A record number of Japanese companies have exited the Chinese market amid mounting economic and geopolitical pressures, marking a significant shift in business strategies between the two countries. As of June, 10,118 Japanese firms maintained operations in mainland China, the lowest figure since data collection began in 2010, reflecting a 22 percent decrease from 2024 and a 30 percent decline from the peak observed in 2012, according to Teikoku Databank, Japan’s largest corporate credit research firm.

Analysts from Teikoku Databank described the decline as a clear indication that Japanese companies are moving from expansion in China toward restructuring their business operations. This shift is influenced by several factors, including the slowdown of the Chinese economy, rising labor costs, and worsening conditions stemming from the collapse of property prices and industrial overcapacity. The report also highlighted that companies are actively diversifying their supply chains to reduce dependence on China without fully severing ties.

The geopolitical climate has further complicated Japan-China commercial ties. The ongoing diplomatic freeze, sparked by Japanese Prime Minister Sanae Takaichi’s parliamentary remarks about a potential military response by Japan in a hypothetical Taiwan conflict, has intensified tensions. China responded by restricting exports of critical minerals to Japanese firms, while official travel between the two nations has largely ceased aside from limited business delegations. This diplomatic strain contributed to a 59 percent year-on-year drop in Chinese tourists visiting Japan in August. Notably, the annual travel expo in Guangzhou, typically held before China’s National Day on October 1, saw no participation from Japanese exhibitors for the first time.

The trend toward exiting China has also been driven by competition within China’s domestic market and broader strategic recalibrations. Satoru Nagao, a fellow at the Hudson Institute, noted that Japanese companies are increasingly redirecting investments to countries such as India, Vietnam, Thailand, and other Southeast Asian nations after years of intensive focus on China. “We fed the dragon and it breathed fire,” Nagao remarked, referring to the intensifying challenges within the Chinese business environment.

Between 2024 and 2025, only 1,221 Japanese companies entered the Chinese market, a record low since the pandemic period. Meanwhile, an unprecedented 4,137 firms completely withdrew from China, underscoring a pronounced reconsideration of the risks and opportunities associated with the market. The evolving landscape suggests that Japanese businesses are navigating a complex combination of economic realities and geopolitical risks as they reshape their global strategies.