The news
China threatened Japan with severe economic retaliation if Tokyo continued to restrict sales of chip manufacturing equipment to Chinese companies.
For months, the US has pressured Japan to restrict the ability of companies to sell advanced chip tools to China, hoping to slow Beijing’s progress in key sectors including artificial intelligence.
Faced with possible sanctions, Tokyo fears the auto industry, which generates nearly 3% of GDP, could be targeted Toyota in particular facing restrictions on minerals essential to auto production, Bloomberg reported.
SIGNALS
China dominates supply chain for minerals crucial to green transition
China has a “almost monopoly“on the production of minerals crucial to the green transition, Fortune reported in June, citing a JPMorgan report. As of 2022, China not only produced the vast majority of rare earth minerals — used to make magnets and batteries — and graphite — for lubricants and electric motors — but it also had a critical advantage in processing those minerals, so the majority of the world relied on Beijing to get access to them. Other countries fear that their heavy dependence on China could pose security risksthe Brookings Institute think tank noted, so their governments, particularly in the US and Europe, are working to build up their own critical mineral supply chains.
The cat-and-mouse game between the US and China could have global implications
Japan’s restrictions on China are largely the result of U.S. pressure, Bloomberg reported. The U.S. and China are playing a “cat and mouse“game that could lead to “real shortages of… semiconductor materials, and therefore would have an impact on global supply chains,” the Financial Times reported. Not everyone in Japan agrees that Tokyo needs to align its strategy with the US, Bloomberg added: “Japan should have its own philosophy, decide what is best for the country and stand firm,” one analyst told the outlet. But U.S. officials are working with Japan to devise a strategy to ensure continued access to critical minerals, and the U.S. government is confident it will reach an agreement with Tokyo by the end of 2024.
Chinese threat forces Japan to increase defense spending
The growing threat from China and the general tensions in the region, such as in the East and South China Seas, have prompted Japan to improve its security strategy and are pushing for an unprecedented defense budget, The Associated Press reported. A record $59 billion budget was approved in late August, part of a five-year plan that will make Japan the world’s third-highest-spending nation on military spending, behind the U.S. and China. Tokyo, which has also struggled with military enrollments, is focusing its efforts on unmanned drones for surveillance and strikes, the outlet added.