Foreign subsidiaries, a key driver of the Japanese industry

In 2021, sales by foreign subsidiaries of Japanese industrial companies accounted for nearly a quarter of total sales. China is the main anchor country, particularly for the automotive industry. Despite this, Japan has retained a larger industrial base than most other OECD countries. The sector accounted for more than 20% of total national value added in 2021. The share of goods exports in GDP has also increased, reaching 16.4% in Q1 2022.

This production structure for Japanese companies, based on the complementarity between domestic facilities and foreign subsidiaries, has helped support profits, which climbed to a record as a share of GDP in Q1 2022. Industrial production in Japan is continuing to shift towards capital goods and away from final consumption goods, largely in response to the increasing competition from other Asian countries in the latter segment.

At a time when the debate around the concept of de-globalization is gaining traction, it is interesting to focus on Japan, where many industrial companies have chosen to set up subsidiaries abroad. The subject is even more relevant today, given the significant depreciation in the yen and the growing geopolitical tensions in Asia. One would expect that this would influence the organisation of Japanese production in the medium and long term.

In recent decades, Japanese manufacturing companies have expanded their share of international activity. Initial estimates from the Ministry of the Economy, Trade and Industry (METI), indicate that sales by foreign subsidiaries in 2021 reached JPY132 trillion (USD1trillion). This was nearly a quarter (22.3%) of total sales by Japanese companies, if we add these foreign sales to those made by Japanese companies located in Japan (see Chart 1).[1]

Progress has been impressive over the past thirty years, as this figure was only 10% in the early 2000s and just 5% in 1990. However, it has stabilised since 2014.

Several factors have encouraged Japanese companies to strengthen their presence abroad. The gradual strengthening of the yen between 1980 and 2012 (the date of the introduction of ‘Abenomics’ and the beginning of a new phase of depreciation in the currency)[2], was the first key factor, but is not the only explanation. According to a METI survey conducted in July 2018[3], companies wanted to get closer to local markets where “demand is strong or expected to be so in future” (68.6% of companies agreed with this statement) in order to compensate for structurally low growth in demand in Japan[4]. The same survey indicated that the cost and quality of foreign labour had a less important role (16.0% agreeing). The extension of global production chains and Japan’s integration into them have also driven the expansion of businesses beyond the country’s borders.

However, the scale of this phenomenon varies from one sector to the next. The automotive industry and companies in information and communication electronic equipment have expanded their production facilities abroad to a much greater extent than those in the food, metals, oil or coal sectors, where businesses remain more heavily focused on Japan (see Chart 2). Most production of Japanese foreign subsidiaries are sold into their host region: this accounted for three quarters of the sales in 2021; the remaining quarter are sales outside the area of operation, and mainly directed back to Japan.

China, the main foreign base

Japanese companies have mainly strengthened their presence in Asia (see Chart 3), and particularly in China.

At the end of the 1990s, sales by Japanese subsidiaries in China accounted for just 5% to 6% of total sales of Japanese subsidiaries around the world[5]. This figure has increased fivefold over twenty years, with a peak of 24.6% reached in 2021.

The move into China came alongside growth in bilateral trade between the two countries. Over 20 years, trade (exports and imports combined) has doubled, whilst exchanges between Japan and the US have contracted by 20 percentage points (see Chart 4). 2001 represented a turning point, as this is the year when China joined the World Trade Organisation.

Industry continues its transformation

Despite this underlying trend in the expansion of Japanese companies abroad, the process of de-industrialisation in Japan has been more limited than in most Western economies. In 2019, manufacturing industry still accounted for more than 20% of the country’s total value added (20.9%), whilst the comparable figures for France, Spain, the UK and the US[6] are all below the 12% mark (see Chart 6). Meanwhile, the share of goods exports in real GDP has continued to grow for more than twenty years now, reaching 16.4% in the first quarter of 2022 (see Chart 7). Therefore, Japan remains a major exporting power. The yen’s depreciation – which continued in June – is thus likely to provide substantial support to industrial activity in Japan again.