Japanese companies deepen India push as domestic market shrinks

Japanese consumer brands including Uniqlo, Muji, Nitori and Lawson are rapidly expanding their presence across major Indian cities, as companies increasingly look to the world's most populous country to offset a shrinking domestic market and diversify their global operations.

The investment drive extends beyond retail into financial services. MUFG Bank agreed to acquire a 20% stake in Shriram Finance for $4.4 billion, while Sumitomo Mitsui Banking Corporation (SMBC) has become the largest shareholder in Yes Bank.

Japanese companies have also emerged as the largest contributors to India's ecosystem of Global Capability Centres (GCCs) in the Asia Pacific, underlining the broader shift from consumer-facing investment towards technology, services and corporate operations, says the BBC.

Several factors are driving the shift.

Japan's population has been declining for 16 to 17 years, creating a permanently shrinking domestic market for companies that have traditionally relied heavily on demand at home. India, with its large population and expanding economy, offers Japanese businesses an opportunity to build new sources of growth.

Geopolitical tensions and concentration risks are also encouraging Japanese companies to diversify their investments.

Investment in China has declined amid geopolitical tensions, while the US market has become more challenging because of tariffs. Southeast Asian economies offer opportunities but have smaller markets, making India an increasingly attractive destination for companies seeking to spread their exposure.

For Japanese firms, expanding in India can serve as a hedge against concentration risks while allowing them to maintain their presence in China rather than abandoning the market altogether.

Economic ties between Japan and India have also become more deeply embedded in government and corporate planning. Relations have moved beyond leader-level diplomacy towards closer bureaucratic and business cooperation.

The two countries' "special strategic and global partnership", initiated in 2014, has provided a framework for deeper economic engagement. A recent summit resulted in $12.5 billion in new investment agreements, further strengthening the commercial relationship.

Business hurdles remain

Despite the opportunities, Japanese companies continue to face operational challenges in India, including bureaucratic red tape, tax uncertainties and delays in securing land and environmental approvals.

These difficulties have been highlighted by public friction and delays surrounding the high-profile Mumbai-Ahmedabad bullet train project, illustrating some of the practical obstacles facing major foreign investors.

Maintaining the current pace of Japanese investment will require India to address these structural bottlenecks, particularly those affecting project approvals and the ease of doing business.

For Japanese companies, India's large market and strategic importance make it an increasingly important part of their global expansion plans. But sustaining that momentum will depend not only on India's economic growth, but also on its ability to make investment and project execution more predictable.