Challenges Facing the Japanese Manufacturing Sector and How Factories Are Adapting to Global Shifts
The environment surrounding Japan’s manufacturing sector has shifted significantly in recent years.
The most significant challenges are a weakening yen, rising resource prices, labor shortages, rapid advances in digital technology, inadequate capital investment, and procurement risks tied to dependence on China.
These challenges are interconnected. Rising costs erode the capacity for investment, and insufficient investment leads to declining productivity. Once established, this cycle is difficult to reverse.
In this article, we will examine five challenges facing Japanese manufacturing and three structural shifts currently underway.
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Current State of Japanese Manufacturing: Five Challenges and Solutions
Japan’s manufacturing sector faces the following challenges:
- Cost increases driven by the weak yen and rising resource costs
- Labor shortages caused by a shrinking working-age population
- Delayed digitalization among small and mid-sized enterprises (SMEs)
- Aging equipment and insufficient capital investment
- Growing procurement risk from dependence on China
Cost increases driven by the weak yen and rising resource costs
The rapid decrease in the value of the yen since around 2022 has increased the yen-denominated cost of imported raw materials and energy. This has pushed up overall manufacturing costs domestically.
In addition, the conflict in Ukraine and surging crude oil prices have driven up raw material and energy costs. This has placed significant pressure on the operations of manufacturing firms.
As a consequence, manufacturers face a growing need to renegotiate procurement terms and reflect cost increases in pricing.
Labor shortages caused by shrinking working-age population
Japan’s working age population has been steadily declining. In 1995, the working-age population was 87.26 million. By 2025, it had fallen by 16% to 73.52 million.
Demographic trends are difficult to reverse. Therefore, workable countermeasures are essential:
- Replacing manual labor through automation and labor-saving technologies such as robotics and AI
- Reducing reliance on individual expertise through standardized processes and data-driven operations
- Shortening skill acquisition timelines through structured training programs
- Building lean operational structures through optimized workforce allocation
At the same time, it is equally important to support the workforce by redesigning work environments, including the use of a more diverse labor pool, with attention to safety assurance and a reduced physical burden.
Source:
Statistics Bureau, “Population Estimates (as of October 1, 2024), p. 5”
Statistics Bureau, “Population Estimates, October 2025 Report”
Delayed digitalization among SMEs
Advances in generative AI, cloud computing, and related technologies are accelerating digitalization in the corporate world. Among large enterprises, DX (digital transformation) is increasingly treated as a management priority. METI and the Tokyo Stock Exchange now jointly administer the “DX Stocks” designation program, which recognizes DX efforts among listed companies.
For SMEs, digitalization is still at an early stage. According to the 2025 White Paper on Small and Medium Enterprises, as of 2024, 64.8% of SMEs remained at the lower end of the digitalization spectrum (stages 1–2). Only 3.2% of SMEs had reached the advanced stage (stage 4), actively leveraging digital tools to strengthen competitiveness. This suggests room for broader adoption.
Without progress in digitalization, operations will continue to be manual and dependent on individuals. This may lead to competitive disadvantages relative to digitally equipped firms. An effective approach is to begin with manageable steps, such as adopting cloud services and pursuing paperless operations to build IT literacy among employees, then advance toward centralized data management and RPA- (robotic process automation) based automation.
Source: Small and Medium Enterprise Agency, “Section 5: Digitalization and DX”
Aging equipment and insufficient capital investment
When investment falls short, equipment updates become delayed. Aging and outdated infrastructure can negate gains in productivity. Yet many firms, particularly those facing economic uncertainty or debt obligations, remain hesitant to commit capital.
Analysis by company size shows small and mid-sized companies consistently invest less that large firms.
Source: Small and Medium Enterprise Agency, “Summary of the 2025 White Paper on Small and Medium Enterprises / Micro Enterprises”
Given the increasing trends of raw material and labor costs, early capital investment can, in some cases, yield long-term returns. Prioritizing equipment modernization and establishing funding plans early are critical steps toward labor-saving and automation initiatives.
