Panasonic TVs on display in a Tokyo store. Photo: EPA

Rumors about an exodus of Japanese enterprises from China have been circulating since January 2015 when media reports said that some giant Japanese manufacturers such as Panasonic and Daikin Industries were planning to move some of their home appliance production back to Japan from the world's second-largest economy due to a weaker yen and rising operating costs there.

The concerns were brought to the fore by a recent Nikkei report about a Japanese delegation's trip to China, where Japanese business leaders met with Chinese senior officials and submitted a proposal to streamline the approval procedures needed for foreign companies' withdrawal from China. Foreign firms operating in China are required to get official approval before they can leave the country because the exit process involves currency exchange, assets settlement, personnel placement and so on.

The Japanese delegation also urged the Chinese government to improve the business environment for foreign companies by making the anti-monopoly law more transparent and performing less interventions in foreign companies' acquisitions and mergers of Chinese firms. The Chinese government has fined a number of famous foreign multinational companies for abuse of market dominance under the anti-trust rules, which were seen as protectionism by foreign companies.

According to the 2016 White Paper on Chinese Economy and Japanese Enterprises released by the Japanese Chamber of Commerce and Industry in China, in 2015 Japanese direct investment in China decreased for a third straight year to $3.2 billion, representing a drop of 25.9 percent from 2014 when China obtained new foreign direct investment from Japan valued at $4.3 billion. In 2015, China ranked the fifth among all countries and regions receiving Japanese direct investment, following Hong Kong, Singapore, Taiwan and South Korea.

The downtrend in the Japanese FDI could also be seen in Western countries, with Germany and the UK seeing year-on-year decreases of 24.6 percent and 20 percent respectively in investment from Japan in 2015, said the white paper.

It strikes a sharp contrast to the 10-member Association of Southeast Asian Nations (ASEAN), which attracted more direct investment from Japan than China in 2015 for the third year in a row, according to figures compiled by the Japan External Trade Organization.

Analysts said that the ASEAN markets are more attractive to Japanese businesses than China whose property prices and labor costs are higher than ASEAN nations which in turn have greater potential to grow, helped by relatively low per capita incomes and a large base of young population.

According to a questionnaire on investment intention conducted in 2015 by Japan Bank for International Cooperation, about 56 percent of the Japanese companies surveyed were willing to expand investment in the five key countries of Singapore, Thailand, Indonesia, Malaysia and the Philippines. The poll also found that about 48 percent of the Japanese companies surveyed planned to strengthen or expand business in China, down from 73 percent in 2011.

The drop in Japanese investment in China is also due to China's renewed ambition to transform itself from a world manufacturing hub into a global powerhouse of innovation. China has charted the blueprint for what it wants to be in 2050 in a document when the country will evolve into a leading economy energizing the world's scientific and technological innovation. Currently, China is trying to modernize its manufacturing industry with the Made in China 2025 initiative, the country's most comprehensive industrial plan.

China's policy change has forced numerous manufacturing and technology giants from the West including Apple, Dell, IBM and Boeing to lower their arrogant heads by adopting China-focused policies allowing technological cooperation with their Chinese partners in exchange for more opportunities to grow in the country where the leaders are seeking the realization of Chinese renaissance.

With the rapid rise of Chinese manufacturing enterprises, Japanese manufacturers are increasingly losing their share in the Chinese market and even the global markets, which is the direct reason why they chose to move their manufacturing facilities back to Japan, said Zhang Yanbin, head of All View Cloud, a Beijing-based consultancy specializing in home appliances.

On the economic front, since Shinzo Abe took office as prime minister in December 2012, the yen has depreciated against the US dollar by a large margin, which has brought more benefits to the Japanese manufacturers, especial those at the low end of the industry chain, which have moved production back to the home base. At the same time, facing the sluggish economy and its aging population, the Japanese government has long been encouraging domestic companies to seek more growth opportunities elsewhere in Asia.

Politically, the growth of Japanese investment in China began to slow after China's anti-Japanese sentiment erupted following Japan's provocations in the East China Sea in 2012. But analysts said that politics would play a limited role in the two countries' economic ties.

At present, Japanese businesses have shifted their focus on the high end of China's manufacturing sector while eyeing the country's service industry.

According to statistics from Teikoku Databank, a Japanese market research firm, as of the end of August 2016, the number of Japanese manufacturing enterprises operating in China increased by 160 to 5,853, while the number of Japanese retailing companies doing business in China increased by 85 to 503, with 52 firms engaged in selling women and children's clothing and 33 companies focusing on online shopping. The market research firm ascribed the growth in the retailing sector to the Internet-based shopping spree in China's urban areas.

In addition, Japanese companies' cooperation mode in China will move away from the one based only on money to a model more driven by technology transfer, like what their European and American peers are doing in the country.