technological innovation.

Japan’s expertise in semiconductor manufacturing and robotic integration could be the foundation of its dominance in AI. Combining the two most powerful market themes of this year, Japanese equities and artificial intelligence, brings a wave of opportunities. The two themes that have been discussed most extensively in the market in the last few months have been AI and Japan, and bringing the two together creates a new wave of opportunities for investors. We have previously discussed how a slew of positives are lining up for Japanese markets – from stronger growth to higher inflation, negative interest rates, improving corporate governance, geopolitical tremors, attractive valuations and Warren Buffet’s increasing interest in the market. Nikkei 225 and the TOPIX have both reached fresh 33-year highs recently, and while there may be reasons for a tactical pullback or a short-term deterioration of sentiment for reasons such as a Fed pivot or China devaluation, the advent of artificial intelligence coming on top of the current dominance in robotics has strengthened the long-term case for an exposure to Japanese equities. Japan set to reaffirm its global chipmaking leadership Japan was the epicentre of the chip manufacturing industry back in the 1980s, and despite some setbacks, it still retains a key position in select semiconductor sectors such as NAND chips (a type of flash memory that does not need power) and sensors. Authorities are seemingly keen to regain Japan’s position in the global chip industry and plan to overhaul its chip strategy to triple sales of domestically produced semiconductors to over 15 trillion yen ($108 billion) by 2030. The new strategy is a conscious step to boost production of advanced semiconductors that are a key strategic commodity globally for economic security and advancements in technology, including the latest buzz of generative artificial intelligence. This has come at a time when global leaders are becoming increasingly concerned about the threat to Taiwan’s chip manufacturing industry, which produces over half the world’s chips and 90% of the most sophisticated ones. Access to Taiwan’s chips remains key for the global digital economy to thrive, and to continue to make progress on AI developments.     Aiming to achieve domestic production of next-generation semiconductors, Japanese authorities set up a consortium called Rapidus in 2022 with investments from eight Japanese companies including Sony, Toyota and Softbank. They plan to make investments totalling $36 billion over the next decade, with the government offering around $500 million in subsidies, with an aim to deliver next-generation 2-nanometre chip technology. In addition, the government has committed financial support of up to JPY 476 billion for TSMC’s new factory in Kumamoto in southern Japan and subsidies of JPY 92.9 billion to Kioxia Holdings, which specialises in flash memory, for its plant in central Japan. US companies such as Micron are also expanding in Japan and it has recently announced a new program for the US and Japan to work together on R&D in semiconductors, which has been of interest for local companies like Tokyo Electron. With its history of being a leader in technological research and innovation, Japan has the potential to fill the gaps and help global semiconductor companies de-risk as they try to move their operations away from China and Taiwan. The increased Japanese investment aligns well with the global need for diversification of supply chains and could bode well for the return of Japan as a technological giant.