Growing procurement risk from over-dependence on China
In Japan’s manufacturing sector, high dependence on China for certain critical minerals and materials is a geopolitical risk. Availability of these materials can be subject to policy decisions of the source country and its politics, potentially leading to risk for operations.
Concentration of procurement from a limited number of countries could lead to production disruptions, and therefore should be resolved as soon as possible.
Mitigating such supply risks requires a shift in procurement design. Securing alternative suppliers, revising inventory tactics, substituting materials, and integrating recycled material streams are some strategies that can be pursued.
Three Structural Shifts Underway in Japanese Manufacturing
In response to advances in digital technology and shifts in the international landscape, Japan’s manufacturing sector is pursuing three structural transformations:
- Promotion of DX
- Promotion of GX (green transformation) and decarbonization
- Supply chain resilience
Promotion of DX
To address labor shortages and rising costs, Japanese manufacturers are advancing productivity improvements through DX. The government has positioned DX as a key driver of corporate value, with METI, the Tokyo Stock Exchange, and Japan’s IPA (Information-technology Promotion Agency) jointly operating the “DX Stocks” designation framework for listed companies.
Examples of DX applications already in use include:
- AI-driven demand forecasting
- Predictive maintenance combining sensors and AI
- Visual inspection using image recognition
However, as noted above, SMEs in particular have been slow to adopt digitalization. Firms that have not yet started should look to DX initiatives implemented by larger enterprises as reference points and identify systems suited to their own operations.
Promotion of GX (green transformation) and decarbonization
GX is the simultaneous pursuit of economic growth, stable energy supply, and emissions reduction. It is considered a critical transformation for the Japanese manufacturing sector. The government has approved the “GX 2040 Vision,” outlining a strategy to mobilize approximately ¥150 trillion in public and private investment over ten years.
Specific measures include transitioning to high-efficiency motors, implementing inverter control, addressing compressor leakage, and recovering waste heat. These combine equipment upgrades with operational improvements.
Additionally, mechanisms such as the carbon tax impose costs proportional to emissions, so that delays in response to GX directly increase a company’s financial burden. Early action on decarbonization is important not only environmentally but also economically.
Orbray Co., Ltd., is advancing initiatives aimed at solving social challenges through decarbonization and SDG-related activities.
Examples include installing solar panels at factory facilities, tree-planting programs in Thailand, and repurposing unused wood from forest thinning as boiler fuel. These are not short-term measures but ongoing efforts integrated into daily business operations, aimed at contributing to a sustainable society.
Source: METI, “Overview of GX 2040 Vision”
https://orbray.com/en/corporate/sdgs.htmlSupply chain resilience
Japan’s manufacturing sector is working to improve supply chain resilience on the basis that geopolitical risks can cause supply disruptions.
The government of Japan has also expressed concern over supply chain vulnerabilities arising from over-concentration in specific countries and facilities, and has introduced subsidy programs to support the development of domestic production bases for critical products and materials.
Specific measures include:
- Diversifying production sites, procurement sources, and processes
- Securing alternative materials
- Reshoring factory operations to Japan
Dispersing production bases and material sourcing to avoid over-concentration in any single region is essential for stabilizing production.
Source: METI, “Subsidy for Domestic Investment Promotion for Supply Chain Measures”
Summary: Structural changes are required for the Japanese manufacturing sector
Japan’s manufacturing sector is contending with multiple challenges, including rising costs, delayed digitalization, and labor shortages.
Addressing these requires advancing DX and GX, strengthening supply chains, improving productivity, stabilizing production systems, and building a corporate profile that attracts investment.
For areas where countermeasures have not yet been taken, getting started, even with small-scale initiatives, is important. If company-wide solutions are difficult to implement, companies could begin at the department or division level to evaluate effectiveness.
The next installment will examine future projections for Japanese factories and Japan’s position in the global manufacturing landscape.
