Japan as a worthwhile alternative for German mechanical engineers

Why is Japan becoming increasingly important as an alternative to China for German mechanical engineering companies?

Geopolitical tensions between Europe and China are rapidly escalating, posing significant challenges for German mechanical engineering companies. A key point of criticism is the massive subsidies for Chinese export goods, which lead to distortions of competition in international markets. At the same time, China's export ban on rare earths is significantly impacting German industry. Since April 2025, China has drastically restricted the export of seven strategically important rare earths and the high-performance magnets made from them. These materials are essential for the production of electric motors in German machines.

The effects are already noticeable: German companies in the automotive, electronics, defense, and medical technology sectors have had to curb production due to a shortage of key components. China controls over 90 percent of the world's rare earth processing and approximately 70 percent of heavy rare earth production capacity. The weak economic situation in China and the trade conflicts with the United States are further complicating the situation.

In this context, Japan is proving to be a rules-based and strategically important partner. Germany and Japan pursue similar trade policy goals and both advocate for a multilateral, rules-based world order. Both countries have 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 "traffic light" 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.

The 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 Bundeswehr began its largest Indo-Pacific deployment to date, and an intergovernmental agreement was concluded with Japan to facilitate future Bundeswehr deployments to Japan.

Over 20 percent of German trade takes place in the Indo-Pacific region, underscoring the region's economic importance. Japan is not only an important bilateral partner for Germany, but also a gateway to other Asian markets. The deep integration of Japanese companies in 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 trends. From January to November 2024, goods worth €20.1 billion were exported from Germany to Japan, representing an increase of 7.5 percent over the same period last year. This ranks Japan 18th among Germany's most important trading partners, accounting for 1.4 percent of total exports.

Particularly noteworthy is 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.

The most important German exports to Japan are pharmaceutical products, valued at €5.3 billion (26.3 percent), followed by motor vehicles and motor vehicle parts (€4.4 billion, 21.7 percent) and machinery (€2.4 billion, 11.7 percent). In mechanical engineering, Japan ranks 20th as a sales country 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, which, however, is due to structural reasons rather than product quality.

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

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

Forecasts predict that Japan's population will shrink by another 40 million by 2060. The country already lacks skilled labor, and a shortage of approximately 380,000 nurses is projected by 2025. The situation is exacerbated by the fact that many young people are pursuing university careers and turning away from traditional industrial jobs.

This demographic development leads to two key factors that drive companies to purchase modern, automated equipment: First, labor shortages are steadily increasing due to the shrinking population. Second, pressure on Japanese companies to seek new markets abroad is increasing, which requires more efficient production methods.

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

What specific advantages does the Japanese market offer for 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 value the social stability and security in the country, and 80 percent value 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, and 47 percent even reported lower unit labor costs by more than 30 percent. These cost advantages arise from the high productivity of Japanese workers and the currently weak yen.

A key advantage is 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, via Japanese branches. According to surveys conducted by the German Chamber of Commerce and Industry (AHK) in Japan, over 60 percent of German companies based in Japan now do business with Japan in third markets such as ASEAN, the Middle East, South America, or Africa. At the automotive supplier Bosch, sales to Japanese companies abroad are more than twice as high as in Japan itself.

Almost 90 percent of German companies generate profits in Japan, and more than half of managers expect moderate to strong growth over the next twelve months. The high quality of production and the workforce are other important factors. Japanese employees bring with them values ​​such as long-term thinking, high motivation, enthusiasm for collaboration, and a diligence and safety-conscious approach.

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

Japan is also becoming increasingly attractive as a manufacturing location. According to a survey conducted by the German Chamber of Industry and 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. In June 2025, the company inaugurated a new factory building in Higashine, Yamagata Prefecture, after having already invested 60 million euros. Boehringer plans to invest a total of 300 million euros in the site by 2028. The plant is increasingly serving as a regional hub, supplying not only Japan but also other Asian markets and Oceania.

