New bill looks to beef up Japan’s economic security, but firms are wary

With the global economy continuing to be at the mercy of the U.S.-China rivalry as well as the coronavirus pandemic, the Japanese government is set to submit a package of legislation to parliament later this month to bolster the country’s economic security.

“Economic security is a pressing issue to protect the safety and security of the people,” said Prime Minister Fumio Kishida during a ministerial meeting on the topic on Feb. 4.

It was only somewhat recently that economic security shifted into the spotlight, mainly on the back of heightened tensions between the United States and China. Then came the pandemic, which served as a fresh wake-up call due to the resulting disruption to supply chains and shortages of critical products, such as semiconductors.

Although the legislation does not explicitly name names, China is the nation that policymakers have in mind, with Tokyo apparently moving in tandem with Washington to strengthen their guard against Beijing. The new rules are designed to prevent the leaking of sensitive information and reduce dependence on imports from the world’s second-largest economy.

Considering the geopolitical and geoeconomic circumstances, the private sector in Japan has indicated it understands the importance of economic security. But experts and business leaders are concerned that the new government restrictions may impinge on business activities.

At present, the economic security bill is expected to be consisted of four pillars:

• Beefing up the security of key infrastructure
• Boosting supply chain stability
• Facilitating public-private cooperation on developing cutting-edge technology
• Keeping patents on sensitive technologies undisclosed

To ensure the effectiveness of the legislation, the government will impose some burdens on the private sector.

To increase infrastructure security, for instance, the government is expected to mandate that companies in 14 business areas report on plans to install infrastructure management systems and who the suppliers will be, so it can conduct advance screening on where they will procure devices and parts. According to some Japanese media reports, the 14 sectors are gas, petroleum, power, water, railway, trucking, airlines, airports, international freight, communications, broadcasting, post, finance and credit cards.

If reports are filed falsely or not at all, possible punishments include a maximum two-year prison sentence or fine of up to a ¥1 million.

Since cyberattacks on core infrastructure have increased around the world, the government will also make sure that domestic infrastructure firms are not using devices that are vulnerable to such strikes.

To reinforce supply chain stability, goods that are vital to businesses and people’s lives will be designated as special goods. Semiconductors, medical supplies and rare earths will likely be the ones designated. The government intends to financially support companies handling such goods, and they will be requested to report who their suppliers are.

Penalties are also expected to be imposed on entities involved in public-private technology cooperation that leak sensitive information.

Sharing secret patent information related to the nuclear and defense industries will be subject to penalties as well.

However, these proposed restrictions and penalties may be revised during parliamentary deliberation.

Companies are wary that the restrictions could hinder their international competitiveness.

“So that Japanese companies are not placed at a disadvantage in terms of international competition, (the legislation) should not impose excessive restrictions on business activities compared with other countries, including the U.S. and those in Europe,” the Japan Business Federation, also known as Keidanren, said in a policy document released Wednesday.

The government is well aware of their concerns.

When Takayuki Kobayashi, the minister in charge of economic security, met with Keidanren Chairman Masakazu Tokura on Feb. 7, he asked for the group’s understanding on the need for the economic security bill while sharing their worries.

“We believe that it’s natural to keep the restrictions to a minimal level,” Kobayashi said.

Although comprehensive legislation on economic security may be necessary, economists say that penalties should be applied only in limited cases, and that the government should clearly set out which businesses will be affected by the restrictions and in what way.

“If the rules are fuzzy, the government can maybe stretch the scope of restrictions at its discretion,” Takahide Kiuchi, executive economist at the Nomura Research Institute, a Tokyo-based think tank. “That would make companies more cautious and pose the risk that overall business activity would contract.”

Kiuchi added that although the government prioritizes national interests, companies in Japan may not have that in mind, given that some are foreign businesses and many Japanese firms now have overseas stakeholders.

But looking at the bigger picture, Kiuchi is worried that the international community is inching away from the free market as more countries tighten restrictions under the guise of economic security.

“Developed nations that have respected the free market and liberalism are deepening government involvement (with businesses) to counter China,” said Kiuchi. As those nations are shifting their stance to one similar to the state capitalism practiced by Beijing, “it’s possible that they will gradually lose the advantages of the free market.”

Information Kyodo added