Japan as a worthwhile alternative for German machine manufacturers

Why is Japan gaining importance as an alternative to China for German machine manufacturers?

Geopolitical tensions between Europe and China are escalating, posing significant challenges for German machine manufacturers. A key point of criticism is the massive subsidization of Chinese exports, which distorts competition in international markets. At the same time, China's export ban on rare earth elements is severely impacting German industry. Since April 2025, China has drastically restricted the export of seven strategically important rare earth elements and the high-performance magnets made from them. These materials are essential for the production of electric motors in German machinery.

The effects are already being felt: The first German companies in the automotive, electronics, defense, and medical technology sectors have had to reduce production due to a shortage of crucial components. China controls over 90 percent of the world's rare earth processing and approximately 70 percent of the mining capacity for heavy rare earths. The weak economy in China and the trade conflicts with the US are further complicating the situation.

In this context, Japan proves to be a rules-based and strategically important partner. Germany and Japan pursue similar trade policy objectives and both advocate for a multilateral, rules-based world order. Both countries possess highly developed, export-oriented industries that depend on open markets and reliable framework conditions.

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What strategic importance does Japan have for Germany's Indo-Pacific policy?

Japan plays a central role in Germany's Indo-Pacific strategy. The governing coalition had already highlighted Japan as a strategic partner in Asia in its 2021 coalition agreement. Since then, relations have been continuously expanded, including under the new government of Chancellor Friedrich Merz. Japan is considered an anchor of stability in the Indo-Pacific region and shares fundamental values ​​with Germany, such as freedom, democracy, the rule of law, and open trade.

Cooperation also extends to the area of ​​security policy. Germany and Japan are intensifying their cooperation in maintaining a free and open Indo-Pacific region. In May 2024, the German Armed Forces (Bundeswehr) began their largest Indo-Pacific deployment to date, and a government agreement was concluded with Japan to facilitate future deployments of the Bundeswehr to Japan.

Over 20 percent of German trade takes place in the Indo-Pacific region, underscoring its economic importance. Japan is not only a key bilateral partner for Germany, but also a gateway to other Asian markets. The deep integration of Japanese companies into the supply chains of Asia, China, and the USA makes the country a strategically indispensable partner.

How have trade relations between Germany and Japan developed?

Bilateral trade between Germany and Japan is showing positive development. From January to November 2024, goods worth €20.1 billion were exported from Germany to Japan, representing an increase of 7.5 percent compared to the same period of the previous year. This places Japan 18th among Germany's most important trading partners, accounting for 1.4 percent of total exports.

It is particularly noteworthy that Japan is one of the few countries to which German exports increased in 2024. While total German exports fell by 1.2 percent and exports to China even declined by 7.6 percent, Japan recorded an increase of 6.5 percent to 21.5 billion euros.

Germany's most important exports to Japan are pharmaceutical products, valued at €5.3 billion (26.3 percent share), followed by motor vehicles and motor vehicle parts (€4.4 billion, 21.7 percent) and machinery (€2.4 billion, 11.7 percent). In the machinery sector, Japan ranks 20th as a sales market with €2.552 billion, significantly behind China, but with an upward trend.

However, the machinery trade is characterized by a trade deficit on the German side. German machinery imports from Japan amounted to approximately €2.8 billion in 2024, while exports reached only €2.4 billion. Despite the 2019 EU-Japan free trade agreement, the Japanese market remains difficult to access for European machinery products, a situation that is due to structural reasons and not to product quality.

Why is the need for automation increasing so sharply in Japan?

Japan faces enormous demographic challenges that are massively driving the need for automation. With approximately 30 percent of its 123 million inhabitants over 65 and less than 12 percent under 14, the country has the fastest aging population in the world. The Japanese population is shrinking by about 2,000 people every day, which, figuratively speaking, is equivalent to the disappearance of an entire village each day.

Projections indicate that Japan's population will shrink by another 40 million people by 2060. The country already faces a shortage of skilled workers, and by 2025, a shortfall of approximately 380,000 nurses is projected. This situation is exacerbated by the fact that many young people are pursuing university degrees and turning away from traditional industrial jobs.

This demographic trend leads to two crucial factors that motivate companies to purchase modern, automated equipment: First, the labor shortage is steadily increasing due to the shrinking population. Second, the pressure on Japanese companies to seek new markets abroad is growing, which necessitates more efficient production methods.

Another important aspect is the aging machinery of many Japanese companies. The Japanese are traditionally very good at maintaining their machinery, so they only purchase new equipment every 20 or 30 years. This long investment cycle is now leading to a backlog, as many companies simultaneously face the need to modernize their outdated equipment and adopt modern, automated solutions.

What specific advantages does the Japanese market offer German companies?

The Japanese market offers German companies several strategic advantages. First, German brands and products enjoy an excellent image in Japan, which translates into stable and long-term business relationships. 93 percent of the German companies surveyed value the stable and reliable business relationships, 87 percent the social stability and security in the country, and 80 percent the political stability and democratic foundations.

