As Tokyo Sharpens Its Economic Security Strategy, Has Seikei Bunri Run Its Course?

Dr Titli Basu, Institute for Defence Studies and Analyses

2021-11-11

ASIA

GEOPOLITICS

This article first appeared on the Australian Institute of International Affairs 'Australian Outlook'

Japan cropped
Japan’s economic security strategy is in the making, given the high politics of technology and its influence on geopolitics and national security. This is augmented by the current US-China strategic competition

In the post-pandemic world, economic security features on the high table across the Indo-Pacific. Key issues include de-risking supply chains, preventing outflow of strategic technologies, fostering game-changing innovation ecosystems that are supported by public-private investments, protecting intellectual property, and patents to reinforce competitiveness.

Tokyo’s strategic discourse on economic security — a core pillar of the national security debate — got a major boost when Prime Minister Kishida Fumio instituted the cabinet position of economic security minister. With Kobayashi Takayuki as the economic security minister, Tokyo is crafting economic security legislation and instituting a tech-fund to pump up innovation and research and development (R&D) in artificial intelligence, quantum technology, biotechnology, and robotics.

However, with the unexpected departure of Liberal Democratic Party (LDP) Secretary-General Amari Akira, a central figure in Japan’s economic security policy conversation, following the Lower House election mandate on 31 October, will the economic security strategy lose steam? This is unlikely due to Japan’s current whole-of-government approach towards ensuring economic security, coupled with Motegi Toshimitsu stepping in as the LDP secretary-general. Motegi, who has a wealth of experience as the former foreign minister, and economy, trade, and industry minister will ensure that economic security remains mainstreamed.

Japan has long pursued its national interests with a “dual hedge” strategy, maximising security guarantees through its alliance with the US, and seizing economic dividends by leveraging the Chinese market. But the security-economy nexus has become more pronounced in Japan’s strategic thinking following the US-China trade friction, and subsequently in the post-pandemic world. So, has Japan’s approach, Seikei Bunri — that is, the compartmentalisation of economics and security matters — vis-à-vis China, run its course?

As the race for technological supremacy intensifies between China and the US, stakes are high for liberal democracies in defining the rules that govern emerging technologies. Given the fluid balance of power, order, and values, the aim is to elevate Tokyo’s international standing in setting norms and standards relating to trade, high-tech supply chains, and digital governance.

The conversation in Tokyo pivots around balancing the objective of realising “strategic autonomy” in high-tech supply chains at the national level, while pursuing “strategic indispensability” at the international level. The aim is to leverage Japan’s strengths in R&D and innovation, and position Tokyo to be in control of cutting-edge technologies in the global supply network.

Securing chokepoints in supply chains, especially semiconductors, advanced batteries, rare earth and strategic minerals, pharmaceutical, and beyond 5G solutions are accorded top priority. This importance stems from their projected capacity to reshape the power balance in the post-COVID-19 order.

Since an insular approach is self-defeating, Japan has joined forces with democracies to turn challenges into opportunities, especially the Quad powers. This is evident in Japan’s decision to engineer an open and secure vaccine manufacturing supply chain under the Quad Vaccine Partnership and to map vulnerabilities and augment security with the Quad Semiconductor Supply Chain Initiative.

Taipei is accorded primacy as Tokyo focuses on cutting-edge logic semiconductors and aims to bolster domestic manufacturing with joint ventures with foreign foundries, possessing materials, and manufacturing capability. The security talks between Japan’s LDP and Taiwan’s Democratic Progressive Party in August centred on facilitating Taiwan Semiconductor Manufacturing Company’s (TSMC) investment in Japan. Tokyo’s massive subsidies have succeeded in luring TSMC to set up a chip factory in Kumamoto. Even though TSMC will not be using its most advanced 5-nanometer technology, Japanese partners like Sony would do well to learn to sharpen their competitive edge.

To pursue secured beyond 5G networks, Tokyo has joined forces with the US under the Competitive and Resilient (CoRe) Partnership to invest in R&D and bolster competitiveness. Japan has conceived the India-Japan-Australia Resilient Supply Chain Initiative to manage risks and competitiveness and is advancing an open and high-standard infrastructure partnership with the G7’s Build Back Better World (B3W).

The building blocks of economic security are laid deep in Japan’s key policy papers, which were released after the pandemic. These include the Growth Strategy, the Basic Policy on Economic and Fiscal Management and Reform, the Strategy for Semiconductors and the Digital Industry, and the Integrated Innovation Strategy. All prioritise attaining tech primacy in niche areas and tightening export control.

Even before Kishida stepped into the Kantei, the mainstreaming of economic security concerns manifested not only with the setting up of an economic unit at the National Security Secretariat (NSS), and a separate Digital Agency, but also with the regulation of foreign investment in “core” industries. Japan subsidised the re-shoring of manufacturing and doled out tax incentives to support network service providers advancing secured 5G infrastructure. Japan also enacted a security-linked land bill. Additionally, it is aiming to prevent technology leakages through strict disclosure guidelines for universities conducting sensitive research.

Driving innovation, productivity, competitiveness, and growth while sensitising the private sector to economic security risks presents a gargantuan challenge as Japanese business interests are deeply entrenched in the Chinese market. China continues to feature as the lead destination for Japanese manufacturing companies in the mid-term, according to the annual Japan Bank for International Cooperation (JBIC) Survey 2020. It also remains Japan’s largest trading partner, according to data from the Japan External Trade Organization (JETRO). The supply chain conversation in Tokyo is premised on diversification within the China Plus One model.

In 2020, while Japan’s overall exports declined, its exports to China increased 4.9 percent. China’s share in Japan’s total exports increased to 22 percent from 19 percent year-on-year. The JETRO White Paper 2021 also indicates that the rate of return on outward foreign direct investment in China is as high as 14.9 percent, compared to 9.1 percent across ASEAN countries, 6.1 percent in North America, and 5.1 percent in Europe. With the Regional Comprehensive Economic Partnership at play, trade integration has taken deep roots.

Seikei bunri is stretched to its limits as Kishida shoulders the delicate responsibility of maintaining a “stable relation” between the two largest Asian economies at a time of intense US-China strategic competition. The priority is not re-shoring everything as this may not be cost-competitive, but to rebalance supply chains of “strategic goods” like semiconductors and rare earth metals where overseas dependence may pose security risks.

As Japan connects the dots on economic security strategy, businesses may perceive it as government intervention wearing down predictability. The aim is not to engage in a zero-sum game with the world’s number two economy, but to alleviate risks and fortify national security while doing business with China.

Dr Titli Basu is an associate fellow at the Manohar Parrikar Institute for Defence Studies and Analyses, India. Her research interests include strategic affairs in East Asia with focus on Japan, and great power competition in the Indo-Pacific. She was a visiting fellow at the National Institute for Defense Studies (NIDS, Tokyo) in 2017.

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