What lessons can be learned from Japan’s critical minerals strategy?

Eiki Tagami
One of Japan’s major strengths is that it recognized earlier than most countries that supply chains are critically important and that disruptions are not hypothetical risks but very real possibilities. In practice, Japan succeeded in reducing its dependence on rare earth imports from China from 85% in 2009 to 58% in 2020 by developing technologies that reduce material usage in products―concentrating dysprosium on the magnet surface―and by cultivating alternative sources of supply―expanding neodymium sourcing to the United States and Australia.

In addition, through experiences such as the Great East Japan Earthquake that disrupted supply chains, Japan’s manufacturing sector, especially its automotive sector, has proactively worked to diversify supply chains. This proactive behavior by private manufacturers can be regarded as another significant strength.

On the other hand, for certain materials—particularly some middle and heavy rare earths—resources are geographically concentrated, and refining costs become inevitably high due to the need to prevent environmental damage and adverse impacts on human health. As a result, supply chain challenges remain for those specific materials.

Eiki Tagami
Based on experience, many Japanese manufacturers maintain a certain level of inventory of critical minerals. However, if export restrictions are prolonged, it is possible that the ban will eventually have an impact. China states that it only prohibits dual-use items with military applications, narrowing the scope of regulations while allowing for arbitrary enforcement. Consequently, the long-term impact remains contingent on future political developments.  

In any event, potential mitigation measures for Japanese manufacturers include inventory stockpiling, the development of alternative sources of supply, resource-saving technologies, the development of substitute materials, recycling, and the utilization of marine mineral resources.

Regarding inventories, both government-held and company-held stockpiles exist, but in either case they are primarily effective as responses to short-term shortages. Developing alternative sources of supply is the most fundamental solution, but it involves significant costs, time, and business risks for private companies, and therefore is unlikely to progress easily. Efforts to develop resource-saving technologies and substitute materials are ongoing in many areas, but technological innovation and successful commercialization are essential. Recycling is also important, and in the case of some rare metals and precious metals, a successful recycling model has been implemented, but for elements such as rare earths—where the content per product is very small—commercialization via mass production is not straightforward. Japan’s recent success in recovering rare earth-rich mud near Minami-torishima Island in February has raised expectations, but full commercialization still faces challenges, including costs and the installation of refining facilities.

Eiki Tagami
For globally prominent battery metals—such as lithium, cobalt, nickel, manganese, and graphite—as well as rare earths used for permanent magnets, China’s near-monopoly position over the processing and refining supply chain has created price pressures that result in the underdevelopment of dependence-mitigating countermeasures worldwide. But importantly, it is already widely known where and for what purposes these critical minerals are required. In contrast, for rare metals and rare earths used in semiconductor manufacturing, it is not necessarily publicly known which elements are used at which stage of the production process.

This is largely due to the extreme technical complexity of semiconductor manufacturing processes and the high level of confidentiality within the industry. For example, tungsten is used in many critical applications across front-end equipment, back-end equipment, inspection equipment, and materials in semiconductor manufacturing. Nevertheless, we rarely see strong arguments calling for the securing of tungsten specifically for semiconductor purposes. I believe this is because there are too few practitioners and researchers who are sufficiently familiar with semiconductor manufacturing processes to conduct element-level supply chain analysis. For semiconductors it is necessary to identify comprehensively and clearly which elements are indispensable and would halt factory operations if they became unavailable. This is why I have tried to analyze the semiconductor manufacturing process in element-level detail.

Eiki Tagami
The most important point is who actually will implement these measures. Governments understand the importance of economic security and believe that rapid action is necessary, but the entities who ultimately act are private companies. While companies may recognize the importance of economic security, they operate based on different decision-making criteria from governments, such as current business conditions, pricing pressures, cost considerations, customer requirements, and responsibilities to pay dividends to shareholders. As a result, even if governments issue strong calls to action or provide subsidies, there is a structural challenge in that companies will not necessarily move in the intended direction. For initiatives such as Pax Silica and the Critical Minerals Ministerial, it is crucial that they go beyond being merely diplomatic frameworks among governments. The key question is how support measures and regulatory systems are concretely designed to turn into actual actions by private companies.

For rare earths—especially middle and heavy rare earths—refining costs have become a more important economic challenge than resource availability itself. This is not only a technological issue; costs inevitably rise when building facilities capable of refining materials while preventing environmental damage and health risks. If governments were to guarantee offtake at a predetermined price for a certain period sufficient to ensure project profitability, including depreciation, some companies could proceed after explaining the rationale to their shareholders.

Another important point is the need to design policies separately for “rare metals,” such as battery metals, and “rare earths.”

For rare metals, it may be possible to design workable schemes by appropriately allocating risks among governments and various layers of private companies through combinations of price floors, compensation mechanisms, strategic stockpiling, and purchase commitments by end users. If such schemes are implemented across multiple countries, further risk diversification is also possible. That said, even designing such systems within a single country is difficult, and coordinating interests across multiple countries makes it even more challenging. Issues include setting minimum prices, defining eligible minerals, determining guarantee periods, securing funding sources, ensuring consistency with trade rules, and establishing traceability for materials sourced from like-minded countries. If any of these elements are missing, the scheme may fail to function. Nevertheless, efforts should begin by attempting to complement existing market mechanisms.

In contrast, for rare earths, total demand is extremely small compared to rare metals, and the number of mining, refining, and trading companies is very limited. As a result, policy designs based on market mechanisms are fundamentally unsuitable. Instead, governments of multiple countries should identify the necessary quantities in advance and provide sufficient guarantees—outside normal market mechanisms—while specific operators engage in production.

For example, like-minded countries could designate a location and establish refining facilities in compliance with the host country’s regulations, ensuring operations that fully consider environmental and health impacts. Naturally, the output would be priced significantly higher than market levels, and governments would guarantee purchase of the output, with commitments from end users and strategic stockpiling playing critical roles. Here too, there are many contentious issues, such as how offtake conditions are determined, how risks are shared, priority of use, and the duration of guarantees. For middle and heavy rare earths in particular, production and refining are highly concentrated in China. If alternative supply sources are launched by like-minded countries, existing suppliers could increase output and depress market prices, undermining project viability. Without full-volume purchase guarantees that anticipate such a possibility, private companies may be unable to make the decision to proceed.

In this way, different approaches are required: minimum price guarantees that complement market mechanisms for rare metals, and time-bound, full-purchase guarantees for rare earths. The rare earth shortage—arguably the most serious challenge currently facing manufacturing—is not due to a lack of technology, funding, or human resources, but rather to an insufficient level of ingenuity and effort in designing appropriate policy frameworks for mining, smelting, and trading. Like-minded countries must work together to create such mechanisms. Ultimately, the key question is how initiatives such as Pax Silica and the Critical Minerals Ministerial can be turned into effective actions by private companies worldwide.