Japan, US in pact for critical minerals supply chain; Tokyo expects EV tax benefits

Japan and the US signed an agreement on March 28 to strengthen critical minerals supply chains, with Tokyo expecting to get tax benefits from the US Inflation Reduction Act for battery components and critical raw materials used in electric vehicles.

Under the agreement, signed by Japanese Ambassador to the US Koji Tomita and US Trade Representative Katherine Tai in Washington, the countries will bolster bilateral cooperation in the area of extraction, smelting and processing of critical minerals used for battery production, according to the Japanese government.

The agreement aims at strengthening and diversifying critical minerals supply chains and promoting the adoption of electric vehicle battery technologies with commitments to facilitate trade, promote fair competition and market-oriented conditions for trade in critical minerals, according to the signed agreement.

Critical minerals include cobalt, graphite, lithium, manganese and nickel.

The agreement follows a Japanese cabinet approval earlier on March 28, which paved the way for signing.

"Amid anticipation of robust battery demand growth for electric vehicles, it has become a pressing issue to secure critical minerals that are vital for the production," Minister of Economy, Trade and Industry Yasutoshi Nishimura told reporters in Tokyo earlier in the day.

Following the agreement, Japan and the US aim to develop strong and sustainable supply chains of critical minerals together with other like-minded countries, Nishimura said.

"This landmark critical minerals agreement between the United States and Japan is proof of the coordinated commitment between our two countries to secure supply chains and counter economic coercion," US Ambassador to Japan Rahm Emanuel said in a statement.

"Together, we will ensure that essential inputs to emerging technologies will be available to industry, and together we will degrade the ability of malign actors to restrict or control the flow of critical minerals as a form of economic coercion."

Critical cooperation

The US-Japan agreement comes days after US President Joe Biden and Canadian Prime Minister Justin Trudeau promised March 24 to strengthen North American critical minerals supply chains.

Trudeau said the supply chain cooperation would help countries reach climate goals as well as counter threats to national security.

"With growing competition, including from an increasingly assertive China, there's no doubt why it matters that we turn to each other now to build up a North American market on everything from semiconductors to solar panel batteries," Trudeau said in a speech to the Canadian parliament.

The Japan-US agreement follows Japan and Germany agreeing on March 18 to cooperate in the area of critical global supply chains, including on clean energy, hydrogen and batteries for energy transition.

The US, EU, Japan, Canada and other governments are working to reduce their reliance on China for critical minerals that are essential to their decarbonization efforts.

Governments are increasing their focus on securing access to critical minerals needed for renewable energy, EV batteries, defense technologies and other uses.

Tax credits

Japan also expects to get the same treatment as a US free trade agreement country under the IRA following necessary procedures to be taken by the US, Nishimura said.

"This means we expect to see that EVs that use relevant critical minerals and materials extracted or processed in Japan will likely fulfill criteria for receiving tax credits under the IRA's tax incentive measure," Nishimura said.

The deal allows Japanese companies to benefit from incentives in the US IRA, landmark legislation to accelerate clean energy and electric vehicle adoption.

The law offers $7,500 in tax credits to buyers of EVs if they meet two criteria: at least half of the battery components must be produced in North America and 40% of the value of critical minerals used in the vehicle must be from the US or from a free trade agreement country. Vehicles that meet only one of the criteria qualify for a $3,750 tax credit.

After the law was passed in August, Japan joined Canada and EU countries in expressing concern that their domestic battery supply chains would be hurt by the lucrative incentives for US-supplied parts and vehicles.