India has emerged as the second-most attractive destination for Japanese investment in Asia since 2023, trailing only Singapore. Notably, it has surpassed China, which held the top spot for over four decades. In 2020, India ranked seventh—this sharp rise underscores a dramatic shift in Japanese investor priorities.

The escalation of US-China trade tensions, particularly following former President Donald Trump’s tariff war, disrupted China’s dominance as a low-cost manufacturing hub. This triggered Japanese companies to reassess their investment destinations, increasingly favoring India’s sustainable growth trajectory and domestic demand base.

Historically, trade disputes involving the United States have been significant headwinds for export-driven economies like Japan and China. A key turning point came in 1985 with the Plaza Accord, where the US and its allies pushed for an appreciation of the Japanese yen to reduce trade imbalances. The resulting currency war hurt Japanese exports, especially automobiles.

Fast forward to the Trump era, a similar tactic was employed with tariffs aimed at curbing China's manufacturing dominance. After Japan’s economic bubble burst in 1991, China became Japan’s go-to destination in Asia for cost-efficient manufacturing. But that era is now changing.

Abe’s Legacy 

The late Prime Minister Shinzo Abe played a pivotal role in redefining India-Japan relations. Under his leadership, the partnership evolved beyond bilateral trade to a special strategic and global partnership, encompassing defense cooperation, infrastructure development, and joint projects in third countries.

Notable collaborations include the Asia-Africa Growth Corridor (AAGC) and joint development of Iran’s Chabahar Port. Abe’s policies also aimed to counterbalance China’s growing regional clout, which gained further momentum during the post-COVID period.

Japanese investment in China plummeted from US$11.02 billion in 2020 to US$3.31 billion in 2024, creating ample room for India. In contrast, investment in India soared from US$1.57 billion in 2020 to US$5.34 billion in 2024—a more than threefold increase.

ASEAN vs India

While ASEAN countries have historically been popular with Japanese investors—due to both investment climate and cultural affinity—investment patterns in ASEAN have turned erratic. This volatility, coupled with India's stable trajectory, has further enhanced India's appeal.

Why India Now Leads 

Several factors underpin India’s rising attractiveness:

1. Robust GDP Growth and Market Size

India’s average GDP growth of 6.5% between FY2014-15 and FY2023-24 (despite COVID-19) has bolstered investor confidence. According to Morgan Stanley, India is poised to become the third-largest economy by 2028, overtaking both Germany and Japan.

2. Services Sector as a Growth Engine

The services sector accounted for 55% of GDP in 2023-24, growing at an average of 8% pre-pandemic and 8.3% post-pandemic. It also spearheaded export growth—service exports rose by 13.5% in FY2024-25, in contrast to a mere 0.14% rise in merchandise exports.

India now ranks 7th globally in services exports, capturing 4.3% of the global market in 2023-24, up from 1.9% in 2005.

3. Rising Domestic Demand

The surge in services and income has stimulated domestic demand, especially in rural and semi-urban areas. This has been facilitated by improved financial infrastructure, including expanded banking access and digitalization, alongside agricultural growth.

A JETRO survey (conducted by the Japanese government’s METI) found that business conditions in China and Thailand deteriorated, while confidence in India improved significantly. About 80.3% of Japanese firms in India expressed intent to expand operations—the highest in the region.

India also ranked as the third most profitable destination for Japanese investors, after South Korea and Taiwan.

Auto Industry 

The automobile sector in India, largely dominated by Japanese firms, serves as a key indicator of the domestic demand boom. India is the fourth-largest producer of passenger vehicles globally, and over 90% of these are sold domestically—a stark contrast to export-reliant markets like Japan, the US, and South Korea.

Semiconductor Move

A landmark event in 2023 was the MoU with Japan’s Rapidus Corporation to establish semiconductor manufacturing in India. Backed by Japanese giants like Sony, Toyota, Kioxia, NEC, NTT, and MUFG Bank, this move could be a game-changer for India’s electronics ecosystem, which currently lacks indigenous chip production.

Japan’s pivot toward India marks a significant realignment of investment strategy in Asia. With trade friction reconfiguring global supply chains and India’s growth story gaining credibility, the India-Japan economic partnership is set to enter a new phase of strategic depth and technological collaboration.

(The writer is an Indian trade consultant and analyst. Views expressed are personal. He can be contacted at subratamajumder0604@gmail.com)