'No longer welcome or safe': 4,000 Japanese firms exit China

"Japanese companies and their employees increasingly feel unwelcome and unsafe in China."

Japanese firms are leaving China — once a core growth market and still the world's second-largest economy — at a record pace. The exodus is driven by tariff risks from US-China tensions, a slowing Chinese economy, intensifying competition from local rivals and a sharp deterioration in Sino-Japanese diplomatic relations. As companies shift business pulled from China toward the United States, analysts say the global footprint of Japanese firms is moving decisively from China to America.

According to data from Japanese credit research firm Teikoku Databank, cited by CNBC on Wednesday (local time), the number of Japanese companies operating in China stood at 10,118 as of June — a 22 percent drop from a June 2024 survey and roughly 30 percent below the 2012 peak.

It is the lowest figure since Teikoku began tracking the data in 2010.

The pace of departures has also accelerated. Over the past two years, 4,137 Japanese firms fully withdrew from China — the highest number on record. By contrast, only 1,221 Japanese companies established new subsidiaries, factories or representative offices in China during the same period, the lowest level even by pre-COVID-19 pandemic standards.

Multiple factors are driving the "China exodus" among Japanese firms simultaneously.

Rising labor and manufacturing costs in China, combined with rapidly improving competitiveness among Chinese companies, have squeezed Japanese firms' profitability. US tariff policy, growing resistance to Chinese-made goods and the rise of alternative markets such as India have further encouraged efforts to reduce dependence on China.

Deteriorating Sino-Japanese relations have added further pressure. Ties between the two countries cooled sharply after Prime Minister Takaichi said last November that Japan could intervene militarily if China invaded Taiwan. China responded by restricting exports of critical minerals to Japanese firms and urging its citizens to avoid travel to Japan.

Japanese firms' anxiety has spread beyond the business environment to concerns about the physical safety of their employees.

A series of Japanese nationals were detained in China this year, and in August a group that included executives from major Japanese companies was held on suspicion of violating restrictions on exports of dual-use goods.

"Japanese companies and their employees increasingly feel unwelcome and unsafe in China," Jeremy Chan, an analyst at Eurasia Group, told CNBC. Companies already considering scaling back their China operations may now accelerate their exit decisions as bilateral relations worsen, analysts said.

The center of gravity for Japanese firms leaving China is shifting toward the United States. According to estimates by Jesper Koll, an expert director at Monex Group, China's share of total sales among companies listed on Japan's Topix fell from 23 percent in 2020 to below 15 percent this year.

Over the same period, the US market's share of sales rose from 25 percent to 35 percent — meaning the positions of China and the United States have in effect been reversed in just six years.

Koll said the US government is actively courting investment from Japanese firms to reindustrialize the country, while China is rapidly shifting toward an economic model of "made in China, by Chinese companies."

However, Japanese firms are not cutting ties with China entirely. Teikoku said the trend is better characterized as "de-risking" — a deliberate effort to reduce exposure rather than a full decoupling.

Kei Koga, a professor at Nanyang Technological University in Singapore, said automakers, parts suppliers and export-oriented manufacturers are the most likely to scale back their China operations. Medical device and precision equipment makers that have successfully localized and can compete with Chinese rivals, however, are more likely to stay, he said.

The Chinese government has also moved to retain Japanese firms. Chinese Vice Premier He Lifeng recently met with a delegation from the Japan Association for the Promotion of International Trade and said China "always welcomes" Japanese companies to expand their business and share market opportunities in the country.

Yet with the number of Japanese firms in China falling to an all-time low and the revenue center of gravity shifting toward the United States, the "China-centered Asia strategy" that Japanese companies pursued for decades is showing signs of fundamental change.