The Covid-19 pandemic disrupted supply chains and economic activities across the globe. Japan is no exception because of its global supply chain vulnerability, notably its high concentration of production bases in China. This article first explains recent developments in Japanese supply chain policy over the past few years. It argues that Japan’s efforts in securing supply chain resilience have not been successful. It then highlights key challenges faced by the Japanese government in strengthening supply chain resilience.
Japan’s Policies of Supply Chain Securitization
The Japanese government has been taking measures to regain supply chain resilience since early 2020. In 2020, the Ministry of Economy, Trade and Industry of Japan (METI) initiated two subsidies programs to assist Japanese companies to relocate production back to Japan and countries in Southeast Asia: (1) the Program for Promoting Investment in Japan to Strengthen Supply Chains, and (2) the Program for Strengthening Supply Chains.
The Program for Promoting Investment in Japan to Strengthen Supply Chains
The first program aims to strengthen supply chain resilience by supporting Japanese companies in building new plants and introducing new facilities for critical products and materials in Japan. In 2020, METI selected 57 projects totaling around $530 million (57.4 billion yen) in July, and 146 projects totaling around $2.3 billion (247.8 billion yen) in November.
The adopted projects fell into two types. The first group targeted projects for producing strategically essential products, parts, and materials that were largely produced overseas, such as aircraft parts, automotive molds, chemical fertilizer, displays, electric vehicle battery parts or materials, medical equipment, pharmaceutical ingredients, rare metals, and semiconductor parts, materials, and products. The second group targeted projects for manufacturing products and materials essential for people’s wellbeing, including antiseptic alcohol, Covid-19 test reagent kits, medical gowns and gloves, nonwoven masks, surgical masks, and vaccines.
In July 2021, METI also adopted 151 projects, totaling around $1.9 billion (209.5 billion yen). This time, the program added a particular category for small and medium-sized enterprises, and 66 projects were selected in this category, along with the previous two categories. METI will call for applications for the third round of the program from February to April 2022, and the total budget will be around $5.2 billion (60 billion yen).
The Program for Strengthening Supply Chains
The second program aims to assist Japanese companies in diversifying their production lines. It is part of Japan’s strategy to reduce overreliance on China as “the workshop of the world” and offers Japanese companies financial support to cover expenses for facilities and equipment and feasibility studies. The program is not designed to facilitate the relocation of companies’ production bases from China to other countries, however. It supports companies seeking to construct new or “additional” manufacturing plants and enhance production or logistical efficiency by utilizing digital technologies.
This program adopted 92 projects in total: 30 projects in July 2020, 21 projects in November 2020, 30 projects in December 2020, and 11 projects in June 2021. The graph below summarizes the adopted projects and suggests that Southeast Asia is the primary destination for Japanese companies to diversify supply chains. The X-axis at the bottom indicates the number of destinations of adopted projects. The Y-axis on the left indicates countries where Japanese companies seek to build manufacturing plants using government subsidies. The most popular destination country is Vietnam, followed by Thailand, Malaysia, and Indonesia. Because some projects involve building facilities in more than one country, the number of destinations is larger than 92, the total number of projects adopted by METI.
Major challenges for Japan’s supply chain resilience
However, these programs do not necessarily help Japanese companies relocate production bases from China to countries in Southeast Asia. China is still Japan’s top trading partner. China’s share of Japan’s total trade, exports, and imports was record high amid the Covid-19 pandemic in 2020. China accounts for 23.9% of Japan's total trade, 22.1% of Japan's total exports, and 25.8% of Japan's total imports. The U.S. ranked second, but its share was much lower than China's. China’s share of Japan’s total trade, exports, and imports will likely be high in 2021.
In contrast, Japan was China’s second most important trading partner in 2020, but accounted for only 6.8% of China’s total trade, 5.5% of China’s exports, and 8.5% of China’s imports. Thus, Japan is asymmetrically dependent on China in terms of trade. Japan cannot live without China, and the idea of decoupling from China is unrealistic.
In sum, Japan’s ties with China have strengthened rather than decoupling amid the COVID pandemic. Japan’s economy is supported by exports that have grown due to China’s rapid economic recovery. What is important is that the primary driving force behind Japan's growing trade with China is Japanese business and not the Japanese government. Business circles are generally interest-driven and are unlikely to prioritize security considerations.
Japanese business is likely to remain highly dependent on China in the foreseeable future. According to an annual survey conducted by Japan Bank for International Cooperation (JBIC), China was the most popular business destination for Japanese companies even after experiencing the coronavirus. This survey has been conducted since 1989. It seeks to understand the current state, issues, and prospects of overseas business deployment of Japanese manufacturing companies. The latest survey was sent to 965 Japanese manufacturing companies in July 2021 and received 515 valid responses in October.
The chart below shows the ranking of promising countries and regions for overseas business over the medium term, namely the next three years. The respondents were asked to name the top five countries/regions. China has been the most popular overseas business destination for Japanese manufacturing companies even after the COVID-19 pandemic. At the same time, the U.S. has been gaining popularity since 2019.
