In November 2025, Japan-China relations are deteriorating rapidly. Following Prime Minister Takaichi’s remarks in the Diet regarding Taiwan contingencies, China has shown strong backlash, with consecutive cancellations of flights and exchange programs. This political tension is beginning to have serious impacts on business operations.
What’s particularly concerning is the supply chain disruption risks that small and medium-sized enterprises (SMEs) are facing. Unlike large corporations, SMEs with limited financial resources and difficulty securing alternative suppliers find that reducing China dependency has become an urgent challenge that cannot be delayed.
Current State of Japan-China Relations | Political Conflict Spilling Over to Business
In November 2025, Prime Minister Takaichi’s statement in the Diet that Taiwan contingencies with armed force “could constitute an existential crisis situation” triggered a rapid cooling of Japan-China relations.
China’s Hardline Stance Becomes Clear
China’s Consul General in Osaka, Xue Jian, posted on social media “I will cut off that dirty neck without a moment’s hesitation” (now deleted), representing unusually strong language criticizing Japan. This isn’t merely a war of words – actual economic activities are beginning to be affected.
Specifically, the following developments have been observed:
- Chinese airlines reducing Japan-China flight frequencies
- Consecutive cancellations of bilateral exchange programs
- Chinese government calling for refraining from travel to Japan
- Reimposition of ban on Japanese seafood imports
- Restrictions on exchanges in business, culture, civilian, and academic fields
In Miyakojima City, Okinawa Prefecture, cruise ship passenger disembarkation was cancelled, and a study tour to China for 20 high school students was also called off.
Two Fatal Dependencies
Japan’s economic dependence on China is more serious than imagined.
Rare Earth Dependency | The Lifeline of Japanese Manufacturing
Regarding rare earths essential for electric vehicles and smartphones, China accounts for 62.9% of Japan’s imports of 8,335 tons (2024 trade statistics).
During the 2010 Senkaku Islands dispute, China effectively stopped rare earth exports, causing the “Rare Earth Shock.” If this happens again, many manufacturers including automakers would be forced into production halts, with impacts extending to subcontractors and business partners.
Rare earth mining in Japan’s territorial waters is just beginning trial extraction in January 2026, with practical application still far off.
Antibiotic Raw Materials | Impact on Healthcare Too
Even more serious is the fact that raw materials for antibiotics used in surgical procedures at Japanese medical institutions are almost 100% dependent on China.
If any unforeseen circumstances disrupt stable supply of these materials, situations could arise where appropriate treatment and surgery become impossible. Currently, the government has designated antibiotics as “specified critical materials” and is pursuing domestic production, but efforts have only just begun.
3 Serious Risks Facing SMEs
Risk 1 | Sudden Supply Stoppage
Many SMEs depend on specific Chinese suppliers for parts and raw materials.
As Japan-China tensions rise, the following situations have actually been reported:
- “The Chinese side suddenly cancelled a meeting”
- “A joint event scheduled in Beijing was abruptly cancelled the day before”
- “A license expected from Chinese authorities was revoked”
- “Public security officials suddenly entered our China office”
- “Our Chinese joint venture partner won’t answer calls”
If such unpredictable supply disruptions occur, SMEs may be forced into production halts until alternative suppliers can be found.
Risk 2 | Cost Increases and Profit Pressure
Even if alternative suppliers are found, procurement routes outside China often involve higher costs.
A Japanese company manufacturing electrical equipment in Vietnam notes: “Special resin molded parts needed for our products cannot be procured locally, so we have no choice but to import from China.” Nevertheless, an increasing number of companies are deciding “there’s value in having product assembly capabilities in Vietnam too, even if production costs rise somewhat, to secure supply bases outside China for BCP purposes.”
Risk 3 | Increasing Customer Demands
There are reports that major companies like automakers are increasingly requesting “procurement from sources other than China”.
A Japanese company manufacturing automotive parts in Vietnam says “automaker demands to procure from sources other than China are strengthening.” In other words, if SMEs continue their China dependence, they also risk losing orders from major clients.
Global Acceleration of De-Risking from China | Shift to ASEAN and India
Learning from Major Corporation Moves
Foxconn (Hon Hai Precision Industry), Apple’s largest contract manufacturer, has accelerated factory construction in India and Vietnam in response to intensifying US-China confrontation since 2018.
Samsung Electronics of South Korea also closed its last smartphone production factory in China in 2019 and transferred production to Vietnam and India.
Japanese Company Relocation Status
In July 2020, the Japan External Trade Organization (JETRO) published a list of 30 Japanese companies planning to relocate production bases from China to ASEAN countries. Of these, half – 15 companies – involved relocation to Vietnam, mostly in medical manufacturing.
The government offers subsidies of 100 million to 5 billion yen per company to support relocation, with the movement toward “de-risking from China and relocation to Vietnam” expanding among not just large corporations but SMEs as well.
Why Vietnam?
