People in Kikuyo have a term to encapsulate a new era of traffic jams, skyrocketing property prices and battles for staff: “the TSMC shock”. 

The small Japanese town and its economy have been radically transformed since Taiwan Semiconductor Manufacturing Company began construction of its first factory in Japan five months ago.

“TSMC’s arrival was a bolt from the blue,” Takatoshi Yoshimoto, Kikuyo’s mayor, said in an interview at his office. “We instantly became famous, and it was as if Kikuyo suddenly became an adult from a baby.”

Kikuyo and the surrounding prefecture of Kumamoto, on Japan’s western island of Kyushu, are now heavily tied to the country’s bid to revive its reputation as an international hub for chip manufacturing, as the world seeks diversified semiconductor supplies to mitigate rising geopolitical risks.

The changes in Kumamoto also offer a microcosm of the broader challenges for Asia’s most advanced economy after a long period of stagnant growth and employee wages. From a severe labour shortage to infrastructure constraints, TSMC’s arrival is forcing Japan to confront problems that have been simmering for years.

“We call it the TSMC shock, but I think this is a huge opportunity to change the structure of Japanese society and economy,” said Kazufumi Onishi, mayor of the city of Kumamoto. “To put it another way, we need this kind of shock to change.”

Kumamoto is already home to dozens of Japanese chip factories — Kikuyo, a town of about 44,000 people surrounded by cornfields, has plants making image sensors for Sony and chip equipment for Tokyo Electron. But TSMC’s arrival is of a different magnitude.

It signals another phase of the boom-and-bust cycle in Japan’s semiconductor industry, whose companies rose to dominance in the 1980s before ceding their edge to rivals in South Korea, Taiwan and eventually China.

To ensure a stable chip supply, the Japanese government offered $3.2bn in subsidies to cover about half of the construction costs for TSMC, the world’s largest contract chipmaker.

Its arrival presented “a once-in-a-lifetime opportunity” to revive the region as a global semiconductor hub, Onishi said.

According to Kyushu Financial Group, a regional lender, TSMC’s foray into Kumamoto is expected to generate a ¥4.29tn ($29bn) boost to the local economy over the next decade through job creation, infrastructure development and drawing other companies to the area.

But it is also posing problems for the local economy.

TSMC posted job adverts in the spring for engineers, offering monthly wages roughly a third higher than the average for college graduates at local manufacturing companies. Its plant in Kumamoto is expected to create 1,700 high-tech professional jobs.

TSMC said salaries were benchmarked against those at similar technology companies to be competitive, adding that it was confident Japan would provide “outstanding recruits”.

But for local businesses, the sudden boost in wages sparked by TSMC has accelerated a trend for younger employees to switch jobs more frequently to seek higher pay and better working conditions amid a shortage of workers.

Minimum wages in Kumamoto are among the lowest in Japan, and about 40 per cent of its high school graduates seek jobs elsewhere.

Kongo, a Kumamoto-based manufacturer of storage systems, has lost about 5 per cent of its 300 workers over the past year, some to TSMC and other semiconductor-related companies.

“It’s easy to blame TSMC when our employees change jobs,” said Toshihiko Tanaka, chief executive of Kongo, who is also chair of the Kumamoto Industrial Federation. “But the movement of employees is an inevitable trend . . . and we need to change our mindset to focus on how we can raise the performance of each individual as our workforce shrinks.”

Japan, Tanaka said, needed to learn to do with 80 employees what used to take 100.

Still, some business leaders said there was a limit to companies’ ability to address labour shortages with increased productivity and more automation.

Japan Material, based in Mie prefecture, is a maintenance service provider that TSMC frequently uses for its plants. Despite the company’s experience, chief executive Hisao Tanaka said the challenge to secure people in Kumamoto was daunting.

Many staff need to pass an exam and get a professional licence for the work needed at TSMC. A 30-minute procedure for Japan Material to replace a single gas cylinder at TSMC’s plant requires three licensed workers — and the company expects to replace as many as 8,000 cylinders a month. It also needs licensed staff for 24-hour water maintenance work.

Japan is also revising labour rules next year to limit overtime for truck drivers, so Japan Material will need more drivers to deliver the same number of products to TSMC. It plans to transport some of the gas cylinders by train.

“You can build a semiconductor plant if the government provides money, but what do you do with the people needed for its operations?” Tanaka said.

Japan Material is negotiating to take over hundreds of staff at Japanese semiconductor-related companies that are expected to shut down unprofitable businesses next year. Through such measures, Tanaka hopes to secure about 300 workers to support TSMC.

“If you look at other companies, though, there are many cases where they are saying no to doing maintenance operations even for their existing clients who want to boost production because there aren’t enough people,” Tanaka said. “It’s an unbelievable situation.”

By the time TSMC starts production in late 2024, an anticipated rebound in the global semiconductor market is likely to make finding workers even more difficult. In July there were 1.3 open jobs for every applicant in Kumamoto. That ratio is projected to rise when a glut of chips is exhausted and semiconductor companies boost output.

People with knowledge of the talks said TSMC was considering building several more fabs in Japan. The company said it was evaluating whether to build a second fab but declined to comment further.

“By the end of next year it’s going to be a very tough situation and we expect labour shortage to become a permanent situation in Kumamoto,” said Mineo Nitta, director-general of the prefecture’s labour bureau. 

Shortages in Kikuyo extend well beyond the workforce. Everything from roads and property to international school places and even rice fields — which are critical to conserving groundwater resources — is in high demand.

Following TSMC’s decision to build in Kumamoto, average commercial land prices in Kikuyo jumped 26 per cent in the year to July 1, according to land ministry data.

The single major road to the plant, close to Sony’s, is jammed with cars and trucks at peak times. The town has asked companies to encourage employees to stagger commuting times to ease the congestion until more roads are built.

Chip plants also use massive amounts of water, sparking local concern over supplies.

An even bigger local concern is conservation of the area’s groundwater, since chip plants use massive amounts of water. The local unit of TSMC has pledged to replenish more groundwater than it uses — it is expected to adopt a method that Sony helped pioneer 20 years ago, flooding rice fields outside of the growing season so water can be reabsorbed.

But due to the decline in rice prices — and Japan’s ageing farmers — it is becoming increasingly difficult to secure new rice fields for groundwater replenishment.

“Land is limited and considering our capacity, I don’t think we can take in more new companies,” Yoshimoto said.

Still he says that for Kikuyo, “I keep telling our officials that there is only a positive impact from TSMC, since we are going to be part of a historic project”.