The Rise of Japan's Semiconductor Archipelago: A Double-Edged Sword of High Stakes and Regional Revival

The Rise of Japan's Semiconductor Archipelago: A Double-Edged Sword of High Stakes and Regional RevivalNews broke on December 12th that fallow rice paddies in Japan's remote regions are now coveted "treasure land" due to soaring property prices. This proves the old adage: plant a phoenix tree, and phoenixes will come

The Rise of Japan's Semiconductor Archipelago: A Double-Edged Sword of High Stakes and Regional Revival

News broke on December 12th that fallow rice paddies in Japan's remote regions are now coveted "treasure land" due to soaring property prices. This proves the old adage: plant a phoenix tree, and phoenixes will come. In Chitose, Hokkaido, a city of 100,000, self-defense force recruitment billboards are ubiquitous, reflecting a 50% shortfall in recruitment last year. Yet, arriving from Tokyo, a different scene greeted me (Gearoid Reidy, Bloomberg Opinion columnist): a packed flight filled with smartly dressed businesspeople sporting expensive watches; outside, six towering cranes, a stark contrast to the rural landscape, raced against time to build Japans boldest industrial gamblea $33 billion semiconductor plant aimed at reclaiming global dominance in the chip industry.

These cranes serve Rapidus, a public-private partnership barely two years old, aiming to outpace competitors and lead global chip production. It plans to partner with IBM to mass-produce cutting-edge 2-nanometer chips by 2027. While the goal is ambitious, and Japans track record in industrial development is mixed, this is undoubtedly Japans most ambitious chip investment in recent years. Prime Minister Kishida recently announced an additional 10 trillion ($66 billion) on top of the 3.9 trillion ($25.6 billion) already invested in 2021 to bolster the semiconductor industry.

Meanwhile, about 1500 kilometers southwest in Kumamoto, Kyushu, another chip-related gamble is underway: a $7 billion semiconductor plant nearing mass production. TSMC opened its first Japanese factory in Kumamoto in February this year, thanks to government subsidies and a robust local supply chain. A second is under construction, and the local government is actively pursuing a third. This influx has drawn a significant number of Taiwanese workers, injecting new life into a city that was almost entirely Japanese.

These nascent chip cities are spearheading the revival of Japan, a former semiconductor giant, in its bid to regain its former glory. In 1989, there were calls for Japan to "be at least five years ahead of the world." However, US trade pressures and strategic missteps in industry transformation saw Japans semiconductor market share plummet to less than 10%. The semiconductor shortage triggered by the 2021 Covid-19 pandemic severely threatened Japans automotive industry, prompting an emergency proposal calling for collaborative chip R&D with allies and a strong push for domestic production. This unprecedented massive investment underscores Japan's ambition to return to the semiconductor forefront. Success would not only boost Japans influence in Asia but also strengthen its hand in dealings with allies and rivals.

I investigated the real-world impact of these projects. Decades of rural revitalization programs failed to stem the flow of young workers to Osaka, Nagoya, and especially Tokyo a massive black hole absorbing all resources and continuously expanding. However, the infusion of massive capital is transforming these once-dormant areas: house prices are rising, construction booms, and lifestyles are being disrupted. A new regional morphology is emerging, neither traditional metropolis nor decaying countryside, shattering the stereotype of a dying Japanese hinterland.

Crucially, Japan's massive chip investment is intertwined with continued infrastructure development. The public works spending at the core of fiscal stimulus in the 1990s was controversial, with the "nation-building" plan criticized as an excuse to delay structural reforms. Yet, these new projects are about far more than increasing Japan's semiconductor self-sufficiency. If Rapidus and similar ventures succeed, they will not only inflate property values and generate wealth but could catalyze further transformations. Prime Minister Kishida, hailing from Japan's rural heartland, makes regional revitalization a core policy, but concrete solutions remain to be developed. Revitalizing Japan's interior won't happen overnight; it requires a sequence of concrete actions, including infrastructure improvements, attracting or nurturing job-creating enterprises, and focusing on graduate training and supply chain development.

Globally, nations are exploring their own paths. The UK grapples with the consequences of austerity; former ECB president Mario Draghi calls for greater European spending; and the incoming US administration considers Elon Musk-style cost-cutting strategies. Against this backdrop, Japan's continued infrastructure investment appears especially astute. The government has debated the pros and cons of investment versus savings, with proponents of austerity ultimately losing ground. Despite Japan's massive debt burden, the returns on infrastructure-dependent ventures like chip cities are clear. From apartments built to alleviate housing shortages to the $60 billion maglev train project, Japanese public works projects are often initially questioned. Yet, just as a nation must avoid entering old age before it gets rich, so too must it undertake necessary infrastructure development during economic prosperity. China has seen considerable success in this area, while the future success of nations that choose to neglect infrastructure during good times, when money is plentiful, and then face tighter economic conditions, rising interest rates, and shrinking populations, is certainly worth pondering.

Japan, once a global chip leader, is now catching up on chip investment, mirroring the two Americas phenomenon with its own two Japans. Visitors to Tokyo are often puzzled; having heard tales of Japans economic decline, they may be surprised by the cleanliness of the streets and efficiency of the subway. But behind the vibrancy of these major metropolitan areas lies another less-seen Japan: rural areas are slowly withering as young people leave to seek opportunities, these towns seeming to gently return to nature. These burgeoning chip cities, however, with their unique geographic location, abundant water resources, stable energy supply, and established infrastructure, promise a third Japan: a third Japan poised to become an economic powerhouse.

Hokkaido is an example, Chitose a microcosm. Even in early September, a chill hung in the air. F-15 fighter jets roared from the nearby Self-Defense Force airbase, their thunder frequently cutting through the quiet; the smell of manure from local cattle farms provided a constant reminder that the economy still revolved around agriculture and the military. Yet within this tranquil tradition, a new expectation brews. The Rapidus factory has drawn as many as 6,000 construction workers. At least 1,000 high-paying jobs, plus a massive supply chain, will follow with the start of test production. During my visit, ASML, the Dutch chip-testing equipment maker, had just established an office with a projected 50 employees. It seemed that every moment, one building was being demolished, another rising.

For foreign visitors, Hokkaido may be known for Niseko, a ski paradise famed for its world-class powder snow, just 100 kilometers from Chitose, providing significant revenue. However, the Rapidus plant is estimated to generate an economic impact of 18 trillion ($116 billion). The chip industry is now the talk of the town. In nearby Sapporo, taxis lined up on weekday nights, their drivers keenly aware of the anxieties surrounding the future of the global semiconductor market. While the Rapidus project carries immense expectations, its potential risks are undeniable, a point already noted in many Japanese media outlets. Government-led semiconductor projects havent always succeeded historically, such as Elpida Memory, a DRAM manufacturer acquired by Micron after its 2012 bankruptcy, and the struggling Japan Display.

Chitose Mayor Ryuichi Yokota says that even before Rapidus, the local economy was performing well. He describes the factory as an economic big bang, transforming the city in unprecedented ways. Yet, as night fell and the construction workers dispersed, only silence remained. I didn't sense the expected flow of billions, just a biting wind foreshadowing the coming winter snow.

Far away in Kumamoto, the scene under the tropical climate is dramatically different. Situated at a similar latitude to San Diego, the surrounding region is often called the "Land of Fire," a name perhaps stemming from its proximity to Mount Aso, one of the world's largest active volcanoes. Kumamoto Prefecture