In times of change it’s normal to reassess the status quo. The U.S. has a fresh administration and among its questions has been the value of Japan as an economic and trade partner.

Over the last three decades the Japan-U.S economic and trade relationship has changed dramatically. What started as a rivalry has transformed into a working partnership – and a profitable one at that, according to Hugh Patrick, director of the Center on Japanese Economy and Business at Columbia Business School.

“There was a lot of tension 30 years ago,” Mr. Patrick explained in a recent interview. "Now the businesses trust each other. And they understand each other pretty well.”

So, what caused this tension and subsequent shift in attitude?

The Root of Friction

U.S. concerns over Japan’s post-war economic rise began around the 1970s. On the back of a skilled labor force and lower wages, as well as imported machinery and technology, Japanese firms started to produce goods that gained a global following. In the process, the nation became the top exporter to the U.S. and the world’s No. 2 economy.

Companies from Japan started to compete in areas where the U.S. used to dominate, such as in textiles and autos. Fewer goods of American origin left for Japanese shores.

This trade imbalance peaked in 1979, setting off a wave of academic and popular writing that cast Japan as a problem. The critics said Japan had to be feared and fought. Others suggested that America should imitate Japan’s business style.

Both were wrong, according to economist Rachel McCulloch, whom current Federal Reserve chairman Janet Yellen cites as her mentor. Writing in 1988, Ms. McCulloch, who taught at Harvard University among other colleges, showed that it wasn't just Japan that was changing – it was the U.S. too. A globalization of the supply chain shifted much of American manufacturing abroad. Though Japanese exports rose, the global position of U.S. multinationals was undiminished as lower U.S. exports by American firms were offset by rising sales from their foreign subsidiaries, Ms. McCulloch wrote in “Trade Policy Issues and Empirical Analysis” (University of Chicago Press, 1988). To help return the U.S. to balance, McCulloch suggested, “Japan is perhaps better seen as part of the solution rather than the source of the problem.”

“Japan is perhaps better seen as part of the solution rather than the source of the problem.”
The Savannah Machinery Works plant situated in Pooler Georgia, is run by Mitsubishi Hitachi Power Systems Americas.

Japanese Brands, American Jobs

If some U.S. manufacturing was leaving American shores, then it would make sense to invite foreign producers to come and replace them. That is exactly what happened in the 1980s as Japanese firms responded to U.S. calls for more local manufacturing in America.

Starting with Honda Motor’s Ohio automotive plant in 1982, Japanese automakers and other manufacturers took up the challenge of integrating into the American economy and communities across the U.S. In some cases, Japanese companies even formed joint ventures with U.S. competitors.

The Japanese opened many of their facilities in the Southern United States, a region that lagged America’s northwest in terms of jobs and income, said Mr. Patrick.

"Over time you got considerable investment in the south-east,” which helped to reduce the north-south income divide, Mr. Patrick said. "That's certainly been good for America."

Japan’s automakers alone directly and indirectly created 1.5 million American jobs, according to the Japan Automobile Manufacturers Association (JAMA). That’s equivalent to 7% of all goods producing jobs in the U.S. What’s more, the positions created by Japanese firms have been largely steady, high-paying jobs with an average salary of $79,819 – close to twice the national average wage.

Mitsubishi Hitachi Power Systems Americas (MHPS Americas) is a case in point. The Japanese maker of power plant equipment started in Orlando, Florida in 2001 with five employees. Within a little over a decade and a half the company has invested $600 million in the U.S. and now employs more than 2,000 staff, of whom 98% are American citizens, Paul Browning, the company president said in an interview.

“One of the neat stories that we have as a Japanese company is not only are we employing a lot of U.S. folks, but we are actually exporting a lot of our product outside of the U.S. to countries like Mexico,” Mr. Browning said.

The benefit has not been limited to jobs. Japanese firms brought with them efficiency strategies that allowed to bring down the cost of U.S. goods. Thus, American consumers could benefit from lower prices while buying products made with local labor.

Japanese firms brought with them efficiency strategies that allowed to bring down the cost of U.S. goods. Thus, American consumers could benefit from lower prices while buying products made with local labor

The localization of Japanese parts has helped MHPS Americas build out a large supply chain across the U.S., while at the same time American workers have taken the initiative to contribute not only to the manufacturing side but also to global product development, Mr. Browning said. “We really have quite a presence here in the Americas, both for manufacturing and service, for product engineering and also sales and marketing.”