The survey also asked the respondents to name the top five promising countries/regions in the next ten years. In 2020, India was the most popular destination with 53%, followed by China with 43.9%, Vietnam with 31.1%, and the U.S. with 27.7%. In 2021, India was again at the top with 49.4%, followed by China with 40.7%, the U.S. with 29.2%, and Vietnam with 28.4%. These results indicate that Japan’s reliance on China as a production base is likely to continue for the next ten years.
There are several reasons for Japanese companies to maintain production bases in China.
First, a high level of regional clustering has already developed in China. It is not easy to replace it in other countries in the short term. Second, the Chinese economy recovered faster than any other country last year, and exports from China grew accordingly. Third, countries like Vietnam, the Philippines, Myanmar, and Thailand were originally regarded as alternative investment destinations. However, unfortunately they are slowing down due to the COVID-19 pandemic, while China is successful in controlling COVID-19. Therefore, finding appropriate alternative destinations to relocate production bases from China will be a tough challenge for Japanese companies and the Japanese government in the foreseeable future.
Japan’s New Economic Security Promotion Legislation
Ultimately, the business community is the primary stakeholder of Japan’s economic relations with China. The Japanese government needs to find a way to get their support to strengthen Japan’s supply chain. One way to solicit cooperation from Japanese companies is the Kishida administration’s effort in submitting a new economic security promotion bill during the current session of Japan’s National Diet. The legislation will mark a new stage in Japan’s business relations with China. The proposed legislation has the following four pillars: 1) strengthening supply chains, 2) ensuring the security of core infrastructure, 3) promoting public-private technical cooperation, and 4) keeping secret patents on technologies that could be used for military purposes. Thus, strengthening supply chains is one of the top four priorities of the new legislation.
Although the specific contents of the bill are unclear, a detailed proposal submitted by the advisory panel on economic security legislation to the Minister in charge of economic security, Mr. Takayuki Kobayashi, on February 2, 2022, helps us understand the outlines of the legislation. The recommendations suggested that the Japanese government take appropriate measures to avoid overly relying on foreign countries to ensure the supply of strategically important materials, such as semiconductors, rare earth, storage batteries, and pharmaceuticals.
The proposal points out that Japan needs a framework that can support not only the development of domestic production infrastructure but also various initiatives, such as diversification of supply sources, stockpiling, development and improvement of production technology, replacing products at risk of interruption, and promotion of recycling.
The new economic security promotion legislation will likely restrict Japanese companies’ business relations with China on security grounds. Nevertheless, the government's new regulations will become counterproductive if they undermine the business sector's free activity and economic sustainability. The Japanese government faces the difficult challenge of striking a balance between strengthening supply chain resilience and maintaining Japan’s vigorous business activities.
This booklet is promoted within the fourth edition of the Asia & Europe Initiative "Stability and Security in the Indo-Pacific: The US, Japan, the EU and the Elephant in the Room" which gathers together leading experts, Asian and European think thank representatives, as well as Italian companies and agencies to discuss the increasing geopolitical interest in the Indo-Pacific Region.
 “Successful Applicants Selected for the Program for Promoting Investment in Japan to Strengthen Supply Chains,” Ministry of Economy, Trade and Industry, July 17, 2020, https://www.meti.go.jp/english/press/2020/0717_002.html
 “Successful Applicants Selected for the Program for Promoting Investment in Japan to Strengthen Supply Chains,” Ministry of Economy, Trade and Industry, November 20, 2020,
 “Successful Applicants Selected for the Program for Promoting Investment in Japan to Strengthen Supply Chains (Second Call),” Ministry of Economy, Trade and Industry, July 2, 2021, https://www.meti.go.jp/english/press/2021/0702_003.html.
 “The Program for Promoting Investment in Japan to Strengthen Supply Chains,” Ministry of Economy, Trade and Industry, January 28, 2022, https://www.meti.go.jp/covid-19/supplychain/index.html.
 “The Adopted Projects of the 1st Public Invitation under the Program for Strengthening Overseas Supply Chains,” JETRO, https://www.jetro.go.jp/services/supplychain/kekka-1.html.
 “The Adopted Projects of the 2nd Public Invitation under the Program for Strengthening Overseas Supply Chains,” JETRO, https://www.jetro.go.jp/services/supplychain/kekka-2.html.
 “The Adopted Projects of the 3rd Public Invitation under the Program for Strengthening Overseas Supply Chains,” JETRO, https://www.jetro.go.jp/services/supplychain/kekka-3.html.
 “The Adopted Projects of the 4th Public Invitation under the Program for Strengthening Overseas Supply Chains,” JETRO, https://www.jetro.go.jp/services/supplychain/kekka-4.html.
 National Bureau of Statistics of China, China Statistical Yearbook 2021 (Beijing: China Statistics Press, 2021), p.353.
 Japan Bank for International Cooperation, “Survey Report on Overseas Business Operations by Japanese Manufacturing Companies, Survey 2021,” December 24, 2021,
 The Advisory Panel on Economic Security Legislation, “Proposal for Economic Security Legislation,” February 1, 2022, https://www.cas.go.jp/jp/seisaku/keizai_anzen_hosyohousei/dai4/teigen.pdf.
 The Advisory Panel on Economic Security Legislation, p.7.
 Ibid., p.11.