Why Is Japan Suddenly Investing More In India? The Answer May Be China
Why Is Japan Suddenly Investing More In India? The Answer May Be China Written By, Last Updated: June 05, 2026, 09:00 IST For decades, Japan
Why Is Japan Suddenly Investing More In India? The Answer May Be China Written By, Last Updated: June 05, 2026, 09:00 IST For decades, Japan has been investing in Chinese factories and industrial parks. But China’s slowing growth, supply-chain disruptions have pushed Japan’s focus towards India Rapid Read While China and Japan are grappling with ageing populations, India has a young workforce and a growing middle class. This offers investors both a manufacturing base and a large market for goods and services. Japanese banks have been financing Chinese factories and industrial parks. It began as official development assistance (ODA) in the 1970s-80s, followed by massive commercial loans as Japanese manufacturers expanded their supply chains into China during the 1990s and 2000s. From automobiles and electronics to machinery and exports, Japanese companies became deeply embedded in China’s economic rise. But that relationship is changing as Japanese companies reassess their China exposure amid slowing growth, rising costs, and geopolitical uncertainties, and focus attention towards India and Southeast Asia. The shift is part of a broader “China Plus One" strategy, under which global companies are seeking alternative manufacturing and investment destinations to reduce their dependence on China. If the trend accelerates, it could bring new factories, jobs, technology and capital into India, and mark a larger transformation in Asian manufacturing and investment flows. Does this mean that India is finally becoming the biggest beneficiary of Asia’s supply-chain reshuffle? Why Japan Is Pulling Back From China Japan’s economic engagement with China was built on a simple formula. Japanese manufacturers moved production to China to take advantage of lower labour costs, efficient infrastructure and access to global export markets. Japanese banks followed, providing financing and supporting business expansion. But the conditions that made China attractive have changed significantly. China’s annual economic growth target has slowed from the double-digit rates to 4.5% to 5%, the lowest since 1991. Labour costs have risen sharply to nearly $8 per hour compared to competitors like Vietnam ($2.3) and India ($1.1), reducing its advantage as a low-cost manufacturing destination. At the same time, geopolitical tensions between China and the US, concerns over supply-chain disruptions and growing uncertainty around global trade have prompted companies to rethink concentration risks. The Covid-19 pandemic further exposed vulnerabilities in global supply chains. Factory shutdowns, shipping disruptions and logistical bottlenecks convinced many multinational companies that relying too heavily on a single country could be risky.
“Japanese financial institutions are not exiting China wholesale, but they are becoming more cautious. Slower economic growth, a prolonged property sector crisis, regulatory uncertainty, geopolitical tensions, and concerns over economic security have altered risk calculations. For many Japanese firms, the issue is less about abandoning China and more about reducing concentration risk," said Pratnashree Basu, Associate Fellow with the Strategic Studies Programme, Observer Research Foundation (ORF). Why Diversification Has Become A Necessity For Japanese Corporates According to a Nikkei report, Japanese local and regional banks are gradually reducing their footprint in China as many of their corporate clients face growing headwinds in the market. Japanese manufacturers operating in China are grappling with rising labour costs, tougher competition from domestic firms and slowing demand across several key industries, prompting a reassessment of their long-term presence in the country. The report says the number of branches operated by Japanese local banks in China has fallen by around 20% over the past five years. While this does not signal a wholesale exit from the Chinese market, it reflects a steady scaling back of operations and a broader shift in resources away from China. That pivot is becoming increasingly visible across Japan’s regional banking sector. The report notes that Chiba Bank and 77 Bank have opened new operational hubs in Singapore, while Saikyo Bank is setting up a subsidiary in Indonesia. The moves underscore a wider effort to support Japanese businesses expanding across Southeast Asia, as companies diversify investments beyond China. Why India Is Suddenly Attractive Unlike many mature economies, India combines rapid economic growth with a large domestic consumer market. It is already the world’s fastest-growing major economy and is projected to remain one of the strongest growth stories over the next decade. The country’s demographic profile also stands out. While China and Japan are grappling with ageing populations, India has a young workforce and a growing middle class. This offers investors both a manufacturing base and a large market for goods and services. “India offers something China currently cannot: a combination of rapid economic growth, a young workforce, expanding domestic consumption, and significant infrastructure demand," stressed Basu. “For Japanese banks, India is not simply a manufacturing alternative; it is a long-term growth market. Large investments in transport, energy, digital infrastructure, and industrial corridors create demand for financing and financial services. Unlike China’s maturing economy, India remains in an earlier phase of development, offering greater room for expansion." Moreover, government initiatives such as Production-Linked Incentive (PLI) schemes, infrastructure investments and efforts to improve the ease of doing business are designed to attract global manufacturers looking for alternatives to China.
