Japanese SMEs Are Quietly Coming Home. That Changes Who in Japan Europe Should Be Calling

A trend moving in the opposite direction from what most assume

For two decades, the default assumption about small and mid-sized Japanese manufacturers was straightforward: if they'd gone international at all, they'd gone to China or South East Asia, chasing lower labour costs. A recent survey by the Japan Finance Corporation complicates that picture. Only 18.0% of Japanese SMEs currently operate overseas at all — a smaller share than many outside observers assume — and among those that did expand abroad, reshoring back to Japan has been rising steadily since 2020.

Of the companies that have reshored, 70.9% brought operations back from China specifically. The reasons are practical, not sentimental: 37.3% cited rising labour costs at their overseas location, and a weakening yen has quietly made domestic production competitive again in ways it wasn't a decade ago.

Why this matters more to Europe than it first appears

A Japanese SME that has reshored from China isn't the same counterpart it was when it operated an offshore subsidiary. Production, quality control, and procurement decisions that used to run through a Chinese operation are now consolidated back in Japan — often at a single site, under direct management, with the founder or owner-president personally closer to sourcing decisions than when a regional subsidiary handled them.

For a European supplier, that consolidation is operationally significant. Instead of navigating a Japanese parent company's separate Chinese subsidiary — with its own procurement team, its own supplier relationships, and often its own priorities — a European automation, precision equipment, or materials company now has a more direct line to the decision-maker: the Japanese company itself, on its home turf.

Reshoring isn't free — and that's where the opportunity sits

Bringing production back to Japan only makes economic sense if the higher domestic labour cost is offset by something — and for most reshoring SMEs, that something is automation and precision equipment that reduces the labour intensity of the work reshoring was meant to solve in the first place. A company reshoring from China isn't simply moving the same production line to a new address; it's typically re-engineering that line to work with a smaller domestic workforce.

This is precisely the moment European industrial automation, precision machinery, and process equipment suppliers have something concrete to offer — not a five-year strategic partnership pitch, but a practical answer to the specific problem a reshoring SME is trying to solve right now. A supplier who can demonstrate real labour-reduction impact on a production line isn't competing on price against a Chinese alternative; they're solving the exact problem that made reshoring viable in the first place.

The caveat worth naming

Reshoring remains a minority trend within an already-small population — most Japanese SMEs (82%) never operated overseas in the first place, and of those that did, reshoring is a rising but still limited phenomenon, concentrated heavily around former China operations. This is a real and growing pool of opportunity, not evidence that Japan's SME manufacturing base is undergoing a wholesale structural shift.

The takeaway

A quiet, steady stream of Japanese SMEs is consolidating manufacturing back onto home soil, driven by cost economics that increasingly favour Japan over China — and each one of them is, in effect, re-engineering a production line to work with less labour. If you're a European supplier who can help solve that specific problem, this is a more direct and more receptive customer than the offshore subsidiary you might have been trying to reach for years.