Japan’s M&A deals boom, the global China+1 strategy, and why India is the big winner

Japanese companies have announced a record $359 billion in outbound and domestic mergers and acquisitions deals so far in 2025 as December draws to a close—an increase of 54%, according to data from Bloomberg.

This has played out well for India with deals involving Japanese acquirers in financial services bunched towards the year-end.

Just last week, financial powerhouse Mitsubishi UFJ Financial Group committed nearly ₹40,000 crore for a 20% stake in Shriram Finance Ltd, India's second-ranked non-banking finance company by assets managed. It is the largest foreign direct investment in an Indian financial services to date.

Earlier in December, Mizuho Financial Group Inc. reached an agreement to acquire a controlling stake in Avendus Capital, an investment bank backed by KKR & Co. Sumitomo Mitsui Financial Group had become the largest shareholder in Yes Bank Ltd in September.

Elsewhere, in the industrial sector, JFE Steel Corp. announced it would acquire a 50% stake in Bhushan Power & Steel Ltd, a unit of its long-term partner JSW Steel Ltd.

Japan is the fifth-ranked country by source of foreign direct investments (FDI) into India. Between April 2000 and December 2024, FDI totalling some $43.28 billion has come from Japan, accounting for 6.02% of total FDI into India, according to website of the Indian embassy in Tokyo.

The China+1 effect

Apart from this, Japanese FDI into India has grown from $1.5 billion in fiscal 2022, to $2.5 billion at the end of fiscal 2025, according to a report by consultancy Grant Thornton Bharat. This marks an over-two-thirds growth in flows over three years.

“Moving beyond small-scale partnerships, Japanese firms are now making bold, long-term bets in India across sectors like banking, fintech, semiconductors, and sustainable energy,” the report read.

Experts say this comes on the back of a shift in the country’s capital allocation, with India emerging as one of the primary recipients of these flows as corporations seek alternatives to the Chinese market.

"The tide has shifted," said Nitish Poddar, partner and national leader for private equity at consultancy firm KPMG India. “India has now become the primary alternative to China as a manufacturing and investment hub.”

Poddar was addressing the shift he has observed beginning around 2020, just before the covid-19 pandemic hit. Numerous issues continue to simmer between China and Japan, like the former's rising military presence around disputed islands in the East China Sea, trade restrictions over US-China tensions, and concerns over peace and stability in the Taiwan Strait.

These issues have nudged Japan's firms to look beyond their top trading partner mimicking much of the rest of the world's China+1 strategy to diversify manufacturing and supply chains away from the world's second largest economy.

Outbound deals continue strong

Meanwhile, the volume of dealmaking in Japan persists despite a depreciation in the yen and domestic economic indicators characterized by low gross domestic product growth. For Japanese boards, the motivation for these transactions is the requirement to secure revenue streams outside of a domestic market limited by demographic contraction and thin interest rate margins.

The concentration of capital from Japan's three megabanks implies a strategy to capture credit demand in a market where interest rate spreads are wider than those available in Tokyo, Poddar explained.

Mukesh Agarwal, partner and leader of PwC India’s Japan business desk, three factors are driving the current volume of investment. “First,” he said, “India is increasingly viewed as a resilient, democratic and high-growth economy, offering strategic diversification amid global geopolitical uncertainty.”

Second, Japanese firms are attracted by India's technical labour force, specifically in engineering, digital services, and global capability centres, he added. To add some context, Japan, in August agreed to invest nearly ₹6 lakh crore in India over the next decade as part of longterm agreements spanning artificial intelligence and semiconductors to rare earth minerals and carbon credits. Japanese VCs, too, are looking more closely at the Indian startup ecosystem citing enormous tailwinds.

Third, the government of India's investments in infrastructure and production linked incentives, or PLI, schemes designed to position the country as a manufacturing hub for both regional distribution and global exports have helped.

Mint had reported in July that India was planning a coordinated FDI drive, which would draw on PLI schemes aimed at attracting global investors in sectors such as electronics system design and manufacturing (ESDM) and chemicals.

Portal to Africa

This is also complimented by the understanding that Japanese firms view India not just as a high-growth market, but as the long-term gateway to the global south, Poddar said.

"Today, India is the story. But 15 years from now, Japanese companies will start looking at Africa for growth and will use their base in India to expand there," he explained. He added that these companies will use their learnings from the consumer and finance-facing sectors in India and implement growth strategies when African countries present them with the opportunity.

The Bank of Japan recently increased its policy rate by 25 basis points to 0.75%. While this represents a three-decade high for Japanese interest rates, the cost of capital still remains low relative to global standards.

"This policy decision will not impact India deals because return thresholds here are higher than what Japanese firms are willing to underwrite," KPMG's Poddar said.

The domestic environment in Japan continues to provide limited incentives for internal reinvestment. Despite the Bank of Japan’s departure from negative-rate regimes, credit demand remains concentrated among specific sectors.

A survey of 18,000 Japanese companies conducted by the Japan External Trade Organization (JETRO) last year found that 80% of firms operating in India intend to expand operations within a 24-month period. The survey identified food products, medical equipment, and human resources as the sectors with the highest projected expansion rates.

Beyond these sectors, Japanese auto giants Toyota, Honda, and Suzuki are already collectively investing nearly $11 billion in India, marking one of the country’s largest-ever foreign investment pushes in the automobile sector.

For regional Japanese banks and smaller corporations, the contraction of the domestic population has necessitated consolidation or the pursuit of international assets, dealmakers explained. As the year concludes, Poddar said that the trend of Japanese capital moving to Indian infrastructure and financial assets has become a structural feature of Asian M&A.