‘Unwelcome and unsafe’: Why Japanese companies are retreating from China at a historic rate

Japanese companies are leaving China in record numbers, as a slowing Chinese economy and a diplomatic freeze force businesses to reassess their presence in the world's second-largest economy.

The number of Japanese companies operating in China fell to a historic low, standing at 10,118 as of June, according to Teikoku Databank, a corporate credit research firm in Japan. That's down 22% from the previous survey held in June 2024 and about 30% below the 2012 peak, and the lowest since Teikoku began tracking the data in 2010.

Japanese firms, which were already planning to reduce their footprint in China, are considering withdrawing from the market with greater urgency since China-Japan ties went into a tailspin, said Jeremy Chan, an analyst at political consultancy firm Eurasia Group.

The exodus is likely to intensify as the diplomatic feud between Asia's top two economies forces Japanese companies — already grappling with shrinking profitability strained by tariff risks, growing labor and manufacturing costs, cutthroat local competition — to shrink or shut their operation in China, Teikoku said in its report last week. Some firms have reduced dependence on China without fully decoupling from it, it added.

China-Japan relations have come under heavy strain since Prime Minister Sanae Takaichi told parliament in November last year that Japan could get militarily involved in the event of a Chinese invasion of Taiwan. Beijing has responded by curbing exports of critical minerals to Japanese companies and urged citizens to refrain from traveling to Japan.

Japanese firms and their employees increasingly feel unwelcome and unsafe in China.Jeremy ChanAnalyst, Eurasia Group

Factors such as U.S. tariffs and a growing public resistance to Chinese goods and a growing Indian market have also further incentivised Japanese businesses' push to diversify away from Beijing, said Martin Schulz, chief policy economist at Fujitsu Research Institute. "Investment in China is weathering the perfect storm," he said.

In the past two years, a record number of 4,137 Japanese companies fully withdrew from China, according to Teikoku's data. Only 1,221 entered over the same period, through subsidiaries, factories or representative offices, the fewest on record outside the Covid-19 pandemic.

Leaning into the U.S.

Japanese firms have grown increasingly reliant on the U.S. market while shifting away from China, what was once a key market, said Jesper Koll, expert director at Monex Group.

Topix-listed companies saw the share of profits derived in China dwindle to less than 15% so far this year, down from 23% in 2020, while those from the U.S. rose to 35% compared with 25% over the same period, according to Koll's estimates.

Washington is "openly courting" Japanese players to aid its re-industrialization efforts while Beijing has shifted towards a "made in and made by China" model, Koll said.

'Unwelcome and unsafe'

Cases of Japanese nationals being detained by Beijing this year have further added to businesses' concerns about sending personnel to China, analysts say. Several Japanese nationals, including executives at top Japanese firms, were reportedly detained in August over alleged violations of dual-use goods export restrictions.

"Japanese firms and their employees increasingly feel unwelcome and unsafe in China," Chan said.

An April report from Japan External Trade Organization showed that companies are increasingly reluctant to expand their business in China.

On Tuesday, a day after the Teikoku report, Chinese vice premier He Lifeng said China "always welcomes" Japanese enterprises to develop business and share market opportunities in the country.

He told 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."

Automakers, parts suppliers and export-oriented manufacturers are the most likely to scale back in China, said Kei Koga, a professor at Nanyang Technological University in Singapore. Companies that have localized and can compete with Chinese rivals, particularly medical and precision equipment makers, are more likely to stay, he added.