Japan seems to be betting on India—why the timing matters

A back-of-the-envelope calculation puts the December transactions alone at about $7.2 billion. When the data for Japanese foreign direct investment in India for fiscal 2026 is toted up, it’s likely to be a multiple of the $2.48 billion for 2024-25.

The milestone marks not just how Japanese businesses are pivoting towards India as an investment destination promising robust returns—but also, how Tokyo, after over three decades of diplomatic efforts, is ready to walk the talk on deepening strategic relationships with New Delhi as both countries want to develop a meaningful counter to China’s might.

For India’s financial sector, the deals in 2025 mark a moment worth noting. Foreign investors are returning with conviction, and Japan—long a steady but cautious partner—appears increasingly willing to deploy serious capital.

It is a striking contrast to the dismissive description of India as a “dead economy” offered earlier this year by US President Donald Trump. Ending the year with renewed investor interest in India’s banking and financial ecosystem is not a bad place to be.

Yet the scale of these investments raises a more important question: what is driving Japan’s growing interest in India, and can this momentum be sustained?

These pressures persist even though Japan remains the third-largest economy in the G7 after the US and Germany.

Against this backdrop, Japan’s push into Indian financial markets appears logical. The International Monetary Fund projects India’s economy to grow 6.6% in 2025 and 6.2% in 2026, according to its October World Economic Outlook. The 2025 forecast represents an upward revision. Global growth, by comparison, is expected to slow to 3.2% in 2025 and 3.1% in 2026.

India’s broader fundamentals reinforce the case. About 65% of its population falls in the 15-59 age group, with a median age of 28, according to Ipsos market research. It has had a stable government since 2014. In economic size, India is now close to Japan: India’s GDP stands at $4.13 trillion, compared with Japan’s $4.28 trillion.

The contrast with the early 1990s is striking: during India’s balance-of-payments crisis, then-finance minister Yashwant Sinha was reportedly kept waiting for an appointment by his Japanese counterpart, a far cry from today’s growing engagement. India-Japan ties have been strengthening steadily in the 21st century, even if not always as quickly as policymakers might have hoped. Today, global conditions appear unusually favourable for a deeper partnership.

Under President Xi Jinping, Beijing has abandoned Deng Xiaoping’s cautious approach in favour of a more overt display of power. When disputes arise, China has shown a willingness to deploy economic and diplomatic pressure alongside military signalling, as seen in its response to statements by Japanese Prime Minister Sanae Takaichi on Taiwan. The broader message—that China will not tolerate challenges to its regional ambitions—has been hard to miss.

At the same time, uncertainty has been amplified by US President Donald Trump’s return to the White House. His tariff policies and transactional approach to alliances have left even close partners wary.

While public displays of solidarity, such as Takaichi’s appearance with Trump aboard the USS George Washington in Yokosuka, offered temporary reassurance, doubts remain about how reliably the US would respond in a crisis involving China.

Taken together, these dynamics have strengthened the strategic logic for closer India-Japan cooperation. Japan brings capital, technology and expertise that India needs as it seeks to move up the development curve. Unlike ties with China or the US, the relationship is not weighed down by major trust deficits. India’s recent reforms also help reinforce investor confidence. The passage of a new insurance law and steps to open nuclear power to private participation are notable, particularly given Japan’s role in manufacturing key components for modern nuclear reactors.

Japan may see India as an attractive destination, but competition is intense. Vietnam, Thailand and Indonesia are actively courting Japanese firms. In 2024, Vietnam hosted around 2,000 Japanese companies, compared with fewer than 1,500 in India. Cultural familiarity, faster approvals, and more predictable investment environments give several Southeast Asian economies an edge.

India has made progress—labour laws have been overhauled after years of delay—but land acquisition and regulatory clearances remain cumbersome. These constraints matter as Japan seeks to convert financial investments into long-term manufacturing and supply chain commitments.

The Japan Chamber of Commerce and Industry in India (JCCII) had suggested some 70 measures to improve the ease of doing business last year. These include tax reforms, harmonization of patent application procedures with international laws and improvement in customs and logistics procedures. There is also a feeling that quality control measures are sometimes used to ringfence Indian businesses.

Japan has doubled its investment pledge to India from ¥5 trillion in public and private capital announced in 2022 to ¥10 trillion over the next decade, in private capital alone. If channelled effectively, this could support manufacturing growth and help absorb India’s expanding workforce. For that, India needs to attract small and medium sector Japanese companies in a big way.

India has been voted most promising investment destination in the medium to long term since 2022 but there is apprehension about regulatory hurdles, according to the JCCII.

The Japan-India Economic Security Initiative, unveiled during Prime Minister Narendra Modi’s visit to Japan in August, aims to strengthen supply chains in critical goods and deepen cooperation in emerging technologies, reducing dependence on both the US and China.

The framework for a deeper partnership is in place. Whether it becomes transformative will depend less on intent than on execution.

Elizabeth Roche is an associate professor of practice, O.P. Jindal Global University, Sonipat, Haryana.