The centerpiece of the recent trade agreement between the United States and Japan was Japan’s promise to invest $550 billion in a new fund that would help “rebuild and expand core American industries.” But the initial terms of the deal did not specify how Japan would finance the investment, who would administer the funds, or how the profit retention mechanism (initially agreed to be 90 percent to the US and 10 percent to Japan) would operate in practice.
On September 4, Secretary of Commerce Howard Lutnick and Minister Ryosei Akazawa signed a memorandum of understanding (MOU) that answers many of those questions. This MOU appears to lay out a powerful investment framework to accelerate both countries’ industrial and security interests, further affirming their deep and layered partnership.
Details of the MOU
Some of the memorandum’s most significant stipulations are:
- Japan should allocate the $550 billion before President Donald Trump’s term ends on January 19, 2029.
- Investments should go to key strategic sectors—semiconductors, pharmaceuticals, critical minerals, metals, shipbuilding, energy (including pipelines), artificial intelligence (AI), and quantum computing.
- The president will create an investment committee to recommend and oversee investments. The US secretary of commerce will chair the investment committee and select its other members.
- A consultation committee, with designees from both the United States and Japan, will advise an investment committee, which will then recommend projects. The consultation committee will also provide legal and strategic input to the investment committee.
- The United States Investment Accelerator will execute, manage, and administer the investments. This office is based within the Department of Commerce, and the secretary of commerce has the power to appoint its executive director.
- The US will create a special purpose vehicle (SPV) for each investment. The US or its designees will govern these investment SPVs.
- With the president’s approval, the US will propose projects and their investment amounts for Japan to review. Japan will have about two months to respond and transfer the necessary funds—in US dollars—to the investment accelerator.
- Japan has the right to decline to fund all or part of a project. But the US can then impose tariffs on Japanese imports in response.
- Japan and the US will evenly split profits from the project until Japan recoups its investment. Afterward, profits will be disbursed at a ratio of 90 percent to the US and 10 percent to Japan.
- The US government will try to arrange leases to federal land, access, water, power, and energy to investment projects, as well as organize offtake arrangements. The federal government will also expedite relevant regulatory processes.
- When possible, Japanese firms will receive priority over comparable foreign firms to serve as vendors and suppliers for projects.
- The US and Japan will abide by their respective domestic agreements and laws.
Significance
Below are five key takeaways from the MOU’s administrative and financial parameters.
Japan is obligated to invest. Under this framework, Japan technically can reject proposed projects. One reason for Japan to do so is that there are firms interested in taking on the investment, rendering the use of the $550 billion investment fund unnecessary.
But the more likely reason that the Japanese government would reject a proposal is that it simply does not support or wish to invest in a particular project. In such cases, the US president reserves the right to apply tariffs against Japan. The president can determine the tariff rate and act on this threat at any time—after the first, fourth, or fourteenth Japanese rejection. This stipulation is clearly intended to give the US leverage to encourage Japanese investment.
Japan receives desirable debt obligations. Under these terms, the Japanese government’s investment in a project is not comparable to an equity stake. Rather, it should be understood as a debt obligation. Therefore, the US is effectively servicing a debt to Japan under the 50/50 profit distribution terms until Tokyo recoups its initial investment. Yet while most loan obligations end once the debt is paid back, Japan will continue to receive 10 percent profits for the project’s duration, which could prove very lucrative in long-term projects.
The MOU makes it clear that, even in the case of a failed investment, (1) both countries will abide by their respective domestic laws and (2) the failed investment will pay out its debt obligations before servicing any equity shareholders, as is customary in US law.
The deal will encourage investment from often-conservative Japanese businesses. The combination of the tariff threat and the profit potential should encourage Japan to take on riskier investments than it usually would. Though corporate governance reforms are starting to make an impact, Japan’s slow economic growth and shrinking population incentivize Japan’s conservative companies to hold cash instead of investing.
The strategic investment fund should change that. Consider a hypothetical $10 billion project in which a Japanese firm and an American firm are only willing to invest $2 billion each. Normally, this project would not come to fruition because no other investors would be willing to cover the remaining $6 billion. However, with the new strategic investment fund, if the US government supports the project, Washington can ask Tokyo to provide the $6 billion. At the same time, the US federal government will provide political backing, facilitate regulatory compliance, and offer access to necessary resources to maximize the probability that the project succeeds. Once the project comes online, 40 percent of the profits will go to the Japanese and US companies, and the governments of Japan and the United States will split the remaining 60 percent 50/50 until Japan’s $6 billion debt obligation is paid off. Afterward, Japan continues to earn 10 percent of the future profits.
The most likely candidate for investment is the proposed $44 billion Alaskan liquefied natural gas (LNG) project. Japanese energy, utility, and trading companies have long doubted the project despite its clear strategic and economic benefits. Japanese firms frequently worry that the project will be unprofitable—despite often lacking the data to support that claim. As a result, they prefer existing and more certain projects like those in the Gulf of America. Loan guarantees from the $550 billion strategic investment fund, as well as likely orders for Japanese tubular steel for pipes, should help address these concerns.
Japan needs to be proactive. The strategic investment fund’s broader implication is that the US wants the Japanese government and its domestic industry to be proactive. Tokyo likely knows this, as the MOU prioritizes key economic security sectors—semiconductors, pharmaceuticals, critical minerals, metals, shipbuilding, energy, AI, and quantum computing—that Akazawa tried to use as negotiating chips during the trade talks in May and June. Though Tokyo can only advise on investments through its position in the consultation committee, it is well placed to proactively recommend win-win projects to a US administration that has clearly embraced foreign investment.
The MOU is designed to encourage Japan’s proactivity in three key ways: (1) guaranteed preference for Japanese vendors and suppliers, (2) deregulated access to land and energy, and (3) a promise of political support in Washington.
Other countries should take note. The European Union and South Korea have signed similar strategic investment fund agreements. This new MOU gives Brussels and Seoul insight about further negotiations with the White House. Japan has demonstrated that, when negotiated correctly, strategic investment funds can advance shared security, economic, and industrial priorities.
Conclusion
Eight busy months of trade and tariff negotiations under the second Trump administration have produced a flurry of headlines. But the White House is clearly committed to securing foreign investment to revitalize America’s industrial strength and economic security. Japan, the first nation to include a strategic investment fund in its trade deal, has the opportunity to remain ahead of the curve by working with the US to make investments that advance both countries’ security and economic interests.
Several questions remain about Lutnick and Akazawa’s strategic investment fund MOU. Yet perhaps the most important is, What should we invest in first?
The author thanks friends in government, law, and finance who facilitated the production of this policy brief.