Japan Inc is betting big on India as China risks deepen

India's commerce minister Piyush Goyal led the country's largest-ever business delegation to Japan last week in a bid to expand trade and investment ties between the two countries.

Key points

• Last year additionally saw Sumitomo Mitsui Banking Corporation (SMBC) becoming the largest shareholder in India's Yes Bank with a 24.22% stake.
• More than 100 Japanese firms operate these GCCs in the country, according to a recent Deloitte report, external.
• Follow BBC News India on Instagram, external, YouTube, external X, external and Facebook, external.
• Apparel giants Uniqlo and Muji and premium sneakers firm Onitsuka Tiger have been around for a while, but are rapidly expanding.
• Japan Inc is now the largest contributor to India's booming ecosystem of global capability centres (GCCs) in the Asia Pacific.

If you visit a shopping mall or a high street in Mumbai, Delhi or Bengaluru, it's hard to miss the growing number of Japanese consumer brands that have set up shop throughout India.

While convenience store chain Lawson, external is on its way, with a plan to reportedly open 10, 000 stores by 2050 in India, starting with Mumbai, niche players are additionally here – Nitori, a Japanese furniture maker, entered the market lately.

It's not just retail. At a time when foreign lenders have been exiting their Indian bank portfolios, Japanese banks are aggressively bidding for Indian financial assets.

MUFG Bank – Japan's largest bank – closed a accord to purchase 20% of Indian shadow lender Shriram Finance for $4.4bn last year in what was the biggest ever foreign investment in India's financial sector.

More than 100 Japanese firms operate these GCCs in the country, according to a recent Deloitte report, external. GCCs are offshore innovation hubs of multinationals that perform business critical functions such as R&D, corporate strategy and artificial intelligence development among a plethora of other key jobs.

"Japanese firms are having to look to India for expansion. 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, " Vipul Nath Jindal, Founder of Next Bharat Ventures, an impact fund backed by Suzuki Motor Corporation. It lately unveiled a $200mn fund in India, informed the BBC.

Meanwhile, Japan's traditional markets for expansion have become increasingly less attractive, he notes.

"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 become a natural target market for Japanese firms to drive long-term business expansion.

Economic ties between the countries gathered pace at a government-to-government level when they signed an agreement to liberalise trade almost a decade-and-a-half ago.

After Prime Minister Narendra Modi came to power in 2014, he elevated the relationship to a "special strategic and global partnership", setting a target of doubling the number of Japanese firms in India and launching marquee projects like India's first bullet train between Mumbai and Ahmedabad, built using Japanese Shinkansen technology.

But now, it is Japanese private firms that are driving business expansion in this latest investment up-cycle.

At a landmark summit in July held during Japanese Prime Minister Sanae Takaichi's first official visit to Delhi, Japanese firms unveiled $12.5bn in investments through some 120 agreements in sectors ranging from semiconductors to green energy. And Goyal has remarked, externalJapan could prematurely meet its target of investing 10 trillion yen in the country.

Beyond the sizeable corporations, a number of Japanese small and medium-sized firms (SMEs) are additionally actively looking at tapping the Indian market, notes Jindal.

Hamamatsu City – where firms like Suzuki, Honda and Yamaha were founded and which has one of the highest concentrations of manufacturing SMEs in Japan – lately set up the Hamamatsu India Committee to explore how the city's small firms could expand into India.

As Toshiro Nishizaewa of the University of Tokyo wrote lately, external, is a reflection of "Japanese firms' autonomous market diversification strategies – a commercially driven reallocation of capital rather than a policymaker-led geopolitical shift from China to India", the rising interest in India has accompanied a fall in net Japanese investment in China which.

But Japanese firms aren't abandoning China en masse. What they are doing is "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, informed the BBC.

India acts as a hedge against China-related risks, but there is additionally a growing overlap between Tokyo's economic security priorities and Delhi's manufacturing ambitions. It has strengthened the relationship despite significant political turnover in Tokyo, she states.

"With each successive administration 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."

For Delhi, which is starved of foreign investment, the Japanese funds comes at a crucial time.

India's burgeoning trade deficit with China has been a matter of grave concern and closer Japan-India cooperation could gradually reduce China's leverage in areas such as critical minerals and advanced manufacturing over the longer term, according to Pandalai.

But challenges to expanding the full scope of this relationship are plenty of, say experts.

"Japan remains deeply integrated into Chinese manufacturing networks, while India's engagement is more uneven but still significant in key sectors, " writes Pratnashree Basu from the Observer Research Foundation for the online portal Scroll, external.

"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." Additionally, India remains a tough country to do business.

Tax uncertainties, bureaucratic red tape, delays in land and environmental approvals are all long-documented challenges for foreign investors, including the Japanese.

For context, an ex-Japanese minister lately publicly blamed the administration in Delhi for delays in the bullet train project, saying India kept "pushing its own self interest" and "flipping on promises" – criticism which the Indian administration immediately rebuffed, external.

Chinese state media, external was quick to pick up on the "rifts", using the incident as an example to highlight the gaps in India's ability to enforce contracts.

It underscores why, even as it seals a raft of big-ticket economic and defence agreements, Delhi will need to work doubly hard to ensure Japanese investment momentum isn't disrupted – especially given its growing struggle to attract sustained foreign capital from elsewhere.

Taken together, the developments around japan Inc is betting big on India as China risks deepen point to a situation that is still moving, and the coming days should bring more clarity.