Japan's manufacturing sector is losing its edge— Here's Why

Editor's note:  Li Haodong is an associate research fellow of China Center for International Economic Exchanges (CCIEE).The article reflects the author's opinions and not necessarily the views of CGTN. It has been translated from Chinese and edited for brevity and clarity.

Japan's manufacturing sector — once globally renowned for its "lean production" model and exceptional reliability — is losing ground as global industrial chains rapidly restructure.

Falling behind in the AI era

The future of advanced manufacturing lies in AI and data integration, and Japan has been slow to catch up. According to Japan's Ministry of Internal Affairs and Communications' 2025 White Paper, only 26.7% of Japanese individuals have used generative AI — far below China (81.2%), the US (68.8%), and Germany (59.2%). Without deep AI integration, Japanese manufacturing still relies heavily on the experience-based approach of traditional engineers. Decades of accumulated "know-how" are now at risk of being overtaken by computing power and data-driven technologies.

At the same time, emerging economies are closing the gap fast. In silicon-based and silicon carbide (SiC) power chips, Chinese companies have surged ahead, backed by lower energy costs and a vast domestic market, while Renesas Electronics pulled out of the SiC market entirely. China's share of mature-node chip manufacturing is predicted to rise to 42% of global output by 2028, up from 37% in 2026. Japan now risks being undercut on speed, scale, and price even in its traditional strongholds.

Retreating from end products

The decline is equally visible in end-product industries. Japan's top automakers posted sharp losses in fiscal year 2025: Toyota's net profit fell 19.2%; Nissan recorded losses for a second straight year, totalling 533.1 billion yen; Honda posted a net loss of 423.9 billion yen. In home appliances, the retreat is even more striking — Sony handed its BRAVIA television business to a TCL-led joint venture in January 2026, following Toshiba's sale of its TV brand to Hisense in 2018 and Panasonic's decision to exit low-end appliance production in China.

Japan has repositioned toward high-margin core components and precision instruments, and may retain control over key supply chain chokepoints in the short term. But the costs are mounting. Japan is now heavily dependent on overseas markets, having ceded both brand influence and pricing power. Industrial hollowing-out is intensifying, with multinationals reaping the gains while Japan absorbs large-scale job losses and widening inequality. Upstream suppliers are also losing direct access to market demand signals, weakening the innovation feedback loop and slowing industrial upgrading.

The strategic repositioning may have bought Japan time. Whether it is enough remains to be seen.