Japanese investment in China surges despite political tensions and diplomatic decline
Commentary: Japanese investment in China keeps rising despite political tensions
A decline in diplomatic relations masks a surge in Japan’s economic ties to China, says this researcher.
TAIWAN: For China-Japan relations, 2026 feels like a strange moment, perhaps the worst of times, and the best.
Japan’s Prime Minister Sanae Takaichi won a landslide victory in the snap election on Feb 8, a move she framed as a way to consolidate support for a tougher foreign policy after declaring that a Chinese military threat to Taiwan would prompt a Japanese response, even after that position had been heavily criticised by Beijing.
As Beijing increasingly uses trade pressure and military signalling to push back against Tokyo, including restrictions on rare earth exports, the relationship between the two countries is entering a new phase.
In 2026, it looks less like uneasy cooperation and more like the early stage of a new Cold War. And yet, the data tells a far more confusing story. At a time when Tokyo and Beijing appear to be drifting further apart politically, Japanese capital is moving in the opposite direction.
Despite diplomatic relations sinking to a new low, figures from China’s Ministry of Commerce show that Japanese foreign direct investment (FDI) into China surged by 55.5 per cent year-on-year in the first three quarters of 2025.
This spike stands in stark contrast to China’s broader investment downturn. In 2025, China’s total utilised FDI (that is, foreign investment that has actually been made rather than just planned or promised) fell to 747.77 billion yuan (about US$109 billion), down 9.5 per cent from the previous year, marking the third consecutive annual decline.
The popular narrative of “foreign capital fleeing China,” however, only tells part of the story. While total investment value dropped, the number of newly established foreign-invested enterprises reached 70,392, up 19.1 per cent year-on-year.
Japan was not an exception. Swiss investment in China jumped 66.8 per cent, British investment rose 15.9 per cent, and the United Arab Emirates recorded 27.3 per cent growth, driven largely by its interest in green energy and the digital economy.
Behind these numbers lies a more calculated shift in Beijing’s thinking: a move away from growth-first logic toward a strategy where security comes first.
With the launch of China’s 2026–30 Five-Year Plan, technological development has been redefined as a matter of national survival. Beijing is now pursuing what it calls “targeted openness”. Manufacturing is broadly opened, while foreign capital is selectively steered toward sectors such as artificial intelligence, electric vehicles and digital services.
China is increasingly positioning itself as a testing ground where advanced energy systems and data-driven technologies converge. By anchoring Japanese and European technologies inside its system, Beijing hopes to ensure that any future sanctions against China would face strong resistance from domestic interest groups in those economies.
Chinese policymakers appear convinced that, even with tighter regulations and the effect of its Anti-Espionage Law, multinational companies will not be able to walk away from China’s market. Takaichi seems well aware of this reality. Having achieved a historic general election victory, she will likely argue that Japan is no longer simply following Washington’s lead but is instead emerging as a rule-setter in the Indo-Pacific.
FROM “THE WORLD’S FACTORY” TO EMBEDDED SURVIVAL
This paradox is not abstract. It is already reshaping how businesses operate on the ground and it is reflected in the experience of many Japanese residents living and working in China.
In 2011, the Japanese expatriate population there peaked at around 150,000. At the time, China was still widely seen as “the world’s factory”.
Many Japanese individuals and small business operators moved to China, drawn by lower labour costs and expanding industrial capacity. Manufacturing and supplier-based activities formed the backbone of this presence, supporting a sizable Japanese community and dense networks of everyday commercial exchange.
That same year, however, tensions over the contested Senkaku/Diaoyu Islands erupted. Beijing imposed rare earth export restrictions on Japan, and China-Japan relations never truly recovered. The effects were felt beyond diplomacy. Rising nationalist sentiment directly affected many Japanese residents, reshaping how political risk was understood at both personal and business levels.
The COVID-19 pandemic further unsettled this already fragile environment. Supply chains were disrupted, operating conditions became less predictable, and many Japanese businesses reconsidered their presence in China, even as high-level political engagement between China and Japan continued.
By 2026, the number of Japanese nationals living in China had fallen to below 100,000. Yet those who remained did not simply hold on.
For small and medium-sized business owners who stayed, the trade-offs were clear. Periodic surges of anti-Japanese sentiment continued to pose social and personal risks, while years of accumulated investment and local partnerships made relocation increasingly difficult. In the past, many sourced semi-finished goods from China for export. Today, they are more likely to be embedded directly within China’s supply chain, a shift that for many has become a form of structural integration.
THIRD-COUNTRY CHANNELS AND THE RISE OF “TECHNOLOGY CUSTODY”
Small and medium-sized businesses are not the only ones staying. Japan’s industrial giants are doing the same.
Despite rising political tensions, major Japanese firms are increasingly adopting an “In China, for China” strategy.
Japan is a member of the RCEP, the world’s largest free trade agreement (FTA), which enables member states to trade and invest more freely within its framework. Now, Japan is leveraging these benefits by investing heavily in high-end manufacturing and R&D within C