Explained: Why The Japanese Increasingly Favour India As An Investment Destination Over China

However, the difficulty for its detractors is that as an economic powerhouse, China’s partner countries depend on it so much, that breaking their economic linkages with the Dragon Nation completely is not an easy task and might even be self-defeating. Nevertheless, the trend towards lowering their dependence on Beijing has started.

Japanese Foreign Minister Yoko Kamikawa and Defence Minister Minoru Kihara's visit to New Delhi should not only be read in the context of the great power rivalry in the Indo-Pacific but also in light of India emerging as a rival investment destination to China.

This trend started after the outbreak of the deadly coronavirus in the Chinese city of Wuhan impacting the social, political and economic lives of millions in as many as 205 countries. As world-wide recession was feared, China’s economic partners kick-started their readjustment strategies by rebuilding their supply chains. 

This process was further hastened by the geopolitical rivalry between the US and China, the world’s strongest powers.

The two major Asian powerhouses, Japan and South Korea, have been reworking their investment strategies and veering away from China, the nation they had chosen to partner with since the 1990s. India has emerged as a rival partner of Japan and South Korea along with other neighbouring countries in Southeast Asia, including Singapore and Vietnam. 

Japanese and South Korean companies operating in China were encouraged by their respective governments to consider relocating business back to homes or elsewhere. In simple terms, China’s loss became Southeast Asia’s and India’s gain. 

India As A Rival To China In Japanese Eyes

The world started to look at India as the potential new hub of global supply chain and so did Japan. 

The Shinzo Abe government of that time announced an emergency in Japan on 7 April 2020, followed by announcement of an economic stimulus package worth a whopping 108.2 trillion yen ($993 billion), equal to 20 per cent of Japan’s economic output, to cushion the impact of the pandemic on the world’s third-largest economy. 

Out of the total amount, it earmarked $2.2 billion to help its manufacturers shift production out of China. Of this, 220 billion yen ($2 billion) was pledged for Japanese companies shifting production back to Japan and the remaining 23.5 billion yen for those seeking to move production to other countries.

As the figures in the graph above show, Japan has continued to invest heavily in the region and away from China, with India, Singapore, Vietnam, Thailand, and Indonesia as preferred destinations. 

Abe was pushed to take this radical step as fears arose that supply chains would be disrupted by the pandemic as Chinese factories shut down. The move risked offending Japan’s biggest trading partner but was taken nevertheless.

The immediate impact of Abe’s decision led to the loss of a number of jobs in China, besides negatively impacting the economic ties between the two countries.      

Japan felt frustrated that the Tokyo Olympics was postponed and it blamed China for its irresponsible handling of the deadly virus that caused a full-blown pandemic which in turn crippled the entire planet.

Historically, Japan does not share a happy relationship with China. The shadow of history and territorial disputes have marred the Japan-China relationship for decades. 

Though Abe tried to mend ties with China, the plan for Chinese President Xi Jinping’s visit to Japan, the first of its sort in a decade, had to be postponed when the virus spread like wildfire. When Abe decided to pull the plug by asking the Japanese companies operating in China to relocate back to Japan and elsewhere, things looked even more bleak.

The Japanese decision to shut shops in China, however, opened up opportunity for India, Bangladesh, and countries in Southeast Asia like Vietnam and Thailand. 

As two ancient civilizations with relations dating back over 2,000 years, the historical base for the partnership between India and Japan was already strong.

Japan was aware that India has a large middle-class population of some 350 million providing a huge market as also the fact that it enjoys comparative demographic advantage given that 65 per cent of its population is below 35 years of age. 

There are nearly 1,500 Japanese companies registered in India. These companies have some 5,102 business establishments spread across states like Karnataka, Tamil Nadu, West Bengal, Delhi and Gujarat. 

Japan International Cooperation Agency (JICA) also started playing a major role in the development of metro rails in Delhi, Bangalore and other states. The Mumbai-Ahmadabad Shinkansen bullet train project is another path-breaking initiative that could define the future of India-Japan economic relations. 

Scale Makes Investment In India Attractive

After Abe, his successors – Suga and Kishida – too seem attracted to India and to its economy. Add to that the fact there is no other country in the world outside China, that can match the scale that India has. 

As a result, a significant portion of manufacturing, especially where scale is required, is moving from China to India. Besides Japanese, the US and European countries are also in the process of moving part of their manufacturing operations into India.

Besides India, other potential replacements are Bangladesh, Laos, Vietnam and Pakistan. With the ongoing political disturbances in Bangladesh, an unstable Pakistan, and China’s inroads into Laos, Japan’s preferred target countries are India and Vietnam.

A recent study by the Japan External Trade Organization (JETRO) underlined that Japanese companies are demonstrating a significant shift in their global expansion strategies. 

The continued growth of the purchasing power in the Indian market is also seen as a favourable factor for Japanese companies to continue their investment in the sub-continental nation.