Japan’s riposte to aging and productivity headwinds: robots with generative AI

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.

Strong potential for success with generative AI

Japanese companies have traditionally been the leaders in robot production, exports and industrial use. Domestically, robot integration in industrial use has been especially popular and easy to execute due to the shrinking workforce given the ageing dynamic of Japanese society and lack of immigration. This has made Japanese businesses and workers more willing to invest in robots in order to drive up productivity, total output and GDP growth. Firms such as FANUC, Kawasaki Heavy Industries, Sony and the Yaskawa Electric Corporation led the way in robotic development during Japan’s economic rise.

Japan’s success in robotics and involvement in the earlier AI booms sets up a strong potential for its success with the latest buzz of generative AI. Firms will remain open to enabling new technologies due to population constraint and easy access to chips. About 60% of Japanese companies have net cash with very low levels of gearing, which will also allow for investments in AI-related research and development, in contrast to international competitors who may face a high interest rate environment. In addition, there is ample tech and AI-skilled labour supply in Japan, given its prior success in robotics and other tech fields and constant collaboration with global tech companies. 

Robots + AI could spell productivity leaps and a new era of Japanese manufacturing

Japan’s greatest potential could be in bringing together its success in robotics with new AI offerings to create a completely new technology that can change the face of the global economy. Artificial intelligence applied to robotics offers a new way for robots (software) to execute commands or tasks given to them. This means robots could become more independent and be able to learn, understand, solve, reason and react, while being less dependent on human commands. For industrials, this could mean a robot navigating its way around a busy warehouse, adapting itself to change routes in case of unforeseen events, or a robot understanding supply chains and streamlining inventory, while also analysing data for any likely hiccups. 

This marriage of robots and AI could bring leaps in productivity gains as well as enhancements in labour and global trade, which could lead to a new era of economic prowess for Japan. Japanese companies in a variety of sectors are embracing AI. SoftBank’s mobile unit is developing a Japanese equivalent of ChatGPT. CyberAgent announced that it has released its own large language model (LLM) with which companies can create AI chatbot tools. NTT also plans to develop its own LLM this fiscal year and provide it to other businesses. Industrial conglomerate Hitachi has set up an internal body called the Generative AI Center to facilitate the use of generative AI to improve the productivity of its employees and also plans to provide consulting services on AI for other companies.

A host of opportunities in Japan’s AI potential

The potential for innovation adds to the other tailwinds that are lining up for Japanese equities and brings a host of additional investment opportunities in Japan. Below is an inspiration list for your reference.

• Chip manufacturers and testing: Advantest, Kyocera, Renesas, Lasertec, Shibaura Mechatronics, Screen Holdings, Tokyo Electron, Tokyo Seimitsu
• Automation manufacturers: SMC Corp, Omron, Yaskawa, Keyence, FANUC
• AI-integrated products: Sony, Nintendo, Nikon, Hitachi, Kawasaki, Mitsubishi, Toshiba
• AI-driven services: Appier, Change Holdings, NTT Data Corp, AI Inside, Advanced Media
• ETFs: Global X Japan Semiconductor ETF, Global X Japan Robotics & AI ETF

Risks to the view

While the potential for Japan to gain a competitive edge in manufacturing is immense, there will likely be a hesitancy from companies looking to diversify their supply chains outside China, given the weak labour supply and rising wage pressures in Japan. The reshoring among Japanese companies could also remain limited to production of higher-end products on a smaller scale. A weak yen also means a high cost of imports of raw materials for companies looking to move production to Japan. On the contrary, a sharp appreciation in the yen could reduce the demand for Japan-made consumer electronics and other products. Meanwhile, recent sharp gains in semiconductor stocks could also mean that the expectations of technology advancement have already been priced in.

Smoothing of US-China tensions could slow down or reverse the realignment of global supply chains. Japan has also announced some curbs on exports of semiconductor chips, which could impact earnings of key Japanese chip companies. In addition, any AI-related advancements could be interrupted by regulation risks or energy supply constraints.