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<\/p>\nWhen it comes to Japan, it looks like President Donald Trump\u2019s plan to use tariffs as a way to boost domestic production is working so far. <\/p>\n
Japan\u2019s export volume to the U.S. has fallen to the weakest level since 2021 while its overall exports remain above the 2024 average, Marcel Thieliant, head of Asia-Pacific at Capital Economics, said in a note on Thursday, citing recent data from the Bank of Japan.<\/p>\n
\u201cWhat is becoming increasingly clear though is that firms are responding to U.S. tariffs by stepping up production in their U.S. subsidiaries,\u201d he explained.\u00a0<\/p>\n
In the second quarter, overseas subsidiaries of Japanese manufacturers in North America booked sales growth that was 6 percentage points faster than Japan\u2019s overall exports to the region.<\/p>\n
And in July, production in Toyota\u2019s U.S. factories soared 28.5% from a year ago, but output in its factories in Japan fell 5.5%.<\/p>\n
Along with this shift in production is an influx of capital. Thieliant estimated that Japan\u2019s foreign direct investment into the U.S. is on pace to hit a record high this year, while overall FDI will probably be little changed. As a result, the U.S. may take in 47% of Japan\u2019s total outbound FDI this year, marking an all-time high.<\/p>\n
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But all of that investment isn\u2019t just due to Trump\u2019s trade deal, he added. Instead, the key driver is the strong U.S. economy as it outperforms Europe, which was previously a bigger destination of Japan\u2019s FDI. In fact, surveys from 2024 showed nearly half of Japanese manufacturers with overseas subsidiaries had planned to expand U.S. production.<\/p>\n
\u201cStepping back, falling exports are a headwind to economic activity in Japan,\u201d Thieliant said. \u201cBut as long as firms are able to keep serving U.S. customers via their U.S. subsidiaries, the impact on corporate\u00a0profits, investment and wage growth should be minimal.\u201d<\/p>\n
Investment from Japan could see an even bigger surge in the coming years. In July, the U.S. reached a trade deal that lowered the tariff rate on Japan to 15% from Trump\u2019s earlier 25%. In exchange, Japan agreed to pour $550 billion<\/a> in key U.S. industries\u00a0via a \u201cJapanese\/USA investment\u00a0vehicle\u201d that will be deployed \u201cat President Trump\u2019s direction.\u201c<\/p>\n They include energy infrastructure and production, semiconductors, critical minerals, pharmaceuticals, and shipbuilding, according to a fact sheet from the White House<\/a> at the time.<\/p>\n Wall Street had expressed serious doubts that the $550 billion will actually materialize. Analysts at\u00a0Piper Sandler\u00a0said in July that\u00a0Trump\u2019s tariffs are illegal<\/a>\u2014and face an ongoing court challenge<\/a>\u2014while noting the Japanese investment pledge comes with few concrete specifics.<\/p>\n \u201cOur trading partners and major multinationals know Trump\u2019s tariffs are on shaky legal ground,\u201d they wrote. \u201cTherefore, we find it hard to believe many of them are going to make massive investments in the U.S. they would not have otherwise made in response to tariffs that may not last.\u201d<\/p>\n Meanwhile, on the other side of the trade deal, a revival of U.S. manufacturing will require more workers with the right skills, and Ford CEO Jim Farley has been sounding the alarm that the labor force has shortages<\/a>.<\/p>\n The country is short 600,000 factory workers and 500,000 construction workers right now, and will need 400,000 auto technicians over the next three years, he wrote in a\u00a0LinkedIn post<\/a>\u00a0in June.<\/p>\n And on Monday, he said the U.S. has overlooked the labor needed to build and sustain data centers and manufacturing facilities.<\/p>\n \u201cI think the intent is there, but there\u2019s nothing to backfill the ambition,\u201d Farley\u00a0told\u00a0Axios<\/a>. \u201cHow can we reshore all this stuff if we don\u2019t have people to work there?\u201d\n<\/p>\n