy decision taken by the government of Japan after Ishiba Shigeru becameprime minister. Over the last three years, the government under former Prime Minister Kishida Fumio provided more than 0.71 percent of GDP or around 4 trillion yen for the same cause. The continual efforts to rebuild Japan’s strength in AI and chip markets shows the Liberal Democratic Party’s determination to stand firm in domestic capacity building. 

Japan’s Tech Ambitions

Japan’s technological policies are aiming for a comprehensive AI rollout, complete with domestic AI-enabled chips that break through the 5nm barrier. The hope is that these tech advances will stimulate transformative economic and social progress. It is the need of the hour, as Japan is on the verge of digitalizing its economy, health services, and disaster responses. 

As per a GLOCOM study, Generative AI (Gen-AI) can unlock 148.7 trillion yen of productive capacity in Japan, equivalent to over one-fifth of Japan’s current GDP. This stands to be the most benefit any single country is expected to materialize in the next-gen tech segment. With this clear benefit in mind, Japan is pushing more subsidized finances into its AI and chips markets to regain its strategic tech autonomy in the region, and even extend its reach to major emerging markets.

AI market forecasts add another incentive behind this mega-stimulus package. Japan’s AI market size is expected to reach $27.12 billion by 2032 – the fastest growth in the forecast period of 2022-2032. Japan’s AI market will experience a compound annual growth rate of 21.43 percent over this period. 

The upcoming stimulus is a dual solution package for the country: It strengthens the Japanese AI and chip industries, providing a new driver of economic growth, while also addressing issues of aging and a reduced workforce. This is one of the basic building blocks of Society 5.0, Japan’s vision for “a human-centered society in which economic development and the resolution of social issues are compatible with each other through a highly integrated system of cyberspace and physical space.”

The Stimulus Package

In earlier packages, the Japanese government focused on long-term support measures and capacity generation for the chip and AI industries – an approach that did not help Japan immediately gain access to global markets. The next stimulus is going to address medium-term support measures, like issuing new bridging bonds having government shares and fixed mid-term treasury notes with higher rates of interest. Reportedly, the Bank of Japan will also use Japanese government bonds as fixed income instruments to support AI and semiconductor investments by corporations, agencies, and foreign companies. In parallel, government-owned companies like Nippon Telegraph, Japan Tobacco, and Telephone Corporation will reward investors’ shares through their dividends – an additional layer of financial guarantee provided by the government of Japan to tech investors. 

Understanding the urgent needs of Japan’s next-gen tech ecosystem, the government will also provide upfront investment support to semiconductor companies that will establish new production facilities inside Japan. The investments will be supported by the government continuously, even if the private sector backs out of the designated projects. This package guarantees financial backing to investors until the project is established on the ground. 

Analyzing the recent next-gen tech stimulus packages rolled out by the Japanese government, it is clear that the footprint of tech production facilities continues to expand. Until September 2024, Hokkaido seemed to be the new future tech center of Japan. But the recent expansion of private tech investments by technology majors in other areas – like Panasonic in Wakayama, TSMC in Kumamoto, Rapidus in Chiyoda, and Kioxia in Yokkaichi – made it clear that regional diversification is also high on Japan’s agenda, keeping future offshore threats in mind. 

Japan’s Economic Security Promotion Act, 2022 highlighted a stable semiconductor supply chain and a thriving domestic chip industry as urgent national tasks. To achieve this, it advised onshoring and offshoring efforts under a public-private partnership model. The upcoming stimulus package is another step on the same path toward subsidizing companies to relocate their production hubs domestically. Meanwhile, it’s hoped that Japanese firms’ overseas supply chain will expand production facilities across Southeast Asia and South Asia to cater to regional production markets. This will open new avenues for Japanese production hubs to expand their footprints, benefiting dual markets through singular tech advancements within a company. 

The role of Japanese government-backed Rapidus, a coalition of eight major Japanese companies, is critical in this stimulus package. Rapidus is mandated to cement Japan’s semiconductor and AI landscape through strategic initiatives. The package will attract its coalition partners to reach a series of goals: to produce 2nm AI-enabled chips by 2027, establish a fully automated chip production facility by 2028, train 20,000-plus engineers in cutting-edge semiconductor designing, and bypass tech hurdles by adopting new architectures like Gate-All-Around (GAA) transistors instead of traditional FinFET designs. To that end, Rapidus needs to identify new advanced startups to pivot Japan’s AI and chip journey to a fruitful end. These packages can establish Japan as a leader in next-stage AI, both at the development and deployment fronts.

Domestic Hurdles

It is noteworthy that the Japanese AI market is experiencing a surge in the adoption of AI-powered chatbots and virtual assistants, as companies look to improve their customer service and try to streamline their regular operations. But, in parallel, it is also true that efforts by Japanese governments to digitalize services have been unpopular with the Japanese public, an attitude only exacerbated by issues with the “My Number” launch last year. The Japanese people’s skepticism toward next-gen technology and cultural emphasis on human interaction rather than AI-backed digital mediums is a hurdle in convincing tech majors to invest domestically. 

Another problem is risk aversion. Japanese society has an ingrained aversion to risk, which reflects in individual as well as in corporate behavior. This dynamic leads to conservatism in corporate practices, which has been a huge drag on next-gen tech advances in Japan.

That said, sophisticated AI and chip fab development was a specialty of Japan until very recently, as late as the second decade of the 21st century. The various tech stimulus packages seek to urge Japanese corporations to reclaim their leading position by embracing the entrepreneurial ecosystem of current digital landscape. 

While the Japanese government focuses on the expansion of next-gen tech inside the country, keiretsu groups, an interconnected network of Japanese companies, prefer to seek profits outside of the domestic market. The fresh stimulus package will try to weld the government’s aspirational policies with the sentiments of private corporations. The large-scale mid-term strategic financial support seeks to enable Japanese corporations to collaborate, cooperate, co-develop, and finally co-produce the next-gen technologies that are required for future national growth.

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