As a result, India has become a key pillar of the “China Plus One" strategy being pursued by companies across sectors ranging from electronics and automobiles to chemicals and logistics. Japan’s Investment In India Japanese foreign direct investment in India has crossed Rs 2.7 lakh crore, according to the Japan External Trade Organization (JETRO). Around 1,430 Japanese companies are already operating in India through 5,200 local business establishments across sectors including automobiles, infrastructure, finance, technology and manufacturing. Japan has long been one of India’s most important economic partners. According to the Japanese Ministry of Foreign Affairs, economic cooperation between the two countries spans infrastructure development, industrial corridors, connectivity projects and private-sector investments. Tokyo has also taken additional steps to facilitate investment into India, creating dedicated mechanisms to help Japanese firms navigate opportunities and challenges in the Indian market. The shift is especially significant because Japanese capital has traditionally been cautious and long-term in nature. When Japanese companies commit to a market, they often stay invested for decades. India-Japan ties have become more “multi-dimensional", said Basu. The relationship now extends beyond infrastructure and development assistance into supply chains, critical technologies, semiconductors, economic security, defence cooperation, and maritime security. Both countries increasingly view each other as “indispensable partners" in shaping the Indo-Pacific order. Culturally, the relationship benefits from an unusual absence of historical baggage. “Shared Buddhist linkages provide an important foundation, but contemporary affinities are increasingly driven by mutual perceptions of trust, reliability, democratic governance, and a preference for stable, rules-based regional arrangements," stressed Basu. Which Indian Sectors Could Gain? Infrastructure, manufacturing, renewable energy, electronics, semiconductors, defence production, logistics, digital services, and data infrastructure are expected to remain major growth drivers, pointed out Basu. “However, an often-overlooked sector is industrial ecosystem development — warehousing, supply-chain management, industrial parks, and supporting services that enable manufacturing competitiveness as India’s growth story is increasingly moving beyond services towards building productive capacity," explained Basu. Japanese companies already play a major role in India’s automobile sector through firms such as Suzuki, Toyota and Honda. As global supply chains diversify, investments could increasingly flow into electronics manufacturing, industrial machinery, components and advanced manufacturing. Electric vehicle supply chains represent another major opportunity. Japan remains a global leader in automotive technology, batteries and industrial engineering. As India pushes towards EV adoption, Japanese investments could help strengthen local manufacturing ecosystems. Infrastructure is also expected to benefit. Japan has already been involved in several marquee projects, including metro systems, industrial corridors and high-speed rail initiatives.
Additional capital could accelerate logistics and transport development. Financial services, housing and real estate are emerging as newer areas of interest. Japanese lenders and investors are increasingly exploring opportunities beyond traditional manufacturing, reflecting India’s expanding economic landscape. India Is Not The Only Option India may be attracting growing Japanese interest, but it is far from the only destination competing for investment. Vietnam, Thailand and Indonesia have all positioned themselves as alternatives to China. Many of these countries already possess strong manufacturing ecosystems, export-oriented industrial policies and efficient logistics networks. Vietnam, in particular, has become a major beneficiary of supply-chain diversification. Several global manufacturers have expanded production there because of its proximity to China, established export infrastructure and favourable trade agreements. This means India is competing not just against China, but also against a range of fast-growing Southeast Asian economies. Can India Really Replace China? This is where the story becomes more complicated. China’s manufacturing dominance was built over decades through massive infrastructure investments, industrial clusters, skilled labour pools and efficient logistics networks. Replicating that scale will take time. India still faces several challenges. Infrastructure has improved significantly but remains uneven. Manufacturing productivity needs to rise. Regulatory hurdles continue to frustrate some investors. Skill development remains a critical issue, particularly in advanced manufacturing sectors. There is also the question of execution. Global investors have expressed interest in India for years. The real test is whether that interest can be converted into large-scale production, exports and employment. “The more relevant question is not whether India can replace China, but whether it can reduce the world’s dependence on China," stressed Basu. News18 Newsletter Handpicked stories, in your inbox A newsletter with the best of our journalism submit First Published: June 05, 2026, 09:00 IST News world Why Is Japan Suddenly Investing More In India? The Answer May Be China Disclaimer: Comments reflect users’ views, not News18’s. Please keep discussions respectful and constructive. Abusive, defamatory, or illegal comments will be removed. News18 may disable any comment at its discretion. By posting, you agree to our Terms of Use and Privacy Policy Loading comments...
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