Japan to fast-track economic security bill amid growing geopolitical tensions

This comes as a result of intensifying geopolitical rivalry between the US and China, Covid-19 and supply chain weaknesses. PHOTO: REUTERS

TOKYO – Japan is set to fast-track an economic security bill through the Diet to shore up the resilience and independence of its supply chains, and to prevent the leakage of sensitive technology to unfriendly forces.

The proposed legislation, which is one of Prime Minister Fumio Kishida’s top policy planks, comes amid concerns that Japan’s woeful safeguards of its strategic research and technology patents put it at risk of intellectual property theft and even espionage by China, Russia and North Korea.

While the bill is aimed domestically, Japan may yet take action on another country for lax controls. In 2019, it abruptly imposed export controls on Seoul, a fellow United States security ally, over the alleged mismanagement of strategic chemicals imported from Japan.

“The bill will eliminate Japan’s inherent weaknesses as compared with other nations and secure its strength in the global community,” Economic Security Minister Takayuki Kobayashi told a news conference last month.

The legislation will designate semiconductors, storage batteries and rare earths as strategically important as these are not just vital parts in everyday items like cars and mobile phones, but may also be tapped for military purposes.

To better protect core infrastructure from cyber attacks, the bill authorizes wholesale supply chain reviews and mandates companies in 14 industries, including power, railways, communications and finance, to give the government prior notice on the purchase of new equipment and their suppliers.

Non-compliance carries a jail term of up to two years and a fine of up to one million yen (S$11,850).

The law comes as Japan is at the mercy of intensifying geopolitical rivalry between the US and China, while the Covid-19 pandemic and a crippling shortage of critical parts like chips have exposed Japan’s supply chain weaknesses.

Its erstwhile lack of safeguards for its sensitive technology – including a rule that patents are made available to the public – has been an obstacle towards closer collaboration in research and development as well as intelligence sharing with the US and other partners, especially amid the blurred lines between the civilian and military sectors.

“Japanese companies and universities hold a substantial number of patents in emerging technologies with a potential for dual use, and many inside Japan have voiced concern about the dangers of making such information public,” Dr Kazuto Suzuki of the Graduate School of Public Policy at the University of Tokyo wrote in a commentary in Jiji News.

“Japan could come under intense criticism from its Western partners if a strategic rival or adversary, such as China, North Korea or Russia, were to appropriate technology disclosed in Japanese patents and use it for military purposes.”

While Japan did not point fingers at any country behind the push for legislation, Fitch Ratings economist Maxime Darmet told The Straits Times that if the Bill is passed, Japan will be in lockstep with other regions such as the US, Australia and the European Union to cut their supply chain reliance on China.

“Japan’s new economic security legislation will strengthen the screening of Chinese investments in the domestic market. Effectively, this means that access to the Japanese market by Chinese entities will be tightened,” he said.

“In the near term, there is a risk that China retaliates by targeting Japanese companies operating in China.”

This might hurt Japanese companies in the near term, Mr Darmet added, noting that China accounts for nearly one-fifth of the foreign revenue of Japanese firms.

Companies have also been unsettled by how the restrictions might hurt their competitiveness and, eventually, their bottom lines.

Keio University economist Fukunari Kimura told ST that while the need for legislation has been widely recognised, there is still a lack of clarity over how far regulations would be imposed and the accompanying compliance costs.

“For instance, if ‘security’ were too widely defined, a large portion of trade and other economic activities would be under the managed trade, which would kill economic dynamism,” he said, adding that it remains unclear how the regulated industries can be set distinctively from other sectors.

The Keidanren business lobby last month also advised against “excessive restrictions on corporate activities” so as to prevent Japanese firms from being hurt competitively.”It is important to maintain and improve an environment in which companies can freely develop their business activities both domestically and internationally at their own risk,” the Keidanren added.

Key thrusts of economic security Bill

Japan aims to shore up its supply chain resilience, guard against the theft of sensitive technology and bolster defences against cyber attacks on core infrastructure.

There are four key thrusts to the legislation:

• Strengthening domestic supply chains for key materials and parts by encouraging companies to invest in producing “strategically important goods” such as semiconductors and pharmaceuticals;
• Encouraging research and technological cooperation between the public and private sectors, including in areas such as artificial intelligence and quantum computing;
• Limiting the disclosure of patents on technology with potential military applications; and
• Protecting core infrastructure against cyber attacks by imposing government oversight in the installation of vital equipment and computer systems in 14 key industries. These sectors are, reportedly, gas, petroleum, power, utilities, railway, trucking, airlines, airports, international freight, communications, broadcasting, post, finance and credit cards.
  Companies will have to give advance notice of their plans to install infrastructure management systems and the suppliers for advance screening.

Non-compliance may carry a jail term of up to two years and a maximum fine of one million yen (S$11,850).

Given the potential vulnerabilities in telecommunications as the geopolitical rivalry intensifies between the US and China, Japan’s telcos have sought to either purge or avoid using Huawei technology in its 4G and 5G networks, instead turning to Sweden’s Ericsson or Finland’s Nokia.

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