In an effort to prevent slowing China’s expansion and recession, Japan Inc.’s foreign direct investment in the US reached a record substantial of US$ 77.3 billion in 2024.
However, as Japan tries to protect itself from an even bigger financial string, Donald Trump’s business battle wrath as the US senator makes Asia the first stop on his tax punishment journey, America hasn’t seen anything yet.
Shigeru Ishiba, the prime minister of Japan, announced last week that his country would invest about$ 1 trillion in the US from$ 783 billion at the start of 2024.
To set that titanically huge number in view, it’s almost the same amount of Tokyo’s US Treasury security assets. And it raises a clear question: Does Japan Inc. truly believe the US market is a purchase, or are CEOs handing over the business equivalent of ransom money in hopes that Trump’s 2.0 president doesn’t devastate them?
Chances are, it’s far more the latter than the previous. Japan is right in the middle of the collateral damage territory, despite the fact that Trump’s tax arms race is primarily focused on China. And Ishiba’s Oval Office attend on February 7 served as a reminder of the dangers of trusting” Trumponomics”.
As Ishiba flew up from Washington, he claimed to have a “deal” with Trump on Nippon Steel’s effort to acquire US Steel. Team Ishiba purchased the business in exchange for a share of the classic American firm, giving them exclusive ownership of the business. Now, that assumption seems more roll than fact.
Trump basically made the teasing of the Nippon-US Steel deal seem linguistic rather than concrete when he was seated next to Ishiba in the White House. Nippon, he said, is “going to do a great investment. I didn’t want]US Steel ] purchased, but investment I love. I’m fine with it, positive”.
Nevertheless, Ishiba’s nation seems okay with a 22 % increase in Japan’s 2023-level bet on the US. Chinese companies are eying opportunities in sectors including semiconductors, unnatural intelligence, autos and vehicles products, liquefied natural gas, chemicals, manufacturing-related research and development, system, funding and others.
Despite Trump 2.0 throwing a wrecking ball at the economic scaffolding that keep it on the street, it does so. Trump’s policies may have a negative impact on America’s credit rating because of how he wants to lower taxes, abuse the rule of law, and obstruct the US Federal Reserve’s democracy.
Elon Musk and his group of it bros, who are Tesla billionaires, may also reduce confidence in US assets by allowing them to demolish government structures and entry sensitive data. Especially after learning that Musk and his supporters had access to the federal payments program, Scott Bessent, the novel Treasury Secretary, was reportedly viewed as a moderating power in MAGA Land.
In a new New York Times op-ed, five former Treasury leaders raised” large cause for concern” that Washington’s economic agreements and procedures may be “unlawfully” undermined. Any tinge of the selective expulsion of congressionally authorized payments may constitute a breach of trust and, in the end, a default. And our trust, once lost, may prove hard to regain”, they argued.
Bottom line:” No Treasury Secretary in their first weeks in office should be put in the position where it is necessary to reassure the nation and the world of our payment system or our commitment to make good on our financial obligations,” Bessent’s predecessors warn.
For today, Ishiba’s government is focused on the good. In his efforts to protect Japan from Trump’s taxes, Ishiba stressed that his nation is already the nation’s biggest US trader. Not just in US Treasuries, but also the biggest investment in corporate America for five decades.
” Japan is the closest financial partner of the United States”, Ishiba said. Toyota and Isuzu, two of Japan’s biggest automakers, are making ambitious plans for fresh US manufacturer construction, according to Ishiba. Additionally, he promised a significant increase in LNG payments.
All of this is in line with SoftBank’s incredible funding strategies for the US. Over the next four years, CEO Masayoshi Son says he’ll invest at least$ 100 billion into the US. Many of these opportunities will be synthetic intelligence-related, winning pursuit with a White House good to have the approach of China’s DeepSeek AI business.
But the measurement that most hobbies Trump is Tokyo’s trade deficit. Trump pressed Japan to close its$ 100 billion trade pact with Washington last week when the US leader sat down with Ishiba.
As last year’s tete-a-tete wrapped away, Trump told investigators he’d be prepared to smack tariffs on Tokyo if the deficit isn’t reversed. Team Trump makes hints as to add a punctuation to the point that the US currently enjoys a trade deficit with Australia, which will be subject to recently imposed 25 % metal tariffs.
The Liberal Democratic Party’s deficit continues to be a significant issue. A weak yen has been the ruling LDP’s most steady economic plan over the past 25 years, making Asian returns mostly export-driven affairs.
Enter Trump, whose administration is already objecting to Japan’s underwhelming imports.
Given the economic risks, Ishiba’s$ 1 trillion pledge sounds more like an insurance against high tariffs than assurance that the US will be a welcome investment destination once Trump 2.0 leaves in 2029.
” While Japan may not avoid all the effects of future US tariff policies, Tokyo may avoid the targeted treatment seen with countries like Canada, Mexico, and China”, James Brady, vice president of Teneo, said in a Saturday note.
Because it appears to enjoy the status of one of Trump’s most favored nations, it may even hope for more lenient trade treatment than other major economies.
The Bank of Japan is tightening its grip on inflation, much of it caused by a weak exchange rate, thining the plot. Unsettling both households and businesses are the highest short-term rates in 17 years.
The rising cost of borrowing is also having a chilling impact on business sentiment. That might undermine government efforts to accelerate wage growth. Or, at the very least, ensure that wage gains keep pace with the rate of inflation.
All of this leaves Japan with a number of already-existing issues that will affect the upcoming Trumpian storm. Retail sales are soft even before Trump’s broader trade war arrives. And the 10 % levies Trump , has slapped on China so far could be but a taste of what’s to come.
