On the Growth Potential of the Japanese Local Economy 

Capital investment in Japan continues to expand. Looking back at capital investment in corporate statistics (excluding financials and insurance companies), after reaching a record high in January-March 2007, it went through a long period of decline due to macro events like the financial crisis, the Great East Japan Earthquake, and so on. After finally bottoming out in 2013, it entered a recovery trend and, excluding the impact of the COVID-19 Pandemic in 2020-21, has been rising consistently, most recently recovering to its second-highest level on record in January-March 2024.

The recent increase in capital spending can be attributed to Japanese companies strengthening domestic production due to a growing desire to stabilize supply chains following trade disputes and the pandemic, as well as the recovery of price competitiveness due to the historically low yen. Another factor is that companies are beginning to increase forward-looking investment in response to the exit from deflation. For example, the automobile industry is leading the overall increase in investment in areas related to electric vehicles.

Increased investment in manufacturing has a positive impact on local economies. The widening of regional disparities and the resulting depopulation of rural areas is a major social problem in Japan, and this trend toward rectifying this situation is a welcome development.

Under these circumstances, CCM’s portfolio managers made a research trip to Kyushu in July to confirm the state of the regional economy. The main purpose of the trip was to confirm the transformation in the local economy triggered by the construction of TSMC's new plant.

TSMC announced the construction of a new semiconductor plant in Japan in 2021 and established "Japan Advanced Semiconductor Manufacturing Corporation" (JASM) in Kumamoto Prefecture as a joint venture with Sony Group, Denso, Toyota Motor Corporation and others. The Kumamoto SEMICON Techno Park was originally the site of semiconductor-related plants of Sony, Tokyo Electron and other companies, but with TSMC's entry into the area, the concentration of the industry has accelerated. The area where Kumamoto Semicon Techno Park is located has seen the highest rate of land price increase in Japan, and TSMC's expansion has had a very significant impact on the local economy and society.

JASM has just officially announced plans to build a second plant, and there are local rumors of the possibility of further plant construction, including a third and fourth plant. Job openings and increased traffic have already been observed, creating a ripple effect in related industries such as staffing services and infrastructure construction. The economic impact of the concentration of the semiconductor industry over the next 10 years is expected to total JPY 6.9 trillion1 in Kumamoto Prefecture alone and JPY 20.1 trillion yen2 in Kyushu and Okinawa. When compared with Kumamoto's gross prefectural product of JPY 6.8 trillion3 and Kyushu/Okinawa's real gross regional product of JPY 53.9 trillion4, we can get a sense of the magnitude of the economic impact. In Hokkaido, too, the construction of a plant by "Rapidus," a joint semiconductor company established by eight Japanese companies, is underway. Its ripple effect is expected to total up to JPY 18.8 trillion5 over 14 years from 2023, equivalent to a nominal gross regional product of JPY 19.7 trillion6. If other regions, stimulated by the regional revitalization measures emerging in Kyushu and Hokkaido, begin to develop their own growth scenarios, we could expect a scenario in which the entire country is revitalized. We believe this is remarkable in that it will bring social stability by correcting the disparities between Japan's regions, as well as creating new investment opportunities.

*1 https://ssl4.eir-parts.net/doc/7180/ir_material32/212938/00.pdf

*2 https://www.fukuoka-fg.com/investorimage/data/20240528_ir.pdf

*3 https://www.reri.or.jp/kanri/wp-content/uploads/2023/12/eac49bc4991af4a1acaf1622ee1a3124.pdf

*4 https://www.kerc.or.jp/sp/prs/20231225ec.pdf

*5 https://www.anic-hokkaido.jp/wp/wp-content/uploads/2023/11/894c9449748e9077be93f64c6cce0cd5-1.pdf

*6 https://www.pref.hokkaido.lg.jp/ss/tkk/databook/160009.html