The reasons Vietnam is chosen as a relocation destination are clear:
- Inexpensive labor
- Geographic proximity to China (easy land logistics)
- Ability to utilize FTAs (Free Trade Agreements)
- Ability to secure vast industrial land
- Young and abundant labor force
Vietnam is actively attracting electronics and semiconductor manufacturing, with Samsung and Apple suppliers entering one after another.
Other Leading Candidates
| Country | Strengths | Key Industries |
|---|---|---|
| Thailand | Auto manufacturing track record, logistics hub function | EV (electric vehicle) production |
| Indonesia | ASEAN’s largest population (approx. 270 million), resources | EV battery production (utilizing nickel resources) |
| India | Huge market, population growth | Smartphones, electronics |
| Malaysia | Infrastructure development, English proficiency | Semiconductors, electronic components |
5 Actions SMEs Should Start Immediately
Action 1 | Supply Chain Visualization and Assessment
First, accurately understand your company’s degree of China dependence in its supply chain:
- Which parts and raw materials are procured from China?
- Are there alternative procurement sources?
- What would be the cost increase if switching to alternative procurement?
- How long would it take to switch to alternative suppliers?
Without this visualization work, appropriate decisions cannot be made when the time comes.
Action 2 | Gradual Diversification of Procurement Sources
Switching everything away from China all at once is not realistic.
The recommended approach is:
- Prioritize securing alternative suppliers for high-importance parts first
- Gradually diversify, such as 60% China, 30% Vietnam, 10% Thailand
- First conduct test procurement in small lots
- After quality confirmation, gradually increase order volumes
A Japanese company manufacturing automotive parts in Vietnam has decided that “there’s value in having product assembly capabilities in Vietnam too, even if production costs rise somewhat, to secure supply bases outside China for BCP purposes.”
Action 3 | Proactive Use of Government Subsidies
The Japanese government has prepared support measures such as “Subsidies for Domestic Investment to Strengthen Supply Chains.”
Subsidies of 100 million to 5 billion yen per company may be available. However, due to high application numbers and competition rates, early preparation and expert support are important.
Action 4 | Information Gathering and Site Visits to ASEAN Countries
Understanding local conditions through actual visits to Vietnam, Thailand, Indonesia and other countries is important.
Inspection tours organized by JETRO and Chambers of Commerce, as well as collaboration with local Japanese Chambers of Commerce, are effective. Understanding actual business environments and cultural differences is difficult through online information gathering alone.
Action 5 | BCP (Business Continuity Plan) Development
Concretely developing a business continuity plan for cases where supply from China is disrupted is essential.
Key points for BCP development:
- Create alternative supplier lists for supply disruptions
- Set inventory buildup standards
- Prepare explanation and negotiation scenarios for business partners
- Response measures for cash flow deterioration
- Regular training and plan reviews
De-Risking from China Isn’t Easy | Realistic Perspective Also Needed
The Reality of “Lock-in Effect”
While we’ve discussed the necessity of reducing China dependence, complete de-coupling is extremely difficult in reality.
What economics calls the “lock-in effect” – meaning agglomeration begets further agglomeration – operates strongly in China. China already has a complete supply chain ecosystem, with an environment established for integrated low-cost operations from parts procurement through manufacturing to logistics.
The Importance of the Chinese Market Cannot Be Forgotten
China’s economy surpassed Japan’s in 2010 and is now approaching five times the size of Japan’s economy.
Not just China as a production base, but the importance of China as a massive consumer market cannot be ignored either. Rather than complete withdrawal, the wise choice is to balance risk diversification with maintaining access to the Chinese market.
Relocation Costs and Time Constraints
Relocating to new production bases involves challenges such as:
- Building new supply networks requires time and cost
- Securing local labor and providing technical guidance is necessary
- Logistics infrastructure is less developed in some countries than in China
- Some raw materials and parts cannot be procured
- Dealing with regulations and tax systems in relocation destinations
Conclusion | What SME Managers Should Consider Right Now
The deterioration of Japan-China relations in 2025 represents an important turning point for SMEs to review their supply chains.
The optimistic attitude that “we’ve been fine until now, so we’ll be okay” no longer works. With repeated China risks – the 2010 Rare Earth Shock, the 2020 COVID lockdowns in China, and now political tensions – SMEs are also being called upon to implement serious countermeasures.
What’s important are these three points:
- Accurately understand your company’s degree of China dependence in its supply chain
- Gradually diversify procurement sources to reduce risk
- Aim for balanced risk management rather than complete de-coupling from China
China’s economic scale is approaching five times that of Japan. The successful development of business in the massive Chinese market also serves as support for revitalizing Japan’s economic strength.
What’s being questioned is not emotional “de-coupling from China,” but rather “prudent risk management” based on calm situational analysis.
Even amid political headwinds, Japanese business managers are strongly expected to value firsthand information from China operations, personally visit sites to calmly assess business environments, and act shrewdly.
SMEs have the advantage of being able to review supply chains more nimbly than large corporations. Now is the time to view this crisis as an opportunity to evolve business models and take action immediately.