Prioritise Japan more
Business Standard, 11 May 2026
The internationalisation strategy of the Indian business elite has traditionally been US-focused. For decades, this was a rational choice. The United States provided the world's deepest capital markets, the most advanced technology, and a predictable institutional environment. This landscape has changed: the quality of institutions in the US has declined. Decision-makers in India must now cautiously rethink their strategy. A diversified approach to global engagement is now a necessity. This search for stability naturally takes us to the mature democracies of the OECD. Within this, a significant opportunity for Indian firms lies in a greater prioritisation of Japan.
The United States is the largest economy in the world, with a 2026 GDP of $32.38 trillion. Japan has a nominal GDP of $4.38 trillion. Japan is a big country that Indian firms can do more with. Our biases from recent decades of Japanese experience need to be reviewed and questioned.
After 1945, the Japanese state engaged in industrial policy on a substantial scale. Bureaucrats attempted to direct credit and pick winners. This was done well in the early years by the competent Japanese state and the ethos of a remarkable generation rebuilding after the war. This approach reached its limits by the mid-1980s. Government control of the resource allocation is synonymous with government interference in the financial system. As with other state control experiments worldwide, the state led approach in Japan led to a massive misallocation of capital. Japan suffered "lost decades" characterised by mediocre growth and a loss of global competitiveness.
Conditions have changed. The Japanese policy establishment realised the limitations of the 1980s model and transitioned toward a more market-oriented, globally integrated, financially sophisticated system. While the state still plays a significant role, a formidable institutional architecture based on market principles has arisen.
Japan now has a fully open capital account and a flexible exchange rate that absorbs external shocks. Power in resource allocation has greatly shifted from government to finance. There is high economic freedom in finance, financial regulation is competent, and underpinned by the rule of law. Through the lost decades, Japanese policymakers chipped away at slowly building the institutional capability required for a modern market economy.
The Nikkei 225 index provides insight into this progress. Equity prices reflect the market's assessment of future cash flows and institutional quality. The Nikkei 225 reached a peak of 38,915.87 in late 1989. The subsequent collapse and the demoralisation of the lost decades meant the index stayed below that peak for over thirty years. It only regained the level of 1989 in 2024. After that, there has been a 61.1% rise in the Nikkei 225. Global and Japanese investors now see a new potential in the Japanese economy that was absent for decades.
We should not be too concerned about Japan's demographic decline. For an analogy, the hoped-for Indian `demographic dividend' did not work out: population is not central to the economic growth process. The absolute headcount required to create great corporations and generate immense value is quite small. As an example, consider the tiny headcount directly employed in the US tech industry. Japan will not run short of the numbers required to sustain its technological and business frontier.
There is genuine intellectual excellence in Japan. The country possesses extremes of capability that are hard to match globally. Whether it is the design of automobiles, advanced materials, or the semiconductor industry, Japanese capabilities are at the top end. In the last 20 years, there were 14 STEM Nobel prizes which went to persons who did their research in Japan. There is now a surge in Japanese defence R&D, reflecting a fresh Japanese effort in coping with the Chinese threat. In time, this will yield new strengths in the universities and high tech firms, which will spillover to civilian applications.
Supply chains are no longer just about cost; they are also about trust. Japan and India see eye to eye on a wide variety of global issues. This alignment includes a shared concern over Chinese aggression and the unpredictability of the US. The commitment in Japan to Indian success is comparable to that found in Israel or Taiwan. This shared strategic interest makes it safe for Indian firms to build deep, long-term ties with Japanese partners. Myriad firms and governments worldwide are pushing to reduce their connection with China, but everyone is happy to work more with Japan given the decency of the Japanese state.
For Indian firms, much remains to be done with Japan working within the traditional strategies which worked well in the automobile sector: To fuse business models with Japanese giants, to produce in India for the world market. But many other pathways are also visible in business activities of the recent years: deploying Japanese capital to acquire distressed heavy industry via the IBC (Nippon Steel and AM/NS India), capital intensive technology investments (NTT Group's hyperscale data centres), and securing deep-tech supply chains through joint ventures (Renesas and CG Power in semiconductors). Japanese financial institutions like MUFG are actively deploying capital into domestic Indian credit markets. The new conception of the Japan strategy that is feasible is not just Japanese advanced IP, but patient Japanese capital also, brought together with Indian scale, to sell into the world market including the Japanese market.
Implementing such a Japan pivot will take time, effort and a shift in mindset. The language barrier has become less important, as the Japanese business elite now speaks some English. There are deep cultural differences in how business is conducted. Relationships in Japan are built on long-term trust and patience. The low-ethics `jugaad', which is often an element of Indian business culture, aiming for quick and dirty wins, will not work well. Indian firms will need to invest time and effort to learn how to engage with the Japanese business world.
The difficulties in the US and the risks posed by revisionist powers require a strategic response. Indian firms must diversify their international linkages into advanced Western democracies other than the US. Prioritising Japan is one logical response to this new reality.
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