Japanese businesses are withdrawing from China at an unprecedented rate, with the number of operating companies hitting a historic low of 10,118 as of June. This exodus is driven by a confluence of factors including China’s slowing economy, escalating diplomatic tensions between Beijing and Tokyo, and increasing operational challenges such as rising costs and fierce local competition. Analysts suggest that Japanese firms and their personnel increasingly perceive China as an ‘unwelcome and unsafe’ environment, pushing them to pivot investments towards markets like the U.S. for greater stability and profitability.
Japanese companies are undergoing a historic exodus from China, with their presence in the world's second-largest economy plummeting to a record low. This significant retreat is fueled by China's decelerating economic growth, a pronounced diplomatic chill between Beijing and Tokyo, and a raft of operational challenges making the market increasingly untenable for Japanese businesses.
According to Teikoku Databank, a leading Japanese corporate credit research firm, the number of Japanese companies operating in China fell to just 10,118 as of June. This marks a 22% drop from the previous survey in June 2024 and approximately 30% below the 2012 peak, reaching the lowest point since Teikoku began tracking the data in 2010.
Jeremy Chan, an analyst at political consultancy firm Eurasia Group, notes that Japanese firms, already contemplating a reduced footprint, are now accelerating their withdrawal plans as China-Japan relations have taken a sharp downturn. This diplomatic friction, coupled with existing hurdles like rising tariff risks, escalating labor and manufacturing costs, and intense local competition, is severely squeezing profit margins and compelling companies to downsize or shutter operations, as detailed in Teikoku’s recent report. Some are strategically reducing their dependence on China without a complete decoupling.
Ties between China and Japan have been under immense pressure since Japanese Prime Minister Sanae Takaichi’s parliamentary comments last November, suggesting Japan might engage militarily if China were to invade Taiwan. Beijing has responded with measures such as curbing critical mineral exports to Japanese companies and discouraging travel to Japan for its citizens.
Japanese firms and their employees increasingly feel unwelcome and unsafe in China.Jeremy ChanAnalyst, Eurasia Group
Additional global factors are also playing a role. Martin Schulz, chief policy economist at Fujitsu Research Institute, points to U.S. tariffs, growing public aversion to Chinese products, and the expanding Indian market as further incentives for Japanese businesses to diversify away from China, describing the situation as a "perfect storm" for investment in the country.
Over the past two years, an unprecedented 4,137 Japanese companies fully exited China, while only 1,221 entered through new subsidiaries, factories, or representative offices – the lowest entry rate on record outside the Covid-19 pandemic.
Leaning into the U.S.
Japanese firms are increasingly shifting their focus and reliance towards the U.S. market, moving away from China, which was once a pivotal market, observes Jesper Koll, expert director at Monex Group.
Koll’s estimates reveal that the share of profits for Topix-listed companies generated in China has shrunk to less than 15% this year, down from 23% in 2020. Conversely, profits from the U.S. have climbed to 35% from 25% during the same period.
Washington is actively "courting" Japanese investors to support its re-industrialization initiatives, whereas Beijing has adopted a "made in and made by China" strategy, according to Koll.
'Unwelcome and unsafe'
Concerns among businesses about deploying personnel to China have been amplified by recent detentions of Japanese nationals by Beijing. Several Japanese executives were reportedly detained in August over alleged violations of dual-use goods export restrictions, further fueling anxieties.
"Japanese firms and their employees increasingly feel unwelcome and unsafe in China," emphasizes Chan.
A report from the Japan External Trade Organization (JETRO) in April highlighted the growing reluctance of companies to expand operations in China.
Despite these trends, Chinese Vice Premier He Lifeng stated on Tuesday, following the Teikoku report, that China "always welcomes" Japanese enterprises to develop business and share market opportunities. He urged a delegation from the Japanese Association for the Promotion of International Trade to "keep to the right course on historical issues … and play a greater role in advancing China-Japan economic and trade cooperation."
Experts like Kei Koga, a professor at Nanyang Technological University in Singapore, predict that automakers, parts suppliers, and export-oriented manufacturers are most likely to scale back in China. Conversely, companies that have successfully localized and can compete effectively with Chinese rivals, particularly medical and precision equipment makers, are more inclined to maintain their presence.