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

The tunneling specialist Herrenknecht has also been operating successfully in Japan for years, supplying technology for urban rail systems and high-speed railways. The Omachi Dam Tunnel Project in the Japanese Northern Alps, in which 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 German companies' choice of location. As early as 2024, a joint survey by AHK Japan and KPMG showed that 38 percent of German companies are relocating their production facilities from China to Japan. Political uncertainty and the stable business environment in Japan were cited as the main reasons.

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

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

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

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What challenges do German companies have to face in Japan?

Despite its many advantages, the Japanese market also presents specific challenges. Language is a significant barrier, and initiating business is often time-consuming. Japanese clients have very high quality standards and often ask many detailed questions upfront. 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 looking 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 entrants. Even technically superior solutions don't automatically prevail, as risk aversion and established business relationships play a significant role. Newcomers must have the proverbial staying power and prove themselves over years before they are considered for larger projects.

The biggest obstacle to the expansion of German companies in Japan is the labor market. 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 essential. Collaboration with local partners can be highly beneficial, provided they have extensive knowledge of market conditions, regulations, and cultural nuances.

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 trading houses offer support for market entry and leverage their established networks.

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

Particularly interesting are third-party transactions where decisions are made in Japan but projects are implemented outside of Japan. German providers are often more internationally positioned than Japanese companies, which gives them advantages when it comes to operational implementation in third countries.

Which industries particularly benefit from the Japanese market?

Several industries stand to benefit particularly from the Japanese market. Investments in the semiconductor and pharmaceutical industries will increase significantly in 2025 and 2026. Japanese companies are building new battery plants at home and abroad, albeit on a smaller scale than Chinese or Korean suppliers.

Investment activity is picking up again in the mechanical engineering and automotive industries, 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 an aging population. Japan is already one of the largest importers of medical technology from abroad, offering opportunities for joint development. Demand for healthcare, nursing services, and medical technology will increase proportionally to the growing number of seniors.

Automation technology and robotics also face significant opportunities. Japan has the third-highest density of industrial robots in the world and is investing heavily in healthcare robotics. The Japanese Ministry of Economic Affairs estimates that the healthcare robotics market will reach a volume of $3.8 billion by 2035.

How do German institutions support market entry in Japan?

German companies can rely on various institutional support options. The German Chamber of Industry and Commerce in Japan (AHK Japan) offers comprehensive advice and support for market entry. With around 100 companies, mechanical engineering is the most strongly represented German sector in Japan, followed by the electronics, automotive, and chemical sectors.

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

At the political level, regular government consultations take place. The first German-Japanese government consultations in March 2023 resulted in concrete agreements on deepening economic cooperation. Both countries reaffirmed their commitment to promoting cooperation in the areas of defense and security.

The German Mechanical and Plant Engineering Association (VDMA) 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 association sees the intensified cooperation with Japan as an important step toward strengthening multilateral trade relations.

What future prospects does the Japanese market offer?

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

The Japan Foreign Trade Council expects Japanese exports to increase nominally by 2.1 percent in fiscal year 2024. Significant increases are forecast for ships, machinery—particularly semiconductor and display equipment—as well as semiconductors and electronic components. These are sectors in which German suppliers are likely to be able to expand their deliveries.

The Japanese government is investing heavily in digitalization and automation. The "Society 5.0" concept aims to contribute to social change through networked artificial intelligence in the areas of 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 of 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 mechanical engineering companies, Japan offers a worthwhile alternative to China that goes far beyond a mere replacement market. The combination of demographic change, technological openness, and a stable political environment is creating strong demand for German automation solutions.

Third-party business, in particular, opens up dimensions not fully captured in bilateral trade statistics. German companies can gain access to all Asian markets 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 fight for a rules-based international order.

However, time is of the essence, as many countries and companies are seeking to strengthen their ties with Japan due to the deep networking of Japanese companies. German mechanical engineering companies that take the initiative now can secure decisive competitive advantages in one of the most important future markets.

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