Japanese companies are leaving China at a record pace due to China's economic slowdown and frozen diplomatic relations, forcing them to re-evaluate their presence in the world's second-largest economy.

The Japan Empire Database ( Teikoku Databank ), a corporate credit research institution, stated that as of June, the number of Japanese companies operating in China had dropped to a historic low of 10,118. This represents a 22% decrease from the last survey in June 2024 and is about 30% lower than the peak in 2012, marking the lowest level since Teikoku began tracking this data in 2010.

An analyst from a political consulting firm, Jeremy Chan, stated that Japanese companies which had already planned to reduce their operations in China are now considering withdrawing from the market even more urgently following the rapid deterioration of Sino-Japanese relations.

Teikoku stated in last week's report that as this diplomatic dispute forces Japanese companies to reduce or shut down their operations in China, the wave of withdrawal may further intensify. Japanese companies are already facing declining profitability, and tariff risks, rising labor and manufacturing costs, as well as fierce local competition, are all squeezing their profits. The report added that some companies have reduced their dependence on China but have not completely decoupled from it.

Since Prime Minister Toshimi Suga stated in parliament last November that Japan might intervene militarily if China invaded Taiwan, Sino-Japanese relations have been under great strain. Subsequently, Beijing imposed restrictions on the export of key minerals from Japanese companies and urged its citizens to avoid traveling to Japan.

Chan said, "Japanese companies and their employees increasingly feel that they are not welcome or safe in China."

Fujitsu Research Institute's Chief Policy Economist Martin Schulz stated that US tariffs, the growing public resistance to Chinese goods, and the expansion of the Indian market have also further prompted Japanese companies to accelerate their diversification and reduce their dependence on Beijing. "Investments in China are experiencing a perfect storm," he said.

Teikoku Data shows that in the past two years, a record number of 4,137 Japanese companies have completely withdrawn from China. During the same period, only 1,221 companies entered China through subsidiaries, factories, or representative offices, which is the lowest level on record since before the COVID-19 pandemic.

Turn to the United States

Monex Group Expert Director Jesper Koll stated that while Japanese companies are gradually moving away from China, once an important market, their dependence on the US market is increasing day by day.

According to the estimates of Koll, since the beginning of this year, the proportion of profits from Chinese companies among the constituent stocks of the CSI Index (Topix) has dropped to less than 15%, which is lower than the 23% in 2020; during the same period, the proportion of profits from the United States has risen to 35%, higher than the 25% in 2020.

Koll says that Washington is "openly courting" Japanese companies to help with their re-industrialization efforts, while Beijing has turned to a model of "manufacturing in China, by China."

"Unwelcome and unsafe"

Analysts say that this year, Japanese citizens have been detained in Beijing, which has further exacerbated companies' concerns about sending personnel to China. In August, several Japanese citizens, including executives from large Japanese corporations, were reported to have been detained for suspected violations of export restrictions on dual-use items.

Chan said, "Japanese companies and their employees increasingly feel that they are not welcome or safe in China."

A report from April by the Japan Trade Promotion Agency ( JETRO ) indicates that companies are becoming increasingly cautious about expanding their business in China.

On the day after the release of the Teikoku report, which was Tuesday, Chinese Vice Premier He Lifeng stated that China "always welcomes" Japanese companies to develop their business in China and share market opportunities.

He stated to the delegation from the Japan International Trade Promotion Association that they should "adhere to the correct direction on historical issues... and play a greater role in advancing Sino-Japanese economic and trade cooperation."

Professor Kei Koga from Nanyang Technological University in Singapore stated that automobile manufacturers, parts suppliers, and manufacturers geared towards exports are most likely to reduce their operations in China. Those companies that have already localized their operations and are able to compete with Chinese competitors, especially manufacturers of medical equipment and precision devices, are more likely to stay.