Japanese companies cut operations in China at fastest pace in decade

The number of Japanese companies running operations in China fell to 10,118 in June, a historic low since tracking began in 2010. The figure represents a 22% drop from the previous survey in June 2024 and sits roughly 30% below the 2012 peak, according to corporate research firm Teikoku Databank.

Over the past two years, 4,137 Japanese companies completely withdrew from the Chinese market. Only 1,221 entered through subsidiaries, factories, or representative offices, marking the lowest entry rate outside the pandemic period.

Diplomatic tensions and security concerns are accelerating the retreat. Relations deteriorated after Prime Minister Sanae Takaichi stated Japan could intervene militarily if China attacks Taiwan. Beijing responded by restricting critical mineral exports to Japanese firms and advising citizens against traveling to Japan. Several Japanese executives were detained in August over alleged violations of export rules, raising safety fears for staff.

"Japanese firms and their employees increasingly feel unwelcome and unsafe in China," said Jeremy Chan of Eurasia Group. The exodus aligns with broader economic shifts. Companies face shrinking profits, rising manufacturing costs, intense local competition, and tariff pressures. "Investment in China is weathering the perfect storm," noted Martin Schulz at the Fujitsu Research Institute.

Japanese businesses are redirecting capital toward the United States. Topix-listed companies now derive less than 15% of their profits from China, down from 23% in 2020. Meanwhile, U.S.-derived profits have climbed to 35% from 25% during the same period. Washington is actively recruiting Japanese partners for re-industrialization, while Beijing pushes a domestic production model.

Not all sectors are leaving. Automakers, parts suppliers, and export-focused manufacturers are scaling back. Companies that have fully localized and compete directly with Chinese rivals, particularly medical and precision equipment makers, are more likely to stay. On Tuesday, Chinese Vice Premier He Lifeng met with a Japanese trade delegation and stated that Beijing "always welcomes" Japanese enterprises to develop business and share market opportunities. He urged the delegation to maintain stable historical perspectives and advance economic cooperation.