Trade Gap Shrinks Through Local Investment

By the 1970s, many in the U.S. felt that the Japanese currency was undervalued. Over the course of several agreements with the U.S. and subsequent floatation of its currency, Japanese yen strengthened from 360 to the dollar in 1971 to around 75 as of 2011. It would be hard to find another U.S. trade partner who has done the same.

Even with a slight weakening of the yen in recent years the five-year average rate against the greenback is still around 101.

As a result of currency measures and the movement of jobs to America, Japan’s share of the U.S. global trade gap has shrunk to 9% from more than half in the early 1990s. This gap is dwarfed by the one that the U.S. has with China and with the EU.

Detractors like to point out that most of the Japan-U.S. trade gap is in autos and car parts. They forget to mention that few foreign firms have invested as much in American car factories as the Japanese.

Toyota has put approximately $10 billion in its U.S. operations in just the last five years. The same amount will follow over the next five years also, helping Toyota’s Indiana facility add 400 jobs from 2019.

The number of Japanese branded cars produced in the U.S. has surged to 3.9 million in 2015, from just 300,000 units in 1985. Today, 75% of Japanese branded cars sold in the U.S. are manufactured in North America and purchases of U.S.-made automotive parts by Japanese firms has climbed to $67.9 billion, according to JAMA.

Autos, however, represent only a quarter of Japanese investments. Between 2003 and 2015, Japan’s firms announced more than 1,400 American investments, according to the U.S. Bureau of Economic Analysis. In this period, Japan has consistently been the second-largest source of Foreign Direct Investment (FDI) after the U.K., bureau’s data show. Last year, Japanese FDI into the U.S. hit a record $411 billion.

Facility at Toyota Motor Manufacturing, Kentucky.

Japan’s Profit is America’s Gain

The benefits of Japanese firms doing well has had a broader economic effect on the U.S. Japan’s FDI has directly led to the creation of 840,000 American jobs, the biggest employment figure generated by foreign capital after the U.K.

In addition, some of Japan’s trade surplus has gone back into U.S. markets, helping to boost American asset prices and provide a buyer for the country’s debt. The latest figures show Japan as the biggest foreign holder of U.S. Treasuries with a portfolio worth more than $1.1 trillion.

Even during the 2008 financial crisis, when 2.6 million U.S. jobs were lost, Japan’s focus was on preserving American jobs. During the economic slump in 2009, Toyota idled many of its U.S. production lines at various times. However, the company did not layoff any full-time team members. Instead Toyota provided training, safety drills, and even community service assignments for workers citing a company policy to retain employees even in times of economic downturns.

The faith that Japanese companies showed in the U.S. economy does not end with manufacturing.

In September 2007, as the U.S. financial system was under strain, Japanese banks helped American peers through capital injections and by taking over some struggling assets with a promise to protect jobs.

Putting Down Roots

Since those first accusations of unfair trading practices against Japan surfaced, the country has diversified its exports away from America, the consequence of which has seen trade imbalances ease over time. In 2013 more than half of Japan’s exports went to East Asia.

At the same time, Japan has worked to improve market access to foreign firms. Even in sensitive areas such as agricultural produce, through World Trade Organization (WTO) negotiations, bilateral initiatives and, most recently, the proposed Trans-Pacific Partnership, Japan has looked at ways to provide more opportunities for American business.

Behind this lies the understanding that any issues between the two countries need to be resolved “dynamically,” Prime Minister Shinzo Abe told the CEOs of private U.S. companies during a February visit to the country. “The two countries have gone through a number of consultations and, after a period of time, this has led to the building up of a win-win relationship." 

Back in the U.S., Japanese companies have stopped being perceived as outsiders. Of Mitsubishi Hitachi Power Systems Americas, Peter Mierke, the general manager of MHPS America’s Savannah Machinery Works says, “the company definitely has a very strong American feel to it.” The Japanese firm “has really partnered with the local community, the state of Georgia, Chatham County, Pooler the city,” Mr. Mierke said in an interview. “This company is important to America because the gas turbines that we’re manufacturing are going to American utilities to provide electricity for American consumers.”

Examples of Japan’s American evolution exist even among the most quintessential of U.S. products: jeans. Fast Retailing (shop brand “Uniqlo”) last year launched a limited-edition jeans line with denim woven and sawn in the U.S.

“The Japanese are quite sophisticated now in how to operate in the States," Mr. Patrick, of the Center on Japanese Economy and Business , said. "By simply being here they've learned a lot.”

At one point, Japan was seen as a problem for American competitiveness and job growth. Through the actions of its corporates and a responsive government policy, Japan has helped transform the Japan-U.S. economic and trade relationship. As Ms. McCulloch predicted in 1988, Japan has become part of the solution.