Surprisingly, despite its reputation as an expensive market, Japan is often more cost-effective than Germany. In a survey conducted by the Chamber of Commerce, 95 percent of German companies stated that unit labor costs in Japan are lower than in Germany, with 47 percent reporting a difference of more than 30 percent. These cost advantages result from the high productivity of the Japanese workforce and the currently weak yen.

A key advantage is the so-called third-market business, which is not fully captured in bilateral trade statistics. This involves sales to Japanese companies abroad, particularly in Asia and the USA, being handled through Japanese subsidiaries. According to surveys by the German-Japanese Chamber of Commerce (AHK Japan), over 60 percent of German companies based in Japan now conduct business with Japan in third-market regions such as ASEAN, the Middle East, South America, and Africa. At the automotive supplier Bosch, sales to Japanese companies abroad are more than twice as high as sales within Japan itself.

Nearly 90 percent of German companies are profitable in Japan, and more than half of the managers expect moderate to strong growth in the next twelve months. The high quality of production and the workforce are further important factors. Japanese employees bring values ​​such as long-term thinking, high motivation, enthusiasm for collaboration, as well as diligence and a focus on safety.

How is Japan developing as a production location for German companies?

Japan is also becoming increasingly attractive as a production location. According to a survey conducted by the German-Japanese Chamber of Commerce (AHK Japan) among 69 German companies with factories in Japan, 57 percent plan to expand their production. Around 730 German companies are active in Japan, 84 of which operate production or assembly plants at a total of 132 locations.

A prominent example is the pharmaceutical company Boehringer Ingelheim, which has been producing in Japan for 40 years and is continuously expanding its operations there. In June 2025, the company inaugurated a new factory building in Higashine, Yamagata Prefecture, following an initial investment of €60 million. Boehringer plans to invest a total of €300 million in the site by 2028. The plant is increasingly functioning as a regional hub, supplying not only Japan but also other Asian markets and Oceania.

The machine tool manufacturer Trumpf has also been present in Japan since 2008, becoming the first German machine tool manufacturer to establish a production facility. The company produces in Fukushima, 250 kilometers north of Tokyo, and has since founded five further subsidiaries in Japan. The compact, automated sheet metal working machines manufactured in Japan are specifically tailored to the conditions of the Japanese market.

The tunnel construction specialist Herrenknecht has also been successfully operating in Japan for years, supplying technology for urban rail systems and high-speed railways. The Omachi Dam Tunnel Project in the Japanese Northern Alps, where Herrenknecht machines bored through 10.6 kilometers of granite rock, is considered a pioneering achievement.

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What role do geopolitical factors play in the choice of location?

Geopolitical uncertainties are playing an increasingly important role in the location decisions of German companies. As early as 2024, a joint survey by the German-Japanese Chamber of Commerce (AHK Japan) and KPMG revealed that 38 percent of German companies were relocating their production facilities from China to Japan. The main reasons cited were political uncertainties and the stable business environment in Japan.

Current tensions in the South China Sea and in relations between China and Western nations are leading to a reassessment of business locations. Many companies are pursuing a strategy of diversifying risks in these globally uncertain times and relying more heavily on Japan as a reliable location. Japan offers the advantage of providing access to Asian markets while also maintaining close ties with the US and Europe.

41 percent of the German companies surveyed export from Japan to the ASEAN countries, 38 percent to China, and 29 percent to North America. This diversification reduces dependence on individual markets and offers flexibility in the face of changing geopolitical conditions.

Japan's strategic importance is further underscored by its successful reduction of its dependence on China for rare earth elements. This experience makes Japan a valuable partner in diversifying supply chains and reducing strategic dependencies.

Related to this:

• Rare Earths: China's Raw Material Dominance – Can Recycling, Research and New Mines Break Free from Raw Material Dependence?

What challenges do German companies face in Japan?

Despite its many advantages, the Japanese market also presents specific challenges. Language poses a significant barrier, and initiating business relationships is often time-consuming. Japanese customers have very high quality standards and often ask many detailed questions beforehand. The cultural differences and hierarchical corporate structures require patience and adaptability.

The weak yen significantly increases the cost of imports from Germany, which impairs the competitiveness of German products. However, for companies wishing to invest locally, the exchange rate is favorable, as it makes investments in Japan cheaper.

Japanese customers are traditionally very loyal to their suppliers, which makes market entry difficult for new providers. Even technically superior solutions do not automatically prevail, as risk aversion and established business relationships play a significant role. Newcomers must have the proverbial staying power and prove themselves over several years before they are considered for larger projects.

The biggest obstacle to the expansion of German companies in Japan is the labor market shortage. Finding qualified employees who also speak English is very difficult, and the shrinking population further exacerbates this challenge.

How can German companies successfully enter the Japanese market?

