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2025 Trends
Economic dynamics in Asia: Japan’s revival, China’s challenges, and India’s emergence
A complex interplay of demographic shifts, trade tensions, and structural reforms is reshaping Asia’s major economies with domestic and geopolitical pressures posing different challenges and opportunities for Japan, China, and India.
Japan juggles demographic challenge and tech opportunities
Japan’s economy is showing promising signs of revival, driven by fundamental structural changes. Yumiko Murakami, General Partner, MPower Partners Fund LP, highlighted the convergence of two significant trends: demographic shifts and technological advancement. “Two tsunamis are hitting Japan right now – the demographic tsunami where we are shrinking with no babies, and automation, technology, digitization,” Murakami explained at a recent Asia Society event in Zurich. In this context, “Japan is in a really good place because we have fewer people, and we need fewer people because of digitization.”
The Japanese stock market’s recent performance reflects this optimism. “A lot of people ask if this is going to last,” Murakami noted, “But this time it’s different because there are structural changes.” These changes include significant labor market reforms, and the first substantial wage increases in 30 years. Companies increasingly recognize the value of employee contributions and are investing in human capital, leading to productivity enhancements that could fundamentally change the landscape of the Japanese economy.
Supply chain resilience and more relaxed immigration policies
The Japanese business community has been preparing pragmatically for geopolitical tensions, particularly regarding US-China relations and for the prospect of a change in the US administration.
While concerns about potential tariffs under a future Donald Trump administration exist, Japanese companies have already implemented supply chain diversification strategies. “This reality is something that a lot of Japanese companies have to some extent expected,” noted Murakami. “Quite a few companies have already started to work on supply chain resilience, reducing reliance on China, with their ‘China Plus One strategy’, by adding other regional suppliers to their portfolio.”
A significant development is Japan’s evolving approach to immigration. The country has made substantial progress in opening its doors to foreign workers, with regulations becoming notably more favorable for non-Japanese professionals. “If you come to Tokyo, you will see a lot more non-Japanese faces working in different segments of the economy,” Murakami observed. “Japanese companies and the government are realizing that we really have no other options.”
“The Chinese market's relative importance is shifting.”
China struggling with deflation and slowing growth
China’s economy faces significant headwinds, according to Alicia García Herrero, Chief Economist for Asia Pacific at Nataxis, who pointed to deflation as a crucial concern. “The main reason [for economic challenges] is deflation, and Japan knows a lot about that and knows how quickly your GDP shrinks when your economy deflates,” she explained. The situation is complicated by China’s fiscal position, with García Herrero noting that “China is running a 12% fiscal deficit, not even Japan” has reached such levels.
The Chinese market’s relative importance is shifting. “The US is the largest export market for Japan in 2024, so is it for South Korea, so is it for ASEAN,” García Herrero noted, highlighting a significant change in regional trade patterns. Recent trade data showing negative import growth (-2.5%) alongside positive export growth (+12.5%) underscores the challenges in China’s domestic market.
China’s challenges: income inequality, welfare, and weak growth
García Herrero predicted that by 2035, China’s growth could slow to around 1%, comparable to Japan’s current rate. However, China’s situation could be more challenging due to income inequality and less developed welfare systems. “Japan has much better income distribution than China… there will be issues when you grow 1% with that income distribution and that growth rate,” she warned.
Demographics in Japan mean a shrinking working population, with the same to come in China. India, meanwhile, has a different challenge.
Prime Minister Narendra Modi's recent European engagement underscores this strategic pivot.
India’s challenge to drive growth and forge geopolitical alliances
India emerges as a potentially complementary partner to Europe, particularly in manufacturing and technology.
Garima Mohan, a senior fellow in the Indo-Pacific program at the German Marshall Fund, emphasized India’s demographic dividend, noting that by 2031, “one of every five working-age people will be Indian.” This presents both opportunities and challenges, as the country must create sufficient employment opportunities for its growing workforce.
“The driving engine of growth in Asia currently is India, given the demographics and the number of young people entering the job market every day,” said Mohan, “But it’s also a curse in the same breath, because it is impossible for the government, under the current economic circumstances, to create enough jobs, as illustrated in the extreme by recent reports of 70,000 people applying for one government job in the state of Uttar Pradesh.”
Prime Minister Narendra Modi’s recent European engagement underscores this strategic pivot. As Mohan noted, “Ever since Prime Minister Modi’s first term, he has been wooing Europe, and Europe suddenly figures in India’s foreign policy priorities.” This represents a significant shift from India’s traditional foreign policy focus on China, Russia, and the US.
India opens up to foreign investment
While the approach by India’s government has traditionally been very protectionist, there is a lot more focus on Foreign Direct Investment (FDI) because of the looming existential crisis of jobs.
The country is seeing a revival in manufacturing through initiatives like the Production Linked Incentive (PLI) scheme, focusing on vital sectors such as electronics, pharmaceuticals, and automobiles. “Manufacturing has to work. We cannot be a service-based economy anymore,” Mohan stressed, highlighting the urgency of industrial development over the existing emphasis on Information and Communication Technology (ICT), which currently contributes more than 13% of India’s GDP.
India’s strategic partnership with Europe is evolving, particularly in defense and technology cooperation. “In the last four or five years, India has signed many bilateral deals with EU member states,” Mohan explained, focusing on four key areas: innovation and emerging technologies, trade and investment, migration and mobility, and security and defense, with the latter a de-risking exercise to create some flexibility over its traditional reliance on Russia as a defense supplier.
For global businesses and investors, understanding these shifting dynamics will be crucial for navigating opportunities and risks in the region.
Shifting economic currents in Asia
As we look ahead, Asia’s three major economies are following distinctly different trajectories. Japan appears to be turning its demographic challenge into an opportunity through technological adaptation and structural reforms. China faces the complex task of managing its economic slowdown while grappling with deflation and inequality challenges. Meanwhile, India stands at a crucial juncture, working to transform its demographic dividend into sustainable growth through manufacturing expansion and strategic international partnerships.
These intersecting paths suggest a more multipolar and interdependent Asian economic landscape, where success will increasingly depend on adaptability, innovation, and strategic cooperation within the region. For global businesses and investors, understanding these shifting dynamics will be crucial for navigating opportunities and risks in the region.
Key takeaways
1. Japanese businesses are adapting to geopolitical tensions through supply chain diversification while maintaining China as a crucial market.
2. Japan’s labor market reforms, the embracing of digital technologies, and immigration policy changes are driving economic optimism.
3. China faces significant economic challenges, including deflation and slower growth prospects.
4. India’s manufacturing sector revival is crucial for job creation and PLI is helping to facilitate this development and encourage FDI.
5. Strategic partnerships between India and Europe are expanding, particularly in defense and technology.
6. Demographics are playing a crucial role in shaping economic policies across Asia
7. Supply chain diversification through China +1 and other resilience strategies remain priority focus areas for Asian economies and companies.
8. European-India cooperation shows potential for significant expansion, particularly in strategic sectors.
This article is based on a wide-ranging discussion of Asia’s economic landscape at the STATE OF ASIA conference hosted by the ASIA SOCIETY in Zurich. A video of the entire event is available.
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