Japanese firms in Sri Lanka see renewed optimism

• JETRO survey reveals 75% of firms expecting improved operating profits in 2025 – most optimistic outlook across entire Asia-Oceania region; surpasses markets such India, Philippines, Vietnam, and Bangladesh
• Japanese businesses in Sri Lanka recover with 46% expecting profits in 2024, up 11.9% YoY
• Cites economic recovery, rising domestic demand, better sales systems, improved production efficiency, lifting vehicle import ban and reduced container freight rates as key factors for optimistic outlook
• Plans for expansion rise with 36% of firms planning to grow operations in SL, up by 8.6% YoY
• Investment appeal remains intact as cost competition continues to be major draw, with low labour costs and fewer communication barriers
• Lists political instability, unclear Govt. policies and currency volatility as investment risks
• Flags specific challenges – abrupt import restrictions, changes in tax rates, rising fixed costs, high corporate taxes, exodus of young talent, power outages, supply chain disruptions

Japanese businesses in Sri Lanka are showing signs of strong recovery, with optimism mounting for the 2025 post-economic crisis.

According to the Japan External Trade Organisation’s (JETRO) annual survey, nearly half of the Japanese companies operating in Sri Lanka expect to turn a profit in 2024, a significant improvement from 2023.

The survey, conducted in August and September 2024, gathered responses from 5,007 Japanese companies in the Asia-Oceania region, including 31 companies in Sri Lanka.

It added that the momentum is expected to accelerate further in 2025. 

On the outlook for operating profits in 2025, a striking 75% of Japanese firms in Sri Lanka foresee an improvement – well ahead of ‘remain the same’ (21.4%) and ‘decrease’ (3.6%) in their operating profits this year – the most optimistic outlook across the entire Asia-Oceania region.

The figure also surpasses even high-growth markets, such as India (57.9%), Philippines (52.9%), Vietnam (50.4%), and Bangladesh (50.0%).

Contributing factors for the outlook improvement include; rising domestic demand, strengthening the sales system in the local market, improvement in production efficiency, as well as lifting of the vehicle import ban and reduction in container freight rates.

The survey also highlighted that Japanese companies in Sri Lanka are clearly on the road to recovery from the economic crisis, with 46.4% anticipating profitable operations in 2024, up 11.9% from 2023. This marks the third highest profitability projection since 2015, after 2019 (55.2%) and 2018 (48.5%).

Economic recovery, resurgence in the tourism industry, new customer acquisitions, and business growth were cited as specific factors of the improved financial outlook.

The survey also noted that beyond profitability, Japanese companies are also increasingly bullish about their future business prospects in Sri Lanka. Over a third (36.7%) plan to expand their operations within the next two years, an 8.6% increase from 2023.

Many firms pointed to plans for expansion of their local sales network and development of new products. However, not all companies shared the same enthusiasm – 13.3% (+7.0% from 2023) answered considering scaling down/reduction or relocating to a third country/region or withdrawal.

Despite Sri Lanka’s recent economic crisis, its investment appeal remains intact for many Japanese firms. Low labour cost cited by 54.8% of respondents (the highest) continue to be a major draw – placing Sri Lanka alongside Myanmar, Laos, Pakistan, and Bangladesh in terms of cost competitiveness in the Asia-Oceania region.

Other advantages include fewer linguistic/communication barriers (41.9%), market scale and growth potential (38.7%), tax incentives (22.6%), ease of recruiting local staff (22.6%), good living environment for Japanese expatriates (22.6%), and plentiful land/offices, low land/rent prices (22.6%).

On the other hand, the most frequently cited risks to investment in Sri Lanka were political or social instability (83.9%), followed by unclear Government policy management (71.0%), currency volatility (45.2%), increased labour costs (41.9%), and high employee turnover rate (35.5%).

Specific challenges flagged by Japanese companies in Sri Lanka include sudden import restrictions and abrupt changes in tax rates, increase in fixed costs due to hikes in corporate tax and utility tariffs, overseas migration of young talent, power outages, too much time to obtain import licences and residence visas, and risk of supply chain disruption due to import restrictions.

JETRO Colombo was established in 1964 as a Japanese Government organisation promoting trade and investment between Japan and Sri Lanka. The “Survey on Business Conditions of Japanese Companies Operating Overseas” has been conducted since 1987, and this is the 38th version.