The 1973 soybean shock drove Japan to diversify its supplies in an experience that may repeat with China's restrictions on rare earth minerals

Production of rare earth elements outside China has risen to about a third of global supply

China's export restrictions are pushing buyers to find alternatives

Conclusion

How did the 1973 soybean shock drive Japan to diversify its supplies? And why might the scenario repeat today as Tokyo seeks to reduce its dependence on Chinese rare earth minerals?

For most countries, the 1973 commodity crisis was linked to oil: from the Arab-Israeli war to the tense meetings within OPEC, all the way to long, anxious queues at gas stations. But in Japan, a different kind of embargo imposed a few months earlier triggered a psychological crisis almost as severe, known as the 'soybean shock'.

In June of that year, U.S. President Richard Nixon halted soybean exports in an effort to curb food price inflation. At the time, Japan relied on the United States for about 92% of its imports of this commodity. Quickly, the decision's repercussions spread to the supply chains of tofu, miso, and soy sauce, prompting the country to rethink the laissez-faire approach of leaving food security to the market that had characterized its post-war prosperity.

That chapter of history offers an important lesson for the present. Just as in 1973, Japan today faces two simultaneous shocks in commodity markets: a crisis in oil supplies from the Persian Gulf, and another in critical minerals, including rare earth elements and tungsten, which it traditionally imports from China.

That chapter of history offers an important lesson for the present. Just as in 1973, Japan today faces two simultaneous shocks in commodity markets: a crisis in oil supplies from the Persian Gulf, and another in critical minerals, such as rare earth elements and tungsten, which it traditionally imports from China. And as was the case with the 'soy sauce shock,' the measures it has taken to address the second crisis may not appear on the surface to match the scale of the challenge. But past experience suggests it would be a mistake to underestimate Tokyo's capacity for long-term planning.

Is China repeating America's mistake?

The critical minerals crisis stems from the diplomatic row that erupted last year over how Japan should handle any potential conflict over Taiwan. Since then, Chinese exports to Japan of tungsten, yttrium, dysprosium, and terbium have fallen to near-zero levels, significantly hampering Japan's ability to produce high-performance magnets, cutting tools, weapons, and lasers. In the past week, Chinese state media boasted about its ability to target 'Japan's weaknesses' and leveled sharp criticism at Tokyo to change its 'misguided security path'.

This Chinese overconfidence recalls the American view of Japan's soybean policy in the 1980s. In 1986, the U.S. Department of Agriculture commissioned an economist to assess the impact of the 1973 shock on the global oilseed market, concluding that it had not brought about any notable change. Japan's government stockpiles were too small to make a real difference, while attempts to establish alternative supply chains in Brazil had failed.

But events in subsequent years proved those predictions catastrophically wrong. Japan began supporting soybean production in Brazil shortly after the crisis, and the results of these investments were about to yield their first fruits when the report was published. Today, Brazil's soybean production has risen to about ten times its level at that time, surpassing the United States to become the world's largest producer.

Japan builds alternatives away from China

Japan may be in a similar phase today in its quest to secure rare earth supplies. As it did with soybeans in the 1980s, it began investing years ago in building alternative supply sources, away from the spotlight.

After a similar diplomatic crisis with Beijing in 2010, the Japan Organization for Metals and Energy Security (JOGMEC) became the main backer of Australia's Lynas Rare Earths, one of the largest supply sources outside China.

That, along with other initiatives, indicates that China's dominance over light rare earth elements, such as neodymium and praseodymium, which was a major concern over the past decade, appears to be on the way to being resolved. After production of rare earth elements outside China was almost nonexistent 15 years ago, it now accounts for about a third of global output.

China tightens its grip on heavy elements... and Japan moves

Aware of this reality, Beijing has since shifted its focus to a specific category of heavy rare earth elements, which Lynas Rare Earths is not well equipped to supply. These include dysprosium and terbium, along with samarium, which is used to enhance the magnetic properties of lighter rare earths.

Although some analysts believe that extracting and processing these elements outside China is almost impossible, signs suggest otherwise. Lynas began processing all three elements last year, and appears to be working with JOGMEC to assess the potential of an area in central Malaysia believed to contain rich deposits of these elements.

This initiative is not Japan's only bet. JOGMEC is also funding a Franco-Malaysian joint venture announced last week, which could supply up to 20% of global heavy rare earth elements. Sumitomo is also one of the largest customers of MP Materials, which operates the largest rare earth mine in the United States and is preparing to start a heavy element separation facility in the coming months. In Europe, Belgium's Solvay is developing another facility in France to process heavy rare earth elements, using ores from

Customers always find alternatives

China still acts as if its dominant position in this metal market is impervious to competition. But cracks are beginning to appear in this superiority. In Europe and the United States, companies are intensifying investments and rebuilding expertise, enlisting retirees who worked in this industry before its center shifted to China decades ago.

Meanwhile, it is Japan and the United States, not Chinese companies, that hold the greatest share of key patents in rare earth technologies. Moreover, Beijing's shift to using heavy rare earths as a bargaining chip implicitly reflects its recognition that its previous attempts to maintain dominance in neodymium and praseodymium have failed. Even in this category, supply chains outside China have begun to grow at an accelerated pace, like a soybean field under the Brazilian sun.