Japan: A key player behind the AI chip supply chain

However, this narrow focus overlooks a critical part of the semiconductor value chain. Every advanced AI chip relies on a wide network of suppliers to actually produce it at scale, and Japan plays a key role in some of the most important parts of that supply chain

Where is Japan’s edge in the semiconductor supply chain?

For decades, the narrative has been that Japan lost its semiconductor crown to leaner Asian rivals. Taiwan mastered chip fabrication. South Korea dominated memory. Japan, many assumed, had fallen behind.

That view is now outdated. In recent years, Tokyo has accelerated strategic investment into the sector through substantial subsidies and policy support, aligning itself with global initiatives such as the US CHIPS Act.

Table 1: Key strategic pillars of the Japanese semiconductor initiative

Initiative	Objective	Target / Status
Rapidus	Government-backed consortium (Toyota, Sony, etc.) to leapfrog into advanced logic.	Pilot production of 2nm chips started on April 2025; mass production by 2027.
TSMC Kumamoto (JASM)	Partnership with the world’s largest foundry to secure domestic supply.	Fab 2 recently upgraded to produce 3nm chips (originally 7nm) to meet AI demand.
METI Budget (FY2026)	Shift to base funding rather than one-off packages.	¥1.23 trillion ($8.2B) earmarked specifically for chips and AI for FY2026.
Source: iFAST Compilations Data as of February 2026

To be clear, Japan’s strength today is not just about reclaiming lost ground in chip fabrication, although the state-backed venture Rapidus certainly signals serious ambition. Japan’s true dominance lies further upstream in the semiconductor ecosystem.

The country holds a structural advantage in semiconductor manufacturing equipment, specialty materials and ultra-precision tooling – all of which are indispensable to advanced chip production. Without these inputs, even the most sophisticated chip designs simply cannot be manufactured at scale.

Japanese firms command roughly 30% of the global semiconductor manufacturing equipment (SME) market and around 50% of critical materials such as silicon wafers and photoresists. In certain specialised areas, including coater/developers and EUV mask inspection, their market share approaches near-monopoly levels.

This is where the investment case becomes even more compelling. Japanese companies can capture value regardless of which chip designer ultimately comes out on top. Whether demand is driven by AI accelerators, automotive chips, or next-generation processors, manufacturing capacity must expand, and that expansion depends on equipment and materials.

Figure 1: Semiconductor foundry supply chain

Source: Bloomberg Finance L.P.

Japan’s semiconductor leaders deserve a closer look

Advantest and Tokyo Electron are part of the crown jewels of Japan’s semiconductor industry.

Advantest

Advantest is the global leader in Automated Test Equipment (ATE), providing the systems used to verify that semiconductors, whether system-on-chips (SoCs) or memory, function exactly as intended before they are packaged and shipped. As chips become more complex due to AI and 3D stacking, the test intensity increases, making Advantest’s role more critical than ever. The company commands more than 50% of the global ATE market, particularly in high-performance SoC testers. That level of market share is not easily replicated. It reflects decades of engineering expertise and deep integration with leading chipmakers.

The numbers tell the story. In early 2026, Advantest reported record-high quarterly sales driven by the explosion in AI-related demand (GPUs and custom ASICs). The company recently raised their 2026 forecast, predicting the total addressable market for SoC testers will grow by up to 38% year-on-year as it expands footprint in advanced packaging and high-bandwidth memory (HBM) testing.

Figure 2: Advantest’s business segments

Source: Advantest, iFAST Compilations, Data as of FY25 annual report.

Tokyo Electron

Tokyo Electron (TEL) specialises in the front-end of semiconductor manufacturing, the highly technical stage where microscopic circuit patterns are created on silicon wafers. Within this space, the company dominates photoresist coaters and developers, where it holds a near-monopoly with roughly 89% global market share. Their machines are indispensable for every major chipmaker, including TSMC and Intel.

As of February 2026, TEL has raised its profit forecasts, reflecting strong demand tailwinds driven by AI-related capital expenditure cycles. Foundries and logic manufacturers are ramping up investments to meet surging demand for GPUs, custom ASICs and high-performance computing chips. That translates directly into orders for wafer fabrication equipment. TEL is forecasting 15% growth in the global wafer fabrication equipment (WFE) market for 2026 and has recently announced record-high dividends and share buybacks due to strong cash flow.

Figure 3: Tokyo Electron’s product mix

Source: Tokyo Electron, iFAST Compilation, Data as of FY25 annual report.

Beyond Advantest and Tokyo Electron, other top Nikkei 225 constituents also play important roles in the semiconductor value chain (Table 2). For example, Shin-Etsu Chemical is the world’s largest supply of silicon wafers. If advanced chips are the “brains” of modern technology, silicon wafers are the foundation on which they are built. The company holds a dominant position in 300mm wafers, which are critical for advanced AI and logic processors.

TDK plays a different but equally vital role. In AI servers, for instance, higher computational intensity means higher power density. That drives demand for advanced capacitors and power components, which are areas where TDK has strong technological capabilities. Finally, SoftBank owns approximately 90% of Arm Holdings, a semiconductor and software design company.

Table 2: Top 10 constituents of the Nikkei 225 and their revenue from semiconductors

Name	Weight in Nikkei 225	% of Total Revenue from Semiconductors
Advantest	12%	100%
Fast Retailing	9%	-
Tokyo Electron	8%	100%
SoftBank Group	6%	8%
TDK	2%	25%
Fanuc	2%	-
KDDI	2%	-
Chugai Pharmaceutical	2%	-
Shin-Etsu Chemical	2%	36%
Fujikura	1%	-
Source: Bloomberg Finance L.P., iFAST Compilations Data as of 20 February 2026

Two ETFs to gain exposure to Japan semiconductors

In a nutshell, Japan is playing a far more important role in the AI revolution than many realise. AI runs on chips, but those chips depend heavily on Japanese engineering, from precision manufacturing equipment to advanced materials. Japan quietly controls many of the essential tools and components that keep the semiconductor ecosystem running.

Beyond the growth in semiconductors, ongoing corporate governance reforms are helping Japanese companies deliver stronger returns for shareholders. The Nikkei 225 Index’s return on equity (ROE) has now crossed 10%, compared with the mid-single digits a decade ago, when companies prioritised survival over returns. Back then, massive cash holdings and cross-shareholdings bloated equity bases, suppressing ROE. Today, Japanese companies are narrowing the gap with developed market peers, such as Europe, where average ROE is around 13%.

For investors looking to tap into Japan’s semiconductor story and the broader structural revival of its corporate sector, there are two ETFs worth considering.

The first is the Xtrackers Nikkei 225 UCITS ETF 1D (LSE:XDJP). While not a pure semiconductor play, it provides broad exposure to Japan’s leading companies, including those benefiting from structural tailwinds in the chip industry. Our target for the Nikkei 225 of JPY 58,500 may suggest limited upside by FY28 ended March, but the longer-term structural story leaves room for additional gains.

For investors seeking more targeted semiconductor exposure within Asia, the Global X Asia Semiconductor ETF (HKEX:3119) is another option. Japanese companies make up roughly 25% of the portfolio, alongside South Korea, Taiwan and China. This ETF captures the broader regional supply chain from memory and foundry leaders to equipment and materials specialists.

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.