Manufacturing and Value Chains

How Japan solved its rare earth minerals dependency issue

A rare earth minerals site in Inner Mongolia.

A rare earth minerals site in Inner Mongolia. Image: Reuters

Tatsuya Terazawa
Chairman and Chief Executive Officer, The Institute of Energy Economics, Japan
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  • All countries should develop measures to avoid over-dependency on rare earth minerals.
  • Japanese dependency on rare earth minerals was exposed by a diplomatic incident in 2010 that prompted the country to diversify supplies and reinforce its supply chain.
  • Japan’s response at the time provides valuable lessons for the world to handle critical minerals dependencies today.

On 7 September 2010, a Chinese fishing boat collided with two Japanese coastguard vessels, off the islands of Senkaku in the East China Sea. Naturally, the coastguard arrested the captain of the fishing boat. Among the Chinese government’s responses was stopping the export of rare earth minerals to Japan.

The embargo sent Japanese industry into panic, especially the automobile sector for which rare earths for the production of magnets were indispensable; at that time Japan was totally dependent on China for nearly 90% of its imports of such materials. The incident was eventually resolved by the release of the fishing boat’s captain, but the prices of rare earths soared 10 times in a year following the incident.

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This episode shows the critical importance of ensuring supply chain resiliency – and Japan’s response provides valuable lessons to other critical minerals and sectors in which there are overdependence on one supplier by other countries.

Rare earth minerals resilience

Alarmed by its vulnerability, the Japanese government put together a package of comprehensive measures to enhance the resilience of its rare earth minerals supply chain. A supplemental budget of JPY100 billion (Japanese yen – worth $1.2 billion at the time) was prepared in the following month of October 2010. The speed and the scale were unprecedented, reflecting the strong sense of urgency.

The package had five main pillars:

  • To develop technologies and to support investment in equipment to reduce the use of rare earths.
  • To develop technologies to use alternative materials.
  • To promote recycling of rare earths through supporting investment in recycling facilities, as well as through development of more efficient recycling technologies.
  • To develop mines and acquire interests in rare earth mines in Australia and elsewhere. The capacity of providing loan guarantees and equity investments by government-affiliated organizations for such activities was significantly strengthened.
  • To start stockpiling rare earths in addition to the policy framework to ensure reserves of critical minerals.

Japanese dependence on Chinese rare earths dropped from 90% at the time of the incident to 60% today. The consumption of rare earths in Japan is now half the level of what it was then. These developments have arguably protected Japan from being targeted by another embargo of rare earths in spite of a series of diplomatic problems with China since the incident.

But the dependence of 60% is still high. China’s dominance in the global rare earths supply is even higher. The challenge is not limited to rare earths. China strengthened its export controls on gallium and germanium this summer, of which it also dominates the global supply. Beijing also banned the import of waste plastics, which caused substantial disruption for countries that had depended on sending their rubbish there. While this was in a different context, it demonstrates the vulnerability of overdependence.

Lessons from 2010

What can we learn from the fishing-boat incident? The first lesson is to be vigilant. At the time, Japan was surprised by its vulnerability in the supply of rare earths. It shows the importance of analyzing the vulnerability of your entire supply chain and to take measures to address your weakness in advance. We will also have to look into possible dependence on other countries in other sectors. Even in the absence of the will to weaponize indispensable inputs, overdependence could lead to vulnerability to disruption in the supply of such inputs. For example, 70% of the world supply of phosphorous, an element critical to the fertilizer industry, comes from Morocco.

The second lesson is that the five pillars of the response package by Japan can well be applicable to the challenges that we face today concerning critical minerals. In fact, at the high-level international conference on critical minerals hosted by IEA in September, efficiency in the use of critical minerals, development of alternative materials, strengthening of recycling and the development of alternative sources were all pointed out as key strategies. The only missing element might be stockpiling that has been pursued by Japan. Considering the impact on manufacturing due to the disruption of the supply of critical minerals, it is advisable to ensure a sufficient level of inventories of critical minerals, in order to be prepared for contingencies.

The third lesson is that, in spite of the achievements of the Japanese response in 2010, China continues to dominate the global supply of rare earth minerals. It also dominates the supply of many other critical minerals, which are becoming more important as we accelerate the energy transition. Efforts by Japan alone to reduce this dependency will have limited global impact. There should be concerted international efforts including development of alternative sources and stockpiling to reduce this dependency. We should also be cooperating in addressing overdependency on other countries in other sectors.

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History may not repeat itself. But it will be unwise not to learn from history. As we are facing a global challenge of heavy dependence on indispensable inputs, we will have to respond globally. This will require the world to learn from the experience in 2010 and to be better prepared for, and hopefully deter, more economic coercion in the future.

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