The Japanese government is investing heavily in high productivity sectors and revitalising regions in the process

Last week I noted in my review of the Australian government’s Mid-Year Economic and Financial Outlook (MYEFO) – Australian government announces a small shift in the fiscal deficit and it was if the sky was falling in (December 19., 2024) – that the forward estimates were suggesting the federal government’s fiscal deficit would be 1 per cent of GDP in 2024-25, rising to 1.6 per cent in 2025-26 before falling back to 1 per cent in 2027-28. The average fiscal outcome since 1970-71 has been a deficit of 1 per cent of GDP. I noted that the media went crazy when these estimates were released – ‘deficits as long as the eye can see’ sort of headlines emerged. It was fascinating to see how far divorced from reality the understandings in Australia are of these matters. Meanwhile, the RBA keeps claiming that productivity is the problem and the reason they are maintaining ridiculously high interest rates even though inflation has fallen back to low levels. My advice to all these characters is to take a little trip to Hokkaido (Japan) and see what nation building is all about. The Japanese government has already invested ¥3.9 trillion for semiconductor industry development since 2021 (that is, 0.7 per cent of GDP) and the Ishiba government recently announced a further ¥10 trillion (1.7 per cent of GDP). Meanwhile, the overall deficit is around 4.5 per cent of GDP and no-one really blinks an eyelid. The Japanese government is investing heavily in high productivity sectors and revitalising regions in the process.

On November 29, 2024), the Japanese Prime Minister Shigeru Ishiba gave a speech – 第二百十六回国会における石破内閣総理大臣所信表明演説 – to the 216th Session of the Diet, which outlined a broad scope of initiatives and priorities for his new government.

In the section, 経済対策・補正予算 (Economic measures and supplementary budget), the Prime Minister noted that (translated):

We will finalize our Basic Policy on Regional Revitalization by the end of the calendar year … By FY2030, we will allocate over 10 trillion yen in public funding to the AI and semiconductor sectors and draw upon more than 50 trillion yen in public and private investment over the next decade. Economic security will be bolstered, and investments in people, including reskilling, will be prioritized.

Secondly, it is essential we ensure no one is left behind the transition into a growth-oriented economy.

Until we bring about economic conditions allowing wage increases to consistently outpace inflation, support is needed for those who are not in positions that easily benefit from wage hikes. We will provide cash assistance to low-income households. We will also provide support, tailored to local circumstances, to people struggling to deal with sharp rises in energy costs and food prices, support for SMEs struggling to pass on price increases to customers, and support for school meal fees.

So attention to both longer-term investments and easing the material burden for low-income citizens.

The specific semiconductor and AI investment plans announced further the commitment the Japanese government has made to backing the creation of new capacity in this area.

In November 2022, the government in collaboration with 8 Japanese technology and automotive firms sunk about ¥78 billion into the creation of – Rapidus – and related supply-chain firms.

Rapidus is “a semiconductor manufacturer” that is building a new factory in Chitose, Hokkaido south of the capital Sapporo.

The factory is adjacent to the – New Chitose Airport – which is owned by the Ministry of Land, Infrastructure, Transport and Tourism and is one of the busiest airports in Japan.

The Japanese government’s regional revitalisation plan is leveraging public infrastructure that it has already built to attract new industries such as Rapidus.

The factory development at Chitose is moving ahead at breakneck speed and the company will start state-of-art chip production of 2-nanometer chips by 2027.

A large proportion of the investment funds for the creation and realisation of Rapidus have been provided by the Japanese government over the last several years.

It has been touted as “the largest investment in the region and its biggest instance of attracting business” (Source).

An additional 100 companies are moving to nearby locations to become part of the supply-chain and spin-off sectors.

The region will enjoy a massive employment boost in high-skilled, highly-paid areas of work.

During the 1980s, Japanese manufacturers dominated the semiconductor industry (Source):

At its peak in 1988, Japanese semiconductor production accounted for nearly half of the world’s total, and in 1990 six Japanese companies were listed in the world’s top 10 semiconductor manufacturers.

However, its position declined, largely due to the Japanese government being ‘coerced’ by the US government to sign trade agreements that worked against the semiconductor industry in favour of the US.

There is also evidence that Japanese management were slow to react to changes in the industry, most notably driven by the Taiwanese, who worked out that design and manufacturing processes should be separated, which reduced costs and increased reliability of supply.

By 2020, its share of the global production was below 10 per cent.

As a result, the Japanese government provided incentives for Japanese electronics suppliers to move their businesses back to Japan after years of off-shoring.

The data shows that since then “13.3% of Japanese companies with overseas factories have already moved their factories to Japan” which has revitalised manufacturing.

