How Japan's carbon neutrality goal could destroy its economic recovery

carbon neutral by 2050, bubble economy, Its semiconductor, Renesas Electronics, Taiwan Semiconductor Manufacturing Company, 2011 triple disaster

Akio Toyoda, the CEO of Toyota and chairman of Japan Automobile Manufacturers Association, has appealed several times in the past year for Japan to increase its use of sustainable energy as soon as possible.

He cautioned that Japan could lose up to 1 million jobs in the automobile industry because of its pledge to be carbon neutral by 2050 without any practical proposals to change the energy generation portfolio. Toyoda is concerned about preserving jobs in Japan because carmakers could transfer production outside Japan if the government doesn’t change its plans.

Japanese carmakers have established global production and sales infrastructure to remain viable since the yen started appreciating in 1985. Their production volume outside Japan is twice that in Japan. They do not have to follow the Japanese government if its economic recipe is nonsense.

The strong ties between the Japanese government and corporations have made many industries strong and afforded Japanese people a high quality of life. The automobile industry is a textbook example of a sector that received powerful support from the government in the 1960s, which led to Japan’s economic miracle of rapid growth.

This approach reached its peak during the “bubble economy” era. Japan expected that the yen might become the world’s key currency together with the US dollar because the United States became a net debtor in 1985 for the first time since World War I.

But the Japanese dream evaporated quickly as the bubble burst, and Japan dived into the lukewarm water that could boil it to death in the future. Its semiconductor, personal computer, home appliance, shipbuilding and mobile phone industries have lost competitiveness in the global market.

They re-engineered themselves to boost productivity. Some sold their divisions of these products to others, including foreign companies. The government supported their efforts to keep Japan’s cutting edge in the global competition.

A signature example is the semiconductor industry. Electric companies have been encouraged to separate off their semiconductor divisions and create one big company, Renesas Electronics. The government has poured in taxpayer money to enhance its capital structure, but Renesas has struggled to deliver on its promise.

Taiwan Semiconductor Manufacturing Company has surged in the past 20 years and now controls 92 per cent of the world’s high-precision processor market. On the other hand, Renesas cannot produce a circuit of a line width of 28 nanometres or less.

Now, the companies in Japan’s automotive industry are among a select few in the country that can compete globally. “Just in time”, a famous production system that encourages assemblers to minimise inventory and increase efficiency, was designed by Toyota and symbolises Japanese carmakers’ strength.

Toyota was able to prepare for the risks to the supply of semiconductors stemming from the Covid-19 pandemic, thanks to the experience of the 2011 earthquake and tsunami. However, the threat posed by the negative impact of the government’s carbon neutrality goal is steadily creeping up on it.

Japan still has 30 years to go until 2050, but if the government fails to shape a new energy mix to achieve its carbon-neutral target, it could set off a chain reaction that rips through automobile operations in Japan like wildfire.

It has the potential to cripple automobile exports from Japan, which Toyoda stressed would put a million jobs at risk. Japan could also stand to lose more than 16 trillion yen (US$145.5 billion) from its total exports, turning Japan’s trade surplus into a trade deficit.

In the past, the goal of carbon neutrality for Japan’s automobile industry was not considered to be difficult because manufacturers would just change all their production to electric and fuel cell vehicles.

Carbon emissions from vehicles in Japan decreased 54 million tons, equivalent to 23 per cent of Japanese cars’ total carbon dioxide output in the past 18 years, while such emissions in Germany and the US increased 5 per cent and 9 per cent respectively in the same period. Japanese carmakers produced 1.5 million electric vehicles, 38 per cent of global production in 2019, more than other Group of 7 countries.

However, government requirements based on the life cycle assessment of vehicles – which calculates the environmental impact of a car’s entire life – could ruin Japanese carmakers’ advantage. The assessment includes everything involved with making the car’s part, assembly, delivery to the customer and disposal.

carbon neutral by 2050, bubble economy, Its semiconductor, Renesas Electronics, Taiwan Semiconductor Manufacturing Company, 2011 triple disaster

A liquefied natural gas (LNG) tanker is tugged towards a thermal power station in Futtsu, east of Tokyo, Japan in November 2017. Thermal power plants account for more than 75 per cent of total energy generation in Japan, where the costs of renewable energy is higher than in the US or Europe. Photo: Reuters

The main question under the assessment is if and when Japan can change its energy mix. Thermal power plants currently account for more than 75 per cent of Japan’s total energy generation. The cost of renewable energy in Japan is higher than the cost in the United States or Europe.

Also, though the cost of wind turbines and solar power plants in Japan is declining, it is still far higher than the global standard. Increasing power generation from nuclear power plants would be difficult for the government as the Japanese people are still hesitant after the events of the 2011 triple disaster.

The government still has confidence in the strength of Japanese manufacturers, so it believes Toyota and other carmakers can achieve the target and wants to focus its support on other industries. However, Toyoda has asked the government to find out how things really are and create a sustainable, practical process that better reflects the circumstances in the country.

The government’s approach to Japan’s energy mix will affect other Japanese manufacturers, too. Japan must be careful that targeting a carbon-neutral economy might end up destroying economic growth. Corporate Japan is at colossal risk now, and the yen could weaken profoundly amid the effects of a trade and fiscal deficit, which is worse than the situation the US faced in the 1980s.

Yoshihiro Sakai is a professor at Chubu University, Japan. This article reflects the author’s own views

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