Fading yen

As recently as 2011, the strength of the Japanese currency combined with relatively high labor, transportation and property costs at home meant that wise companies were investing in manufacturing facilities overseas. Today, as the yen slips and costs rise in other parts of Asia, those same companies are increasingly considering repatriating a good proportion of their production to Japan.

Sharp Corp., one of the nation's largest home appliance makers, has started up production lines for home-use air purifiers and ion generators at its plant in Yao Prefecture, central Japan. Production is presently on a test basis, but if the figures add up then Sharp is planning to reduce or halt its present output of the appliances at its plant in China.

It is a similar story at Panasonic Corp., another of Japan's electronics giants, which is planning to shift the bulk of its output of washing machines, air conditioners and other appliances back to Japan starting this spring, while Canon Inc. wants to have 60 percent of its output from Japan within three years, up from 40 percent at present.

Car firms' plans

Construction of overseas production facilities for car companies such as Nissan Motor Co. has been costly, but even firms in this sector are aiming to raise domestic output, along with allied components manufacturers.

Underlining the scale of the rethink on the part of Japanese companies, China's Ministry of Commerce announced on January 16 that Japanese direct investment in China shrank by 38.8 percent in 2014 from the previous year. In total, Japanese firms invested 4.33 billion USD in China last year, the second consecutive year the figure has fallen.

The ministry blamed the decline on rising labor costs - cheap workers was not long ago one of China's key competitive advantages - coupled with a slowdown in China's GDP. Figures released on Tuesday, January 20, showed that year-on-year GDP rose at 7.4 percent in 2014, the weakest expansion in 24 years and down from 7.7 percent in 2013.

"Obviously the fall in the value of the yen against the dollar has played a big part in these decisions, but there is also a global restructuring going on at Japanese companies as they shift their focus to future markets for their products," Martin Schulz, senior economist with the Fujitsu Research Institute, told DW.

"The period of cost-cutting is over at Japanese companies now, they are relatively flush with cash and they are looking for new investment opportunities," he said. "And they need to identify growth markets for their futures."

Geo-political instability

A further consideration for many Japanese firms, and particularly those with operations in China, is the unstable geo-political situation in the region.

Bad feelings between Japan and China have been simmering since the Japanese government in 2012 purchased a group of uninhabited islands in the East China Sea from the Japanese family that owned them, effectively nationalizing territory that Japan knows as the Senkaku islands but which Beijing claims are Chinese territory and should be known as the Diaoyu archipelago.

Outrage in Chinese media was mirrored on the streets of dozens of cities, with the premises of Japanese companies - supermarkets, car dealerships, restaurants - attacked by mobs, causing losses that ran into millions of yen.

Factory buildings operated by Panasonic Corp. in Qingdao and Suzhou were damaged by protestors, while Aeon closed 30 of its 35 departmental stores across the country after its Qingdao outlet was ransacked.

A poll by Reuters at the time of the unrest claimed that some 41 percent of Japanese companies believed the bilateral dispute has had an impact on their business plans and that some were considering scaling down their presence in China or shifting operations to other countries in the region.

"The risk from geo-political factors is far higher in this region than in, say, Germany," said Jun Okumura, a visiting scholar at the Meiji Institute for Global Affairs. "This is a concern for many Japanese firms because of what happened a few years ago," he added.

Situation calming

"The situation does appear to have calmed down considerably in recent months, and there are signs of a thaw in the relationship between Tokyo and Beijing, but the root cause of the problem has not gone away and it is conceivable that it could blow up again at any time," Okumura told DW.

"This has not played out fully yet, and it will inevitably be in the collective thoughts of Japanese companies," he added.

Yet Schulz says there is no likelihood that Japanese manufacturers will develop a truly insular mentality and repatriate all their production facilities because the domestic market is simply insufficient to meet their sales needs.

"Companies like Toyota and Nissan need markets overseas so they are not going to simply halt production in places like China, the US or Mexico - where they actually announced recently that they are planning to open a new production facility," he said. "What I think will happen is that more of the research and development functions will come back to Japan, closer to their headquarters and their 'mother plants' here."