TOKYO - The second batch of projects in the United States under Japan's $550 billion investment commitment, unveiled in Washington on Thursday, may help strengthen Prime Minister Sanae Takaichi's relationship with U.S. President Donald Trump but could force Japanese businesses into unfavorable contract terms, analysts said.
The latest projects worth $73 billion focus on the energy sector, with Takaichi describing them as timely initiatives given the Middle East crisis and growing power demand around the world. They come on top of the $36 billion of investment promised in the first round only a month ago.
With the latest batch, around 20 percent of the $550 billion, proposed by Japan in exchange for tariff relief in July, has been pledged.
Additionally, the Joint Announcement on the Japan-U.S. Strategic Investment, released Thursday, said the two governments are working on "significant promising projects" including those in the areas of small modular reactors, large-scale nuclear reactors and crude oil infrastructure.
As for the pace and scale of the projects, which come in the form of investments, loans and guarantees from government-backed institutions, the Japanese government explains that such projects are agreed on only when they would be beneficial to both sides.
According to the memorandum of understanding that the two governments exchanged in September, the projects will be directed by Washington.
The MOU said while the Japanese and U.S. sides will split any profits in the first stages of the projects, the United States will retain 90 percent when the investments are fully operational.
Japanese banks will face challenges in procuring foreign currency in the United States for the massive projects, even if the investments are guaranteed by the Japanese government, analysts said.
"Although the projects are said to be decided under the agreement between the United States and Japan, they are discussed while the United States threatens to raise tariffs," said Junki Iwahashi, senior economist in the research department at Sumitomo Mitsui Trust Bank.
"Challenges include whether Japan can make an appropriate risk evaluation regarding the investment projects while facing such U.S. political pressure," he said, adding showing reluctance on investment proposals could also cause Trump to slap additional tariffs.
"It is possible that Japan will be asked to be involved in projects whose risks are difficult for the United States alone to assume," Iwahashi said, noting that if they were profitable, the U.S. side would do them on its own.
Analysts also say that uncertainties remain about how each project will be financed and the degree of engagement that Japanese government institutions and companies will have.
Japan-U.S. cooperation in the energy sector is important in the medium- to long-term, especially if it helps diversify sources of supply, but the offtake prices paid by Japanese companies will need to have an "economic rationality" for projects in the field to work out, Iwahashi said.
In a sign of Japanese companies' reluctance, a project for the production of storage batteries, a plan for Japan Display Inc. to run a factory to procure advanced display screens and the construction of a copper smelting facility were considered as candidates for the second batch of commitments, according to people close to the matter, but they did not end up on the list released Thursday.
Such business commitments requiring investments in the United States could lead to an outflow of Japanese industries at a time when Takaichi's government wants to promote domestic investment to build a strong economy, said Takuya Hoshino, chief economist at Dai-ichi Life Research Institute.
"The government is calling for domestic investment to spur productivity at a time of labor shortages and a reduction in land productivity is expected," Hoshino said.
Projