At first blush, it’s difficult to take seriously Japan’s ostensible commitment to invest US$550 billion in exchange for tariff relief.
Back-of-the-envelope calculations show that this would require Japan to roughly triple the $55 billion in average new investment that Japanese companies ploughed into the US between 2012 and 2023 to meet the early 2029 deadline, coinciding with the end of President Donald Trump’s term.
Under the fund’s highly unconventional arrangement, Trump has the final say on projects, which are recommended by an investment committee chaired by Secretary of Commerce Howard Lutnick. An extraordinary clause in the agreement means that Japan could face higher tariffs or “catch up” payments if it refuses to fund a project recommended by Trump. Perhaps most outlandish is the stipulation that the US will receive the majority of the investment projects’ profits.
To say that this deal and the “street-level tactics” deployed by Trump’s henchmen were anathema to Japanese sensibilities would be a gross understatement. It remains far from clear that Japanese companies – even with government-backed soft loans – will invest at anywhere near the rate required to meet Trump’s deadline.
The US is a walled garden offering a degree of protection from fierce Chinese competition that is squeezing Japanese companies in China and beyond.
The Japanese investment fund is a more extreme example of Trump’s predilection to extract “trillions” worth of often amorphous investment pledges from corporates and US allies. Leaving aside any specific dollar value, there is nonetheless a compelling economic logic driving Japanese companies to continue to make major investments in the US.
Simply put, the US is a walled garden offering a degree of protection from fierce Chinese competition that is squeezing Japanese companies in China and beyond.
At its zenith, Japan Inc bestrode global manufacturing. Japanese companies pioneered or were once globally dominated in sectors including electric vehicles, lithium-ion batteries, rare earth magnets, solar panels, memory chips, shipbuilding, display technology and many types of consumer electronics. The story is in many ways synonymous with Japan’s broader economic stagnation. Japanese companies lost out to aggressive and often more heavily subsidised competition from South Korea and more recently, China. Japan also failed to anticipate and respond to major industry trends, most infamously the shift to the fabless-foundry business model in semiconductors.
While much of the Western world has belatedly woken up to the atrophying of industrial bases, Japan has much more successfully resisted deindustrialisation.
Japanese companies continue to dominate critical niches – typically with much higher barriers to entry – among the world’s most important supply chains. Semiconductor materials and equipment are a prime example, as are robotics and machine tools. Japan retains major strengths in less esoteric areas of global manufacturing. Toyota has consistently been the world’s largest automaker by sales for most years since 2008.
Japan, like all other industrialised nations, fears being enveloped by China’s determination to achieve self-sufficiency and indeed global leadership in every facet of manufacturing. The secular decline in Japanese investment in China is often attributed to geopolitics and trade tensions. These factors play a role, but Japanese companies are also generally struggling to compete with state-backed and sometimes highly innovative local rivals.
Companies face the wicked conundrum of being forced to exit the China market or doubling down on major investments to regain competitiveness. In the automotive sector in particular, competition has spilled out into Southeast Asia where Japan’s traditional dominance is rapidly fading.
The US – not without its own drawbacks – has proved a much more propitious market for corporate Japan. China-specific tariffs and a gamut of other policies favouring local manufacturers have provided a fillip to Japanese manufacturers with a high degree of localisation.
Japan’s investment in the US and the US share of Japan’s corporate earnings have steadily grown.
Politically, there is also a clear symbiosis between Japan’s residual strengths in manufacturing and the stated desire in the US to reindustrialise at the same time as reducing China dependence. This is clearly demonstrated by the types of projects which are being advanced under the aegis of the bilateral investment deal.
One instructive example is a proposal for Japan Display (JDI) to build a US$13 billion factory to supply liquid crystal displays to customers including the US military, which is concerned about its reliance on Chinese products. JDI is otherwise struggling to compete with Chinese and South Korean competitors.
Murata typifies the type of world leading Japanese company which is hardly a household name. Murata produces vital ceramic components for electronics and is looking at a US$15 billion investment.
Under arrangements which will likely involve Japan financing projects undertaken by US companies, Japanese corporates are exploring supplying tens of billions worth of battery energy systems, power equipment and cooling systems. Though pre-dating the bilateral deal, Nippon Steel’s US$14.9 billion acquisition of struggling US Steel also fits the mould. Nippon Steel, which recently considerably downsized its China presence, is hoping to cash in on steel tariffs and various local content policies.
Trump, who is otherwise an avowed economic nativist, is pragmatic enough to recognise US industry’s capacity to benefit from Japanese manufacturing nous. This synergy will outlive any Trumpian deal.