Thorough preparation is essential for a successful market entry. Careful market research and an understanding of cultural nuances are indispensable. Collaboration with local partners can be highly advantageous, provided they possess extensive knowledge of market conditions, regulations, and cultural specifics.

A proven strategy is the gradual development of business contacts with Japanese companies in Germany or Europe, which can become a gateway to further business. In Japan itself, various German specialist retailers offer support with market entry and leverage their established networks.

Trade fairs have a different significance in Japan than in Germany, and quick deals are not to be expected. Instead, technical discussions and negotiations at company headquarters are essential. Companies should invest time to answer all questions from Japanese customers in detail and ensure that the entire value chain runs smoothly.

Third-country transactions are particularly interesting, where decisions are made in Japan but projects are implemented outside of Japan. German providers are often more internationally oriented than Japanese companies, which gives them an advantage in operational implementation in third countries.

Which industries benefit most from the Japanese market?

Several industries stand to benefit significantly from the Japanese market. Investments in the semiconductor and pharmaceutical industries are expected to increase considerably in 2025 and 2026. Japanese companies are building new battery factories both domestically and internationally, although on a smaller scale than Chinese or Korean suppliers.

Investment activity is picking up again in mechanical engineering and the automotive industry, driven by Japan's goal of climate neutrality by 2050. This opens up new opportunities for German companies with innovative technologies in the field of renewable energies and energy efficiency.

Medical technology benefits from the aging population. Japan is already one of the largest importers of medical technology from abroad and offers opportunities for joint development. The demand for healthcare services, care services, and medical technology will increase proportionally with the growing number of elderly people.

Automation technology and robotics also face great opportunities. Japan has the third-highest density of industrial robots in the world and is investing heavily in care robotics. The Japanese Ministry of Economy, Trade and Industry estimates that the market for care robotics will reach a volume of US$3.8 billion by 2035.

How do German institutions support market entry into Japan?

German companies can access various institutional support services. The German Chamber of Commerce and Industry in Japan (AHK Japan) offers comprehensive advice and assistance with market entry. With approximately 100 companies, mechanical engineering is the most strongly represented German industry in Japan, followed by the electronics, automotive, and chemical sectors.

Germany Trade & Invest (GTAI) regularly provides market analyses and industry information. The German Federal Government has positioned Japan as a strategic partner in its Indo-Pacific strategy and promotes economic relations through various programs.

Regular government consultations take place at the political level. The first German-Japanese government consultations in March 2023 led to concrete agreements on deepening economic cooperation. Both countries reaffirmed their commitment to promoting cooperation in the area of ​​defense and security as well.

The VDMA (German Engineering Federation) is actively committed to deepening relations with Japan. VDMA President Bertram Kawlath traveled to Japan in September 2025 to meet with industry representatives and Japanese politicians. The federation views this enhanced cooperation with Japan as an important step towards strengthening multilateral trade relations.

What future prospects does the Japanese market offer?

The future prospects for German companies in Japan are promising. Despite the shrinking population, Japan is becoming increasingly attractive as a sales market and production location. German car manufacturers already dominate the imported car market and have been serving stable demand for years.

The Japan Foreign Trade Council expects a nominal increase in Japanese exports of 2.1 percent for fiscal year 2024. Significant increases are forecast for ships, machinery – particularly semiconductor and display equipment – ​​as well as for semiconductors and electronic components. These are sectors to which German suppliers are expected to expand their deliveries.

The Japanese government is investing heavily in digitalization and automation. The "Society 5.0" concept aims to contribute to societal change through the use of networked artificial intelligence in areas such as healthcare, digitalization, mobility, energy, and industry. Although Japan has fallen behind in global innovation, this initiative offers opportunities for German technology companies.

Demographic change, which initially appears to be a challenge, also opens up new market opportunities. Japan can serve as a test market for solutions that will later be implemented in other aging societies, such as Germany. The high level of acceptance for automation and robotics in Japan makes the country an ideal market for German automation technology.

Japan as a strategic partner and market opportunity

For German machine manufacturers, Japan offers a worthwhile alternative to China that extends far beyond a mere replacement market. The combination of demographic change, technological openness, and stable political framework conditions creates a strong demand for German automation solutions.

Third-country business, in particular, opens up dimensions that are not fully captured in bilateral trade statistics. German companies can gain access to the entire Asian market and beyond via Japan. Long-term business relationships and the high regard for German technology create a solid foundation for sustainable growth.

Although market entry requires patience and cultural sensitivity, Japan rewards successful companies with long-term and profitable business relationships. In a time of increasing geopolitical tensions, Japan offers German mechanical engineering companies not only an attractive market but also a strategic partner in the struggle for a rules-based international order.

Time is of the essence, however, because due to the deep networking of Japanese companies, many countries and businesses are trying to strengthen their ties with Japan. German machine manufacturers who take the initiative now can secure crucial competitive advantages in one of the most important future markets.

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