Had Ishiba’s party acted urgently to reduce bureaucracy, incentivize a startup boom, modernize labor markets, empower women or increase productivity, Japan might be less vulnerable to Trump’s trade war.
Tokyo is beginning to realize that 25 plus years of zero rates have turned out badly because of this last obstacle. The real monetary fireworks started in 2013, despite the BOJ’s experimentation with zero rates dating back to 1999.
The government urged the BOJ to launch its quantitative easing experiment in a different direction that year. Through exchange-traded funds, the BOJ actively hoarded government bonds and stocks. By 2018,  , the , BOJ’s balance sheet , topped , the , size of Japan’s annual gross domestic product ( GDP ).
Trouble is, the resulting plunge in , the , yen  , is now coming back to haunt Tokyo.
” A weaker yen means it takes more yen to buy the same amount of food or oil as before”, says Richard , Katz, author of” The Contest for Japan’s Economic Future”. Imported inflation, according to the report, “has caused political pressure to try to stop the yen from weakening even more” ( poena ).
It also deadened , the , urgency , for lawmakers to level playing fields and increase competitiveness. It took pressure off corporate CEOs to innovate, restructure, disrupt and boost productivity.
The International Monetary Fund claims that Japan’s economy’s overall factor productivity growth has been sluggish for ten years and has fallen even further behind the United States in its most recent assessment of the country. Productivity has been hampered by a steady decline in allocative efficiency since the early 2000s, which most likely reflects an increase in market frictions.
What’s more, the IMF notes,” Japan’s ultra-low interest rates may have allowed low-productivity firms to survive longer than they otherwise would have, delaying necessary economic restructuring. Improved labor mobility across companies would improve Japan’s overall efficiency and productivity.
However, it’s unclear how much political capital Ishiba has to reinvigorate the reform process with his , approval ratings in the 30s. Or, to convince Trump he’s a worthy sparring partner.
” Ishiba’s weak political standing may also be a liability, as Trump tends to respect strong leaders”, says David Boling, an analyst at Eurasia Group, a risk consultancy.
Boling notes that Shinzo Abe, Japan’s prime minister from 2012 to 2020, “enjoyed comfortable majorities in the national parliament when he was prime minister, so he could negotiate with Trump from a position of political strength, but , Ishiba , does not enjoy that luxury”.
As Japan’s economy runs into fresh headwinds, accelerating the structural upgrade process will become more and more important.
Not surprisingly, Ishiba’s Trade Minister Yoji Muto is lobbying Trump World for a pass on Washington’s 25 % taxes on steel and aluminum. Yet Tokyo’s real challenge may be getting past Trump’s trade advisors, led by anti-globalization activist Peter Navarro.
Navarro contends that the US aluminum market is being harmed by Prime Minister Anthony Albanese’s economy, despite Trump’s hints that Australia might be granted a waiver. ” Australia is just killing our aluminum market”, Navarro told CNN. ” President Trump says no, no, we’re not, we’re not doing that anymore”.
All this uncertainty could leave Japan Inc , pledging big US-based investments with buyers ‘ remorse. The consumer price index increased by 0.5 %, increasing the annual inflation rate by 3 %, as US inflation increased once more in January.
” This is not a good number”, says economist Brian Coulton at Fitch Ratings. It shows how the Federal Reserve is still working to reduce inflation as new risks from tariff increases and labor supply growth squeeze new levels emerge.
It will undoubtedly make hopes that the Fed will cut interest rates in 2025 more difficult. In fact, it supports the claim that the Fed is more likely to tighten than relax next.
This makes things even more disorienting in corporate boardrooms in Tokyo and New York. Japanese leaders might have more trouble making good on US investment pledges as the year progresses and economic trajectories turn sour.
Case in point: Son’s SoftBank swinging to a surprising$ 2.4 billion loss in the October-December quarter as its Vision Fund investment went awry. It prompted fresh concerns about Son’s ability to fulfill his commitments to invest$ 500 billion in the Stargate AI project, which Trump announced last month at a glittering White House event.
The news led Fitch company CreditSights to downgrade SoftBank’s US dollar and Eurobonds to “underperform” from “market perform”. As CreditSights analyst Mary Pollock puts it,” we think there’s more scope for downside, as]SoftBank Group ] is clearly willing and able to ramp investment” by resorting to project finance funding strategies.
For now, Ishiba’s economy has a decent US investment story to sell Trump. Toyota Tsusho, a division of Toyota Motor, is building a roughly$ 14 billion battery factory in North Carolina that could start shipping in April. Honda Motor plans to start producing electric vehicles in the US soon and is investing$ 1 billion in upgrading its Ohio production facility.
Resonac Holdings, a Japanese materials maker, is eyeing land in Silicon Valley to assemble cutting-edge chips. This year, Sumitomo Chemical will start a mass production facility in Texas to put itself at the forefront of the newly revitalized US chipmaking supply chains.
Nissin Foods Holdings, the world’s largest instant ramen company, will open its first new US factory in almost 50 years in August. By the end of the year, soybean-soy sauce snob Kikkoman plans to begin shipping from Wisconsin.
And so on, and so on. The question, of course, is whether the macroeconomic trajectory of the US can stay on the rails these next four years. Markets might not cooperate as Trump and Musk upend government agencies and cause chaos.
A US national debt of up to$ 36 trillion is at a time when Trump threatens to veer off the Fed’s mandate, slack the dollar, and impose a wave of tariffs that the world’s financial system might not anticipate.
Japan Inc. can run, hide and try to limit the fallout. But no Asian economy, friend or foe, can likely escape the Trump 2.0 onslaught on free trade to come.
Follow William Pesek on X at @WilliamPesek