Asia's Semiconductor Surge: AI-Driven Demand and the Structural Bull Case for South Korea and Japan

The semiconductor industry in Asia is undergoing a transformative phase, driven by the explosive demand for artificial intelligence (AI) and high-performance computing (HPC). South Korea and Japan, two of the region's semiconductor powerhouses, are leveraging structural advantages-including government policies, R&D investments, and strategic partnerships-to solidify their dominance in the global market. With AI applications reshaping industries from data centers to edge computing, these nations are poised to outperform peers, creating a compelling investment narrative for the AI era.

South Korea: A Strategic Bull Case

South Korea's semiconductor exports hit a record $173.4 billion in 2025, a 20% year-on-year increase, fueled by global demand for high-priced memory chips used in AI data centers. This growth aligns with the broader global semiconductor industry forecast, which predicts a 15% increase in 2025, driven by AI and HPC applications. The country's structural advantages are underpinned by aggressive government intervention.

In 2026, South Korea announced a $5.6 billion investment in science and ICT R&D, with a focus on advancing its position as one of the world's top three AI powers. A significant portion of this budget targets core semiconductor technologies, including AI-safe chip development and quantum computing. Additionally, the government launched a 150 trillion-won Public Growth Fund in 2026, allocating over KRW 30 trillion to AI and semiconductor sectors, including KRW 6 trillion for AI-specific projects. This funding is complemented by sovereign AI infrastructure initiatives, such as deploying over 50,000 NVIDIA GPUs across public and private projects.

Strategic partnerships further amplify South Korea's bull case. In October 2025, the U.S. signed Technology Prosperity Deals (TPD) with South Korea to foster collaboration in AI, semiconductors, and quantum computing, reducing reliance on China's tech supply chain. Domestically, companies like Samsung and Hyundai are developing AI factories, leveraging government support to scale production.

Japan: Rebuilding Technological Sovereignty

Japan's semiconductor industry is experiencing a renaissance, driven by a nearly fourfold increase in government spending on advanced semiconductors and AI. The Ministry of Economy, Trade and Industry (METI) allocated JPY 1.23 trillion (USD 7.9 billion) in FY2025 for these sectors, a 50% year-on-year rise. A key focus is Rapidus, a state-backed venture receiving JPY 250 billion in government funding to develop cutting-edge chips.

Japan's AI strategy emphasizes "physical AI," embedding AI into robotics and industrial machinery, with JPY 387.3 billion allocated for domestic foundation model development. This aligns with broader efforts to address supply chain risks, such as prolonged lead times for memory products and automotive microcontrollers, which often exceed 26 weeks. By stabilizing local manufacturing and securing funding, Japan aims to reduce dependency on global supply chains while capturing AI-driven demand.

Bilateral cooperation is also critical. In December 2025, the Korea Chamber of Commerce and Japan Chamber of Commerce and Industry (JCCI) pledged to strengthen AI and semiconductor supply chains, addressing shared challenges like aging demographics. These efforts are bolstered by the U.S.-Japan-South Korea TPD agreements, which aim to shape global standards for emerging technologies.

Structural Factors Driving the Bull Case

Both nations are capitalizing on structural tailwinds. The Asia-Pacific semiconductor market is projected to grow at a 7.72% CAGR from 2025 to 2034, expanding to USD 650.02 billion by 2034. This growth is fueled by AI adoption in edge devices (e.g., IoT and automotive platforms) and data centers, driving demand for both advanced and legacy nodes.

Government policies are addressing supply chain vulnerabilities. South Korea's focus on AI-safe semiconductors and Japan's emphasis on physical AI create niche advantages in a fragmented market. Meanwhile, geopolitical pressures are accelerating local manufacturing investments, with South Korea and Japan benefiting from U.S. funding programs.

Conclusion

South Korea and Japan are uniquely positioned to outperform in the AI-driven semiconductor market. Their combination of government-led R&D, strategic partnerships, and sovereign infrastructure investments creates a robust bull case. As AI adoption accelerates, these nations' structural advantages-particularly in memory chips, AI-safe semiconductors, and physical AI-will likely translate into sustained market leadership. For investors, the semiconductor sectors in Asia represent a high-conviction opportunity, underpinned by both technological innovation and geopolitical tailwinds.