Business Climate Survey by AHK Japan and KPMG AG

38% of German companies are relocating production facilities from China to Japan.

23% are relocating regional management functions to Japan.

• Biggest Location Advantage: 94% of German companies value Japan's economic stability.
• Convincing Fundamental Data: 92% of German companies generated profits in Japan in 2023; 21% achieved pre-tax profit margins of more than 10%.
• Key Reasons for Engagement in Japan: Revenue potential (81%), trend scouting (62%), and competitive analysis (57%).
• Biggest Challenges for Companies: Recruiting qualified employees (82%) and currency risks (76%).
• Top 5 Country: 54% of German corporate headquarters make significant revenue and profit contributions in Japan (+9% compared to 2021).
• Germany's Reputation Suffers: Increasing frequency and violence in demonstrations affect Germany's reputation in Japan, according to 39% of respondents.

Amidst geopolitical uncertainties and the strategic goal of increased diversification, a new trend is emerging. For example, 38% of German companies either intend to relocate production from China to Japan or are deciding in favor of Japan as a location for new investments in Asia. Nearly a quarter of companies (23%) are relocating regional management functions to Japan.

The country is now becoming increasingly relevant as an Asian headquarter, with over a quarter (26%) of German companies now designating it as their regional base – a substantial increase compared to the previous year’s figure of one in five (20%). This places Japan firmly in second position, closely behind Singapore (28%).

"Japan is highly regarded in Asia as it offers German companies equal competitive conditions, a reliable and stable legal framework, as well as compatible values", comments Andreas Glunz, Head of International Business at KPMG in Germany.

The current Business Climate Survey "Economic Outlook – German Business in Japan 2024", conducted jointly by the German Chamber of Commerce and Industry in Japan (AHK Japan) and KPMG Germany, reveals insights from 164 subsidiaries of German companies that have taken part in the survey. This represents a response rate of 35%.

In times of geopolitical turbulence and economic challenges, Japan proves to be a safe haven. Globally, the country continues to achieve top scores, with a strong reputation for its reliability. Key strengths identified by German companies as include Japan's most significant advantages include its economic stability (94%), the stability and trustworthiness of business relationships (93%), and safety and social stability (91%).

"Japan is the oldest industrialized nation in Asia. The country offers moderate cost structures, loyal employees, generous government support programs, and a highly developed R&D landscape. The stable environment also makes Japan an attractive production location", remarks Marcus Schürmann, Managing Board Member of AHK Japan.

For 54% of respondents, Japan is one of the five largest sources of revenue and earnings within the entire group. This represents an increase of 6% compared to the previous year and 9% compared to 2021.

This trend is driven by convincing fundamental data: 92% of German companies generated profits in Japan last year. Profitability is particularly noteworthy: Approximately one-fifth of companies (21%) achieved a pre-tax profit margin of more than ten percent.

Future expectations are optimistic: 66% of companies anticipate a rise in profitability for the current year. By 2025, it is expected this figure will rise to 78%.

"In the last ten years, Japan has undergone significant changes and globalization. Not only can one earn good money in the country, it is also possible to produce competitively for both the local and global markets. Out of over 700 German companies in Japan, more than 80 operate production facilities at over 130 locations," says Marcus Schürmann (AHK).

For 81% of German companies, Japan's impressive sales potential – a market with over 124 million consumers – is the primary reason for their engagement. The scouting of new trends in technology and innovation is identified by 62% as the second most important reason, marking a 5% increase.

Observing Japanese competitors – cited by 57% of companies – and participating in the global business networks of Japanese corporations – mentioned by 47% of companies – also play significant roles.

"As the third and fourth largest economies, German and Japanese companies encounter each other worldwide, both as competitors and as cooperation partners. The fact that more and more German companies are observing their Japanese peers in their home market is a strategically astute move," comments Andreas Glunz, Head of International Business at KPMG in Germany.

New to the AHK Japan and KPMG Germany study series is the question about Germany's economic reputation from a Japanese point of view. According to the findings, 39% of respondents believe that the increased frequency and violence of demonstrations and protests in Germany most severely tarnish Germany's image in Japan. Additionally, climate activists and the outdated infrastructure in Germany are cited by 27% of German companies in Japan as factors affecting Germany's reputation.

"The increasingly critical view from Japan towards Germany aligns with the observations of our study 'Business Destination Germany 2024', published by KPMG Germany in March 2024," says Andreas Glunz, Head of International Business at KPMG. "Almost two-thirds (63%) of Japanese companies surveyed in Germany consider Germany to be among the weakest five EU countries in terms of its digital infrastructure; 40% even regard Germany as the bottom performer in the EU regarding the digitization of public administration."

The challenge of recruiting specialized employees with adequate qualifications remains the biggest obstacle for 82% of respondents in Japan.

"To address the shortage of skilled workers, AHK Japan will introduce a dual vocational training system based on the German model in Japan starting from April 2024, focusing initially on Automotive Mechatronics", says Marcus Schürmann, Managing Board Member of AHK Japan.

Due to the weak yen over the past four years and Japan's high national debt, 76% of respondents identify currency risks as the second biggest challenge (+13% compared to 2022).

While high commodity and energy prices, inflation, and supply chain issues are still present, their relevance has decreased significantly compared to the previous year by 11%, 18%, and even 29%, respectively.

Inflation has less of an impact on businesses. Approximately half of the respondents (49%) now consider inflation a challenge, compared to 67% in the previous year. Conversely, the burden of rising labor costs in Japan has noticeably increased to 44%, (+7% compared to the previous year).

About the business climate survey

The AHK Japan and KPMG AG conducted the "German Business in Japan 2024" business climate survey, polling 472 subsidiaries of German companies in Japan. A total of 164 companies (35%) participated. The survey was conducted between January 30 and February 13, 2024. The questions focused on the economic outlook of German companies in Japan as well as their challenges and business opportunities.

Katrin Häbel

Head of Coporate Communications
KPMG AG Wirtschaftsprüfungsgesellschaft

T +49 69 9587 4228
khaebel@kpmg.com

Yuko Makita

Press and Publications
German Chamber of Commerce and Industry in Japan

T +81 3-5276-8741
ymakita@dihkj.or.jp