Deepening U.S.-Japan Economic Ties Through Workforce Development Cooperation

Commentary by Taisuke Kassai

Published January 27, 2026

Japanese firms remain deeply committed to the U.S. market, which continues to be Japan's most important investment destination. Recent high-profile announcements of Japanese investments in the U.S. by companies such as Nippon Steel and Softbank Group and the creation of the $550 billion U.S.-Japan strategic investment initiative are signs of growing opportunities for U.S.-Japan economic engagement. Yet the private sector faces growing operational challenges. Labor shortages have persistently constrained the profitability of Japanese firms operating in the United States, and recent survey data show that these challenges have been exacerbated by negative impacts from tariffs, underscoring the need to move beyond headline investment figures. To anchor Japanese investment more firmly in U.S. local economies and industrial competitiveness and to deepen the bilateral economic relationship, greater policy predictability and a shared approach to workforce development are critical.

Policy Context: A Stabilizing Agreement with Open Questions

The U.S.-Japan agreement concluded in July 2025 helped contain tariff risk and improved business predictability for Japanese firms operating in the United States. For the United States, the agreement offers tangible economic benefits, including potential job creation and industrial strengthening through inward investment that could reach up to $550 billion.

Nevertheless, the agreement's durability remains uncertain. As Ambassador Daniel Kritenbrink noted at a recent CSIS event, its implementation ultimately depends on whether concrete investment projects materialize. The memorandum on the U.S.-Japan investment initiative stipulates that the United States will refrain from raising tariffs on Japan so long as Japan funds investment in the United States. In other words, failure to implement such investments could expose Japan to the risk of higher U.S. tariffs.

Since December, the United States and Japan have convened three meetings of the "consultative committee" as part of the investment framework, and Japan has indicated that announcements regarding the first projects may be forthcoming. While final decisions on the projects rest with President Donald Trump, it is critical for Japan that the selected projects align with its national interests and lead to the steady and credible implementation of investment commitments. Beyond these uncertainties, additional policy or implementation "pitfalls" could still emerge.

Business Conditions: Strong Commitment, Rising Cost Pressures

Japanese firms continue to lead foreign direct investment in the United States. According to data from the Bureau of Economic Analysis (BEA), of the $5.7 trillion in U.S. inward foreign direct investment stock in 2024, Japan accounted for $820 billion (14 percent), ranking first among all countries for the sixth consecutive year. With Nippon Steel's large-scale investment commitments and potential investments under the $550 billion framework, Japan is likely to retain this position into 2026.

A November 2025 survey from the Japan External Trade Organization (JETRO), Japan's trade and investment promotion agency, offers additional evidence to support this trend. It shows that 48 percent of Japanese-affiliated firms operating in the United States plan to expand their business over the next one to two years, attracted by strong demand and the size of the U.S. market. Only 3.7 percent anticipate downsizing.

At the same time, profitability is under pressure. According to the JETRO survey, 30 percent of surveyed firms expect operating profits in 2025 to decline year over year. Tariffs are a key factor, with nearly 70 percent of firms reporting negative impacts. The continued 15 percent reciprocal tariff is raising procurement costs and eroding cost competitiveness. Only 54 percent of firms report attempting to pass these higher costs on to customers, indicating that many are absorbing them internally, reducing their profit margins.

Even if the Supreme Court were to rule that the International Emergency Economic Powers Act tariffs are unlawful, similar measures could likely be pursued by the U.S. government under alternative legal authorities as a "Plan B," meaning that the issue would continue to pose a challenge. Therefore, for Japanese firms operating business in the United States, eliminating tariff exposure is likely unrealistic. What companies seek instead is predictability-above all, the avoidance of abrupt policy shifts. From a U.S. perspective, making the most of investment from allies such as Japan as a strategic asset for economic security and industrial resilience requires strengthening institutional trust and policy predictability.

Workforce Development as a Shared Strategic Investment Issue

In addition to the recent shock of tariffs, labor constraints present a persistent challenge to investment sustainability. Chronic labor shortages and rising wages have long affected Japanese firms in the United States and show little sign of easing. According to the November JETRO survey, 47 percent of surveyed firms report no improvement in U.S. labor market conditions over the past two years, while 27 percent report further deterioration.

Japanese firms are making efforts to address these challenges. However, workforce availability should not be left solely to individual firms but addressed as a shared U.S.-Japan investment challenge. The U.S. and Japanese national governments and U.S. state governments can play a complementary role by supporting workforce pipelines aligned with strategic sectors.

The semiconductor sector UPWARDS for the Future Network initiative illustrates this approach. Launched at the G7 Hiroshima Summit in May 2023, the initiative brings together Tokyo Electron, Micron Technology, and 11 universities in both countries to support the development of next-generation talent while advancing cutting-edge research and development. Comparable models, in which both governments serve as a bridge between industry and educational institutions across the two countries while clearly demonstrating their commitment to international talent development frameworks, could be applied to other strategic fields of shared interest between Japan and the United States. For example, through the $550 billion investment framework, both governments have identified areas of cooperation not only in semiconductors but also in pharmaceuticals, metals, critical minerals, shipbuilding, energy, and AI and quantum technologies.

In parallel, both governments should support Japanese companies that are currently struggling to secure workers in the United States. As Japanese investment continues to grow, ensuring a reliable workforce has become a key factor in maintaining business continuity and competitiveness. To address this challenge, JETRO and Japanese consulates have partnered with U.S. regional economic development organizations, including the Indiana Economic Development Corporation, to host student-focused career fairs in the Midwest United States. By directly linking Japanese investment to regional labor markets, these efforts can create a virtuous cycle that offers high-quality employment opportunities for U.S. workers while providing Japanese companies with a stable supply of talent.

Cooperation on workforce development and job creation represents a natural next phase in U.S.-Japan economic relations. Beyond addressing near-term labor shortages, such cooperation can strengthen regional economic resilience, improve regional affordability, and reinforce industrial bases in strategically important sectors. Institutionalizing these efforts would help shift the bilateral economic relationship from a focus on investment volume to one centered on durability, integration, and long-term competitiveness.

The Path Ahead

Although U.S.-Japan economic relations appear stable on the surface, supported by bilateral agreements and strong Japanese investment, uncertainty over agreement continuity and ongoing pressures from tariffs and labor shortages risk weakening the long-term impact of that investment. From a U.S. policy perspective, the key issue is not whether Japanese firms will continue to invest, but whether those investments can be sustained at scale and aligned with U.S. strategic priorities over time. Japanese capital is already deeply embedded in advanced manufacturing, critical materials, and technology supply chains that underpin U.S. economic security. If policy uncertainty and labor shortages weaken the business case for continued expansion, the risk is less one of disinvestment than of gradual erosion-slower reinvestment, constrained innovation, and diminished long-term competitiveness.

Such dynamics have direct implications for U.S. industrial policy. Federal efforts to reshore production and strengthen domestic supply chains depend not only on attracting capital, but on maintaining a stable operating environment and a reliable pipeline of skilled labor. With complementary investments in policy predictability and workforce development, investment from allies such as Japan can contribute to durable resilience and long-term competitiveness gains in the United States.

Taisuke Kassai is a visiting fellow with the Japan Chair at the Center for Strategic and International Studies (CSIS) in Washington, D.C., from the Japan External Trade Organization (JETRO).

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