Japanese banks are shifting their overseas focus from China toward India and Southeast Asia as part of a structural realignment (China+1) driven by China’s slowdown, rising costs, and geopolitical uncertainty, while still servicing select Chinese opportunities.

Megabanks MUFG, SMBC and Mizuho are making large, direct investments in India’s banking and financial services sector, signaling a deepening commitment beyond serving Japanese clients.

Recent deals illustrate this pivot: SMBC bought about a 20% stake in YES Bank for roughly $1.6 billion, MUFG acquired a 20% stake in Shriram Finance for about $4.45 billion, and Mizuho took a majority stake in Avendus via its securities arm in late 2025.

India is positioned as a prime beneficiary due to its investment-grade rating, large domestic market, improving infrastructure, and higher loan growth potential, with lending rates notably higher than in China.

The shift leverages India's large domestic market, rising incomes, expanding manufacturing and semiconductor/data center growth, and a young, growing workforce to support long-term opportunities for banks.

This transition is framed as a gradual realignment rather than an exit, balancing continued Chinese opportunities with increased growth capital toward India.

Singapore remains a regional treasury and wealth hub due to regulatory stability and favorable taxes, though its operating costs are among Asia’s highest.

Drivers include manufacturing shifts to Southeast Asia and India, slower growth in China, and tighter Chinese regulation, with narrowing loan margins reducing incentives to stay in China.

The pivot signals a quiet yet powerful reorientation of Japanese finance with potential long-term effects on India’s manufacturing and financial role, while China becomes a smaller ongoing consideration.

Analysts view the shift as a possible sectoral transformation for Japan Inc., potentially bolstering India’s manufacturing and services hub ambitions and reducing reliance on Hong Kong and Shanghai, albeit with geopolitics and India-specific regulatory risks.”

The transition brings opportunities and challenges for banks, including navigating unfamiliar legal frameworks, higher operating costs in Singapore, and aligning with clients’ supply chains and financing needs in new markets.

RBI data shows Japanese direct investment in India rising to about $4.6 billion in the latest fiscal year, while Japan’s banks are expanding Mumbai office space (Grade A) as demand grows, signaling concrete momentum.