Japan must invest at least ¥1 trillion ($9 billion) toward chip development this fiscal year and trillions more after that, if it is to have any hope of reviving its national industry, according to Tetsuro Higash, the government’s lead adviser on semiconductor strategy.

Japan is currently pursuing an all-out strategy to lure overseas semiconductor companies, including designing generous financial incentives.

"Japan will swiftly match efforts by other countries to attract cutting-edge chipmaking facilities so it can build a secure supply chain at home," a recent note presented to a Cabinet Office stated.

Japan lags behind South Korea and Taiwan in advanced chip manufacturing. It imports more than 60% of its semiconductors, much of them from Taiwan and China.

The 10-nanometer (nm) chips that drive smartphone is dominated by chip manufacturers from Taiwan and South Korea, 28nm technology used in automobiles is mostly produced in Taiwan and China.

Local Japanese player Renesas Electronics can mass-produce only up to 40nm chips domestically.

Japan’s share of global semiconductor sales plummeted to just 10% in 2019, down from 50% in 1988. The country still has 84 chip factories, the most in the world, but they’re not producing enough high-end products. As a result, Japan now has to import 64% of its semiconductors.

NEC, Toshiba and Hitachi were widely regarded as the pioneers in semiconductor industry during 1980s and 1990s. But this began to change in the 2000s as chip design became uncoupled from manufacturing, leading to the rise of foundries like Taiwan Semiconductor Manufacturing Company (TSMC)

In a bid to boost Japan's competitiveness in the chip manufacturing sector, the country signed off on a US$338 million semiconductor research project to develop cutting-edge chip technology in the country with the market-leading TSMC. Around 20 Japanese companies will work with TSMC on this project. Japanese government will be funding half the project cost.

Japan is also hoping to persuade TSMC to firm up a plan to build a chip fab in Kumamoto Prefecture in western Japan. The proposed unit could be company's first production hub in Japan, which accounted for 4.7 percent of TSMC's revenue in 2020.

Taiwanese chipmaker is currently developing a $12bn+ site in Arizona, expanding its Chinese site, and considering opening a plant in the EU.

TSMC is currently setting up a massive state-of-the art manufacturing plant in southern Taiwan to produce 5-nanometer processor. 5-nanometer process are superior because more transistors can fit in the same sized chip, boosting power and efficiency.

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