Japan Inc is betting big on India as China risks deepen

Japanese companies are significantly increasing their investments in India as risks associated with China deepen.

Brands such as Uniqlo and Muji have rapidly expanded their presence in India.

Last week, India's commerce minister, Piyush Goyal, led the country's largest-ever business delegation to Japan, aiming to strengthen trade and investment ties between the two nations. This visit highlighted Japan's increasingly apparent and deeper engagement with Asia's third-largest economy.

A visit to shopping malls or high streets in major Indian cities like Mumbai, Delhi, or Bengaluru reveals a growing number of Japanese consumer brands establishing themselves across the country. Apparel giants Uniqlo and Muji, along with premium sneaker company Onitsuka Tiger, have been present for some time and are now undergoing rapid expansion. Niche players are also entering the market; for instance, Nitori, a Japanese furniture manufacturer, recently launched operations, while a convenience store chain is also making inroads.

The trend extends beyond retail. At a time when foreign lenders are divesting from their Indian bank portfolios, Japanese banks are aggressively pursuing Indian financial assets. MUFG Bank, Japan's largest bank, finalized a deal last year to acquire a 20% stake in the Indian shadow lender Shriram Finance for $4.4 billion. This marked the largest foreign investment ever in India's financial sector. Also last year, Sumitomo Mitsui Banking Corporation (SMBC) became the largest shareholder in India's Yes Bank, securing a 24.22% stake.

Japan Inc is now the leading contributor to India's burgeoning ecosystem of global capability centers (GCCs) in the Asia Pacific region. According to a recent Deloitte report, over 100 Japanese firms operate these GCCs in India. GCCs are offshore innovation hubs for multinational corporations, performing critical business functions such as R&D, corporate strategy, and artificial intelligence development, among many other key roles.

Vipul Nath Jindal, Founder of Next Bharat Ventures—an impact fund backed by Suzuki Motor Corporation, which recently announced a $200 million fund in India—told the BBC, "Japanese companies are having to look to India for growth. With the local population declining for the past 16-17 years, there isn't just a slowdown in domestic demand, but a permanent shrinking of the market."

He added that Japan's traditional markets for expansion have simultaneously become less appealing. "Investment into China has fallen sharply amid geopolitical tensions and changing economic dynamics, the US market is more challenging because of tariffs and domestic competition, and the market size of other Southeast Asian economies is limited."

Against this backdrop, India has emerged as a natural target market for Japanese companies seeking long-term business growth. Economic ties between the two countries gained momentum at a government-to-government level nearly a decade and a half ago when they signed an agreement to liberalize trade. After Prime Minister Narendra Modi assumed power in 2014, he elevated the relationship to a "special strategic and global partnership," setting a goal to double the number of Japanese companies in India and initiating flagship projects like India's first bullet train between Mumbai and Ahmedabad, which utilizes Japanese Shinkansen technology.

However, in this latest investment up-cycle, Japanese private firms are primarily driving business expansion. During Japanese Prime Minister Sanae Takaichi's first official visit to Delhi in July, a landmark summit saw Japanese companies announce $12.5 billion in investments through approximately 120 agreements across sectors ranging from semiconductors to green energy. Goyal has indicated that Japan could prematurely achieve its target of investing 10 trillion yen in India.

Beyond large corporations, several Japanese small and medium-sized companies (SMEs) are also actively exploring opportunities in the Indian market, Jindal noted. Hamamatsu City, the birthplace of companies like Suzuki, Honda, and Yamaha, and home to one of Japan's highest concentrations of manufacturing SMEs, recently established the Hamamatsu India Committee to investigate how the city's smaller companies could expand into India.

This increasing interest in India coincides with a decline in net Japanese investment in China. As Toshiro Nishizaewa of the University of Tokyo recently wrote, this reflects "Japanese firms' autonomous market diversification strategies—a commercially driven reallocation of capital rather than a policymaker-led geopolitical shift from China to India."

However, Japanese firms are not abandoning China en masse. Instead, they are "reducing concentration risk after several years of supply chain disruptions and geopolitical tensions," Shruti Pandalai, India Chair at the Sydney-based Lowy Institute think tank, told the BBC.

Pandalai explained that India serves as a hedge against China-related risks. Furthermore, there is a growing alignment between Tokyo's economic security priorities and Delhi's manufacturing ambitions, which has strengthened the relationship despite significant political changes in Tokyo. "With each successive government, the targets have risen rather than fallen. That suggests the relationship has moved beyond leader-level diplomacy and become embedded in bureaucratic, corporate, and strategic planning on both sides."

India's consumer market is experiencing rapid growth as discretionary incomes increase. For Delhi, which is in need of foreign investment, Japanese capital arrives at a critical juncture. India's expanding trade deficit with China has been a significant concern, and closer Japan-India cooperation could gradually diminish China's leverage in areas such as critical minerals and advanced manufacturing over the longer term, according to Pandalai.

Nevertheless, experts point out numerous challenges to fully expanding the scope of this relationship. Pratnashree Basu from the Observer Research Foundation wrote for an online portal, "Japan remains deeply integrated into Chinese manufacturing networks, while India's engagement is more uneven but still significant in key sectors." She added, "Economic interdependence, in this sense, constrains the scope for coordinated measures as these would impose significant commercial costs or provoke direct economic retaliation from China."

Moreover, India remains a challenging country for doing business. Tax uncertainties, bureaucratic red tape, and delays in land and environmental approvals are long-documented obstacles for foreign investors, including those from Japan. A former Japanese minister recently publicly criticized the Indian government for delays in the bullet train project, stating that India kept "pushing its own self interest" and "flipping on promises"—criticism that the Indian government immediately refuted. This incident underscores why, even as it finalizes a series of major economic and defense agreements, Delhi will need to work exceptionally hard to ensure that Japanese investment momentum is not disrupted, especially given its increasing difficulty in attracting sustained foreign capital from other sources.