When it comes to Japan, it looks like President Donald Trump’s plan to use tariffs as a way to boost domestic production is working so far.
Japan’s 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.
“What is becoming increasingly clear, though, is that firms are responding to U.S. tariffs by stepping up production in their U.S. subsidiaries,” he explained.
In the second quarter, overseas subsidiaries of Japanese manufacturers in North America booked sales growth that was 6 percentage points faster than Japan’s overall exports to the region.
And in July, production in Toyota’s U.S. factories soared 28.5% from a year ago, but output in its factories in Japan fell 5.5%.
Along with this shift in production is an influx of capital. Thieliant estimated that Japan’s 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’s total outbound FDI this year, marking an all-time high.
But all of that investment isn’t just the result of Trump’s 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’s FDI. In fact, surveys from 2024 showed nearly half of Japanese manufacturers with overseas subsidiaries had planned to expand U.S. production.
“Stepping back, falling exports are a headwind to economic activity in Japan,” Thieliant said. “But as long as firms are able to keep serving U.S. customers via their U.S. subsidiaries, the impact on corporate profits, investment, and wage growth should be minimal.”
“Our trading partners and major multinationals know Trump’s tariffs are on shaky legal ground,” they wrote. “Therefore, 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.”
And on Monday, he said the U.S. has overlooked the labor needed to build and sustain data centers and manufacturing facilities.
