In recent years, the Japanese government has made its desire to decouple from China amid rising Sino-American economic rivalry increasingly clear.
As early as 2020, the Shinzo Abe administration handed subsidies worth 70 billion yen (US$446.5 million) for Japanese manufacturers to move production from China to Southeast Asia or back to Japan.
Revisions to its Foreign Exchange and Foreign Trade Act the same year also enabled closer scrutiny by the Japanese government of trade in sensitive items with China on national security grounds, often in collaboration with US and European authorities.
However, multiple analyses have observed that the two countries’ deep and comprehensive trading relationship presents a substantial obstacle to decoupling. Indeed, Japan’s current economic relationship with China is defined by intricately intertwined supply chains.
As Japan’s largest trading partner, China purchases more than 21% of Japan’s exports while providing more than 24% of the goods that help the Japanese economy tick along. For Japan to genuinely decouple from China these figures need to be reduced.
Headlines show Japanese manufacturing is decoupling from China, if gradually and cautiously, due to multiple factors. The most prominent is a fear of being shut out from the lucrative US market as Washington ramps up tech and trade sanctions on China and starts to shut down China’s transshipment and other roundabout efforts to circumvent the punitive measures.
Whereas only 27% of Japanese firms with business ties to China expressed a desire to expand those ties, a slew of major Japanese manufacturers desire to establish new production facilities in the US. Many of these firms, notably Toyota and Panasonic, have received US subsidies for their further expansion in the US.
Japan Inc’s turn away from China is also being accelerated by the increasing inability of their goods to compete in the Chinese market. The market share of Japanese cars in China fell to an unprecedented 17% last year, driven by a rapid shift toward EVs made by Chinese producers like BYD.
This has prompted Mitsubishi to shut down its China production while Toyota and Nissan have partnered with local Chinese firms to survive. Japanese carmakers’ losing battle against Chinese EV makers is reminiscent of Japanese household electronics makers, once ubiquitous in Chinese shops, being superseded by the likes of Haier, Xiaomi and Hisense.
The broader realignment of the two countries’ other trading partners also favors proponents of Japan’s decoupling from China. Slowing growth in China, coupled with fear of wider US and EU sanctions, is shifting global supply chains in ways that can reduce Japan’s trade with the Middle Kingdom.
News as varied as TSMC’s establishment of new semiconductor facilities in Japan, India, Mexico, and ASEAN’s efforts to draw manufacturers away from China and a slow but steady stream of reshoring by US firms all point to a future where Japan needs to depend less on “made in China.”
However, these analyses, based on the trends in manufacturers and manufactured goods, ignore a large part of the equation that will ultimately determine the success or failure of Japan’s broad decoupling from China.
While Japanese manufacturers that produce in China for Chinese markets can conceivably still sell to China when factories are moved elsewhere, the same cannot be said of the many Japanese firms that run restaurants, shops, consultancies and clinics catering to Chinese consumers based inside China.
Considering manufacturers only make up around 40% of the some 12,000 Japanese firms currently operating in China, ignoring this outsized presence of the Japanese service industry paints an incomplete picture of decoupling trends and potential outcomes.
Indeed, a casual look shows that Japanese service providers are deepening, not uprooting, their presence in China amid all the talk of decoupling. For instance, Japanese convenience store chains have been steadily growing their presence in China since 2019, with Lawson in particular nearly tripling the number of its stores over the period.
Meanwhile, fast-fashion giant Uniqlo’s presence in China grew from 711 stores in 2019 to 925 in 2023. Restaurant chain Saizeriya grew from 120 stores in 2016 to 387 over the same period. Shopping mall operator Aeon now runs 22 facilities in China after opening its first branch in 2010.
These firms’ deepening presence in China has not been seen on a similar scale in any other country. The “China-only” success of the Japanese service industry is glaring from any perspective.
Among Lawson’s 7,344 foreign outlets, 6,288 are in China, representing 86%. The equivalents for Uniqlo, Saizeriya and Aeon are respectively 57% (925 out of 1,634), 81% (387 out of 478), and 59% (22 out of 37).
As Japan’s fast-shrinking population creates ever-greater urgency for these firms to expand abroad, their inability to find an alternative to the Chinese market makes decoupling a painful proposition.
As Japan Inc explores different ways to reduce its economic dependence on China, it will need to pay greater attention to firms in the services industry and not just its manufacturers.
While the Japanese government hands subsidies and devises strategies to reduce the goods trade with China, it should place equal energy in helping Japanese service providers manage a transition that could disproportionately hurt their interests.