Japanese mid-sized firms flocking to South-east Asia for growth

[KUALA LUMPUR] For decades, Japan’s mid-sized companies built their businesses around a stable domestic market. Now, faced with a shrinking population, a labour shortage and slowing growth at home, many are increasingly looking overseas – not out of ambition, but necessity.

Yusuke Ojima, corporate officer and head of the overseas division at Tokyo Stock Exchange-listed Nihon M&A Center, observed that South-east Asian countries are gaining traction amid this wave of Japanese “capital exports”.

Citing a survey by the Japan External Trade Organization (Jetro) released last year, he noted that 43.8 per cent of Japanese-affiliated companies already in Asia and Oceania plan to expand further.

Jetro found that the proportion of firms with overseas expansion plans has remained above the 40 per cent mark since 2021.

“The mindset has shifted quite clearly,” Ojima told The Business Times.

“For many Japanese mid-sized companies, international expansion is no longer seen as a ‘nice-to-have’ option. It is increasingly part of how they pursue growth, reduce concentration risk, and prepare the business for the next stage of competition.”

He said that South-east Asia remains highly attractive because it offers many of the growth dynamics Japan currently lacks, including expanding populations, a rising middle-income class, rapid urbanisation and strong digital adoption.

“I think South-east Asia continues to stand out for a few fairly straightforward reasons,” he added. “It brings together growing consumer demand, the ability to diversify supply chains, and relatively strong regional connectivity, all within one part of the world. That combination is quite hard to replicate elsewhere.”

Beyond the “China Plus One” narrative

Ojima argued that South-east Asia’s appeal goes beyond the commonly cited “China Plus One” strategy.

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Japan’s economic relationship with the region has been built over decades, creating what he described as “a certain level of familiarity and trust”.

Many Japanese firms are therefore not entering South-east Asia and setting up from scratch, but expanding within markets where they already have networks, partnerships and operational experience.

The strength of those ties is reflected in trade and investment flows. Data from the Asean Secretariat indicates that two-way trade between Japan and South-east Asia stood at about US$236 billion in 2024, and Japanese foreign direct investment (FDI) into the region rose 20 per cent between 2023 and 2024, to US$17.5 billion.

Although official 2025 trade figures have yet to be finalised, Ojima expects investment momentum to remain strong amid rising regional interest from Japanese corporates.

A separate report by the Organisation for Economic Co-operation and Development showed that Japan led as a source of worldwide FDI outflows in the first half of 2025, with US$98 billion. China came in second with US$61 billion, and Luxembourg third with US$57 billion.

Multi-market strategy

A major attraction for Japanese firms is that South-east Asia is not a single, uniform market, but a collection of highly diverse economies with different strengths and roles.

Companies can therefore structure their regional footprint according to their strategic priorities. Singapore is often used as a regional headquarters or holding base, while markets such as Vietnam, Thailand, Indonesia and Malaysia serve as manufacturing and production hubs.

Ojima said that this structural flexibility has become increasingly valuable in today’s uncertain economic environment, where businesses are trying to balance cost efficiency with supply chain resilience.

“In practice, most Japanese companies are not thinking about South-east Asia on a country-by-country basis. They are looking at it as a region and building a presence across multiple markets, each serving a different role,” said Ojima, who oversees operations in Singapore, Malaysia, Vietnam, Thailand and Indonesia.

For instance, Japanese chemical and bio-manufacturing firm Kaneka Corporation, which maintains its regional hub in Singapore, continues to expand its footprint across South-east Asia by leveraging diverse business segments.

In Vietnam, it operates three manufacturing facilities focused on the production and sale of medical devices, spices and PVC compounds. In Thailand, its two manufacturing plants produce and market expandable plastics and PVC compounds. Its Indonesian food manufacturing division, meanwhile, focuses on the production and sale of processed oil products.

Japanese engineering giant Kraftia Corporation, formerly Kyudenko Corporation, manages its South-east Asian energy-construction business through its regional headquarters in Singapore.

With operational footprints in Vietnam, Thailand and Indonesia, Kraftia delivers end-to-end facility design and construction services to support its clients’ regional expansion.

Singapore-Johor model gains traction

Ojima said that within the region, the Johor-Singapore Special Economic Zone (JS-SEZ) as one of the most compelling “twinning propositions” for Japanese companies looking to diversify operations.

“What makes the Singapore-Johor model interesting is that it does not force companies to choose one side over the other. Instead, it encourages them to think about both locations as part of a single operating setup,” he said.

Under such a model, Singapore provides global connectivity, credibility and access to capital, while Johor offers industrial capacity, space and cost efficiencies.

“That balance is highly compelling for mid-sized Japanese companies looking to establish a robust South-east Asia platform without taking on an overly heavy regional footprint,” he added.

Execution confidence

Ojima noted that, despite growing interest in South-east Asia, the biggest obstacle for many Japanese mid-sized firms is not valuation, but execution confidence.

Hesitation often arises when companies lack clear visibility over how operations will function after they enter a market. Concerns surrounding local management capability, cultural alignment and governance standards frequently outweigh the attractiveness of financial returns.

While Japanese firms are generally prepared to navigate the diversity of South-east Asia, confidence can weaken quickly if compliance requirements, financial transparency or legal adaptation appear too difficult to manage.

Against this backdrop, mergers and acquisitions are increasingly being favoured over building operations from scratch, in that acquiring or partnering with an established local company gives Japanese firms an operating platform, local expertise and business continuity from the start.

“It does not eliminate risk, but it significantly reduces the unknowns that often hold firms back,” he said.

Momentum builds in Malaysia

Recent corporate activity reflects the growing momentum of Japanese investment into Malaysia in sectors ranging from finance and energy to digital infrastructure.

In the financial services sector, Japan-based Amova Asset Management, formerly Nikko Asset Management, is acquiring near-full ownership of Malaysian fund management firm AHAM Asset Management.

In energy, Idemitsu Kosan recently entered Malaysia’s upstream segment by acquiring interests in offshore exploration blocks in Sarawak; Mitsubishi Corporation expanded its exposure to Malaysia’s liquefied natural gas sector by increasing its stake in a Petronas-linked project.

Japanese technology firms are also aggressively scaling their regional footprints through Malaysia, exemplified by NTT Data’s recent acquisition of the Malaysian payment solutions provider GHL Systems.

Japan was among Malaysia’s top investors at the end of 2025, with RM142.9 billion (S$46 billion) in approved investments in more than 3,800 projects, going by data from the Malaysian Investment Development Authority.

More importantly, these are not just plans on paper; more than 2,800 of those projects are already up and running, creating nearly 500,000 jobs for local workers.