Japanese corporations are exiting China at an unprecedented pace, driven by deteriorating diplomatic relations and a slowing economy that has forced a major reassessment of their presence in the world’s second-largest market. According to data from Teikoku Databank, a corporate credit research firm, the number of Japanese companies operating in China dropped to 10,118 as of June, marking the lowest level since tracking began in 2010.
This figure represents a 22% decline from the previous survey conducted in June 2024 and stands approximately 30% below the peak recorded in 2012. The retreat has been significant, with 4,137 companies fully withdrawing over the past two years, while only 1,221 new entrants established subsidiaries, factories, or representative offices—the lowest entry rate outside of the pandemic period.
Jeremy Chan, an analyst at the Eurasia Group, noted that Japanese firms, already planning to reduce their footprint, are now accelerating their exit due to the sharp decline in China-Japan ties. “Japanese firms and their employees increasingly feel unwelcome and unsafe in China,” Chan said. The diplomatic feud has been exacerbated by comments from Japanese Prime Minister Sanae Takaichi, who stated last November that Japan could be militarily involved if China were to invade Taiwan. Beijing has responded by restricting exports of critical minerals to Japanese companies and urging citizens to avoid traveling to Japan.
Teikoku Databank’s report highlighted that Japanese businesses are grappling with a convergence of challenges, including tariff risks, rising labor and manufacturing costs, and fierce local competition, all of which have squeezed profit margins. While some companies are reducing their dependence on China without fully decoupling, the overall trend points toward a significant收缩 in operations.
Martin Schulz, chief policy economist at the Fujitsu Research Institute, described the situation as a “perfect storm” for investment in China. He pointed to U.S. tariffs, growing public resistance to Chinese goods, and the allure of the Indian market as additional factors incentivizing diversification away from Beijing.
The shift is also evident in financial metrics. Jesper Koll, expert director at Monex Group, reported that Japanese firms are increasingly relying on the U.S. market. Profits derived from China for Topix-listed companies have fallen to less than 15% this year, down from 23% in 2020, while U.S.-derived profits have risen to 35%, up from 25% over the same period.
A bit surprising they stayed this long given the risks. Seems like everyone is finally admitting the ‘China plus one’ strategy is mandatory now.
My uncle has a factory there and says it’s becoming genuinely uncomfortable for Japanese expats. The business case is crumbling.
It’s not just politics; the profit margins are clearly shrinking. US market profits rising to 35% makes the move financially sensible.
I wonder if this will eventually force China to reconsider its trade restrictions, or if the tension will only deepen further.
This is a massive shift. The 22% drop in just two years shows how seriously Tokyo is taking the diplomatic fallout.