The government then induced the Taiwan Semiconductor Manufacturing Co., Ltd. (TSMC), which is “the world’s largest wafer foundry” to set up a plant in Japan for “3D packaging technology” and to establish a research base in Japan:

The Japanese government spared no effort in subsidizing TSMC’s factory, and on June 17, the Ministry of Economy, Trade and Industry decided to provide subsidies amounting to 476 billion yen. TSMC has partnered with Sony and Denso to invest $8.6 billion (approximately ¥1.14 trillion) in Kumamoto Prefecture to build a factory that is expected to create 1,700 jobs.

TSMC has built a huge manufacturing plant in the – Kumamoto Prefecture – at Kikuyo, on the southern island of Kyūshū.

Other nations are also chasing TSMC in a similar vein, given the global shortage of semiconductors.

These developments, which are the product of massive public investment are revitalising regions that were in decline and losing population to the large urban centres of Osaka, Nagoya and Tokyo.

These decentralised hubs are making the Japanese economy more resilient in the face of constant threat from a major seismic incident.

If we go back to the 1990s in the post bubble crash period, the Japanese government changed direction with respect to fiscal policy and invested heavily in public infrastructure.

Mainstream economists were highly critical using the ridiculous phrases such as ‘highways to nowhere’ or ‘bridges to nowhere’ as putdowns to mock the government spending that they were just ideologically opposed to (being public that is).

The capital works programs that the government invested in helped the private economy get through the devastating bubble crash and kept the unemployment rate low.

It did exactly what it intended to from the perspective of filling the spending gap left from the retreat by private expenditure.

But it also did something else which is now paying dividends.

It created the infrastructure – transport (for example, magnetically levitated train), utilities, housing and more – that the private sector could leverage their own investment off.

And all that was required to get that leverage moving was an industry development strategy from the government which is exactly what it is now doing with respect to the semiconductor investment strategy.

While it is early days, the Government has put in place a multi-layered policy plan to exploit the first-class infrastructure they have created over the last two decades.

It includes attracting private investment and serious companies, putting funds into the higher education system to produce the requisite skills, and ensuring there are integrated supply chains available to feed the nascent industries (the incentives to get Japanese firms to reverse the offshoring is part of that).

The Japan Times article (December 22, 2024) – Chip cities rise in Japan’s fields of dreams – notes that:

As the United Kingdom wrestles with the consequences of austerity, former Italian Prime Minister Mario Draghi urges Europe to spend and the incoming U.S. administration ponders unleashing Elon Musk’s style of cost-cutting, Japan’s past decisions demonstrate the benefits of building. The merits of investment versus saving is a debate Tokyo has had, too, but there the austerity crowd has largely lost out.

The Japanese experiment demonstrates again how the mainstream economics notion of ‘crowding out’, where fiscal deficits are alleged to drive up interest rates and kill off productive private investment as a result, is nonsensical.

Instead, well-crafted public infrastructure development ‘crowds in’ private expenditure and can play a major role in diversifying the employment opportunities for regions in decline.

None of this would have happened without the central role played by the Japanese government.

Rich countries didn’t get rich on the back of ‘private market-driven’ forces.

Rather they required strong government investment in infrastructure and people with a strong regulative structure to ensure the resulting private investment went in the right place.

As the cited article noted, the strategy is not without risk.

But nation building requires action and nations such as Australia, which is now crippled by the inaction of our national government, who is so afraid of offending anyone and so afraid of running deficits that are just small fractions of the size of the economy, are falling behind.

Just look at what the ‘Schwartz null’ mentality (and austerity action) has done for Germany over the last 25 years.

Austerity has short- and longer-run consequences, and the latter become obvious when the horse has already bolted.

Japan is now learning that these nation-building exercises take many years to put in place – from initial public infrastructure investment, to, then, more targetted strategies to attract private leverage.

I should add that I generally do not support handing out massive subsidies to private, profit-seeking corporations, which often just turns out to be a drain that produces profits but little action.

Australia learned that when it was bribed by failing foreign-owned automobile manufacturers to stay producing here.

After millions were paid over many years, the firms still closed their doors.

Conclusion

The Japanese experience makes all the horror stories from the Australian media last week about 1 per cent fiscal deficits look ridiculous.

The Japan Times article summarised the point well:

The easiest thing in the world is to defer or demur, to cite the dangers and send such projects back to be studied again — think how many public works projects in Anglophone countries … have been lost to this approach. But what is the alternative? When Japan was on top of the world’s chip business in the 1980s, Taiwan and South Korea didn’t say it was too perilous to try challenging it.

Holidays

Given the timing of the Xmas break this year, my blog is going on vacation from today until Monday, January 6, 2025.

I have a lot of writing to do to advance and complete some major projects I am working on and I will use this period for that purpose.

All the best to everybody.

That is enough for today!

(c) Copyright 2024 William Mitchell. All Rights Reserved.