Japan’s Economic Security Awakening
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Japan’s Economic Security Awakening

As the EU Commission is preparing its own economic security strategy, Japan has started implementing its own policies, walking the increasingly tense tightrope between China and the US.

During last month’s G7 summit in Hiroshima, economic security was high on the agenda, with Europeans, Japan, the US, and Canada wrangling over the exact wording on how to “de-risk” from China.

It was fitting that this debate took place in Japan, where economic security policies are being rolled out as Europeans are still contemplating them.

“There has been an economic security awakening in Japan,” Akira Igata, an advisor to the Japanese government and lecturer at the University of Tokyo, told EURACTIV.

“Different ministries, politicians, the private sector, local governments, they all started to realise that economic security was important,” he added.

Igata identifies Japan’s growing awareness of its dependency on China as the first trigger for this awakening. Unsurprisingly, given the geographic proximity, China is Japan’s biggest trading partner, both in exports and imports.

Japan’s China problem

Already in 2010, China temporarily suspended the export of some rare earth minerals to Japan as part of a row over the Senkaku islands, or, as China calls them, the Diaoyu islands. This power play made Japan change course. Within a decade, it reduced its rare earth dependency on China from over 90% to below 60%.

The corresponding figure for the EU is still well above 90% dependency on China for many minerals.

To achieve this partial shift away from China, Japan used a government agency – the Japan Organisation for Metals and Energy Security (JOGMEC) – to invest in mining companies abroad, such as Australia and Canada.

While the Senkaku episode was “a wake-up call”, according to Igata, it “wasn’t enough of a shock to move Japan to what it’s doing today.”

More broadly, the trigger to focus on economic security came with a series of reforms, like the hardening of the Chinese policy vis-à-vis Hong Kong and its more interventionist economic policies.

“It’s really the Chinese becoming much more aggressive in their economic statecraft and economic coercion that has made the Japanese realise that this is really problematic,” Igata told EURACTIV.

In addition to the changed perception of China came the emergence of new technologies that can also be used militarily, for example, AI, quantum computing, or drones. And finally, the Russian invasion of Ukraine did its part to refocus minds on economic security.

A series of measures were taken to give economic security more relevance in Japanese policymaking. For example, the Japanese government was also reinforced by a minister of economic security, with Sanae Takaichi currently holding this new cabinet-level post.

Moreover, Japan’s national security strategy published in December 2022 includes a chapter on “promoting economic security policies to achieve autonomous economic prosperity.”

Diversification subsidies

Probably most importantly, Japan has introduced the Economic Security Promotion Act (ESPA), which gives the Japanese government new possibilities to intervene in private sector activities.

One example is the monitoring of important supply chains. The Japanese government identified a series of critical goods, such as batteries and semiconductors. If a Japanese company deals with these goods, it can propose a diversification strategy to the government, making it less dependent on a single country like China.

If the government deems the strategy worth pursuing, it can then subsidise this diversification strategy. For example, a battery producer could ask the government for substantial financial assistance in acquiring a plant for refining Lithium under this law.

“I really think this is significant because this actually gives the private sector the incentive to move away from China,” Igata told EURACTIV.

Critical Infrastructure

Another part of the ESPA concerns critical infrastructures like railroads, electricity suppliers, and other essential parts for the functioning of the economy. Within these critical infrastructures, the government identifies the companies that must be considered “too big to fail.” For example, the biggest airline operator might fall under this definition.

For those critically important companies, the government will also define which software, hardware, or services are so critical that the government can intervene. If the country’s largest airline used a Chinese cloud to store all its data, for example, the government could order the airline to change supplier.

“The government can just say, ‘No, Alibaba might be cheap, but you have to choose something else’, and the companies have to cover the costs,” Igata said.

According to him, this rather interventionist and coercive law was made much more likely to pass since the ESPA was packaged together with the diversification subsidies that are quite a bit sweeter from corporate perspective.

While many big European companies are still very sceptical of economic security policies, the big Japanese industrial conglomerates seem to largely support the economic security policies. “A substantial number of big companies how has created an exclusive division focusing on economic security issues,” Igata said.

One of the reasons might be the rather more intertwined nature of relations between large companies and the government in Japan. As a testament to this, the Japanese government is currently considering following up on ESPA by rolling out its security clearance system for government employees to parts of the private sector, enabling the government to share more sensitive information with private companies.

Strategic indispensability

According to Kazuto Suzuki, a professor of public policy at the University of Tokyo and director of the Institute of Geonomics, Japan should also strengthen its “strategic indispensability,” by which he means technologies in which Japan has an important technological edge.

These “one-of-a-kind technologies and capabilities that no other country possesses” would “make Japan less susceptible to pressure from other countries,” he wrote in an article for the Stimson Center.

To ensure this “strategic indispensability”, Japan will invest in R&D and ramp up control over technology leaks and transfers.

Meanwhile, the EU discussion on economic security strategy has not reached this stage yet. On 20 June, the EU Commission will unveil its “European economic security strategy,” which is expected to start a conversation on export and outbound investment controls.