Assessing the Economic and Strategic Risks of China's Dual-Use Export Controls on Japan

The intensifying geopolitical rivalry between China and Japan has reshaped global supply chains, particularly in semiconductors, robotics, and advanced materials. China's dual-use export controls, introduced to counter perceived security threats and align with its push for technological self-reliance, have forced Japan to recalibrate its industrial strategies. For global investors, these developments highlight a critical juncture: the interplay between geopolitical tensions, supply chain vulnerabilities, and the long-term viability of Japanese industries.

Economic Risks: Dependency and Diversification Challenges

Japan's reliance on China for critical materials, such as rare earth elements, underscores its exposure to export controls. Approximately 60% of Japan's rare earth imports originate from China, which has leveraged this dependency to impose restrictions on dual-use items, including advanced electronics and precision machinery according to analysis. In response, Japan has pursued a dual strategy: diversifying supply chains and accelerating domestic production. Partnerships with Australia for strategic reserves and investments in Southeast Asia for manufacturing hubs aim to mitigate risks as strategic planning indicates. However, these efforts face cost implications. For instance, Japan's government has allocated $25.7 billion in subsidies since 2022 to bolster semiconductor resilience, a figure representing the largest global outlay as a share of GDP according to reports. While such investments signal commitment, they also raise questions about fiscal sustainability.

Strategic Risks: Resilience vs. Competitiveness

The Japanese semiconductor industry's push for self-sufficiency, exemplified by the Rapidus consortium, reflects a strategic pivot toward resilience. Government support for Rapidus has exceeded one-third of its capital costs, with additional funding announced in 2024 and 2025 according to industry analysis. Yet, the long-term viability of such projects remains uncertain. Rapidus faces challenges in attracting private investors, managing costs, and competing with global leaders like TSMC.

A joint venture with TSMC and Sony to build a $8.6 billion chip plant in Kumamoto-targeting 12- to 28-nm production-illustrates Japan's attempt to bridge this gap as detailed in reports. However, even with foreign collaboration, the project's success hinges on technological advancements and sustained policy support.

Geopolitical alignment further complicates Japan's strategy. While the U.S. CHIPS and Science Act and the EU's CHIPS Act prioritize economic nationalism, Japan's approach mirrors these trends without explicit integration into broader alliances according to analysis. This fragmented strategy risks isolating Japanese firms in a globalized market, where cross-border collaboration is often critical for innovation.

Investor Strategies: Navigating Uncertainty

Global investors are recalibrating their approaches to mitigate risks. A key trend is the focus on securing long-term supply chain agreements and investing in recycling technologies. For example, the semiconductor industry is exploring alternatives to tungsten hexafluoride (WF₆), a critical material for deposition processes, to reduce reliance on China as industry experts note. Additionally, investors are prioritizing R&D in domestic and regional partnerships, such as Japan's collaboration with Southeast Asia, to diversify sourcing geographies according to strategic assessments.

However, these strategies are not without challenges. The recent suspension of China's rare earth export controls until November 2026, as part of a U.S.-China trade agreement, introduces short-term stability but does not resolve long-term vulnerabilities as reported. Investors must weigh the immediate benefits of reduced tensions against the likelihood of renewed restrictions, which could disrupt supply chains and inflate costs.

Conclusion: Balancing Risks and Opportunities

Japan's Economic Security Strategy China's dual-use export controls have forced Japan to confront its supply chain vulnerabilities, accelerating investments in resilience and diversification. While these efforts align with global trends toward economic nationalism, they also expose Japan to fiscal and strategic risks. For investors, the key lies in balancing short-term stability with long-term adaptability. The success of initiatives like Rapidus and the Kumamoto plant will depend not only on government support but also on Japan's ability to integrate into global innovation ecosystems. As geopolitical tensions persist, the semiconductor and advanced materials sectors will remain central to the economic and strategic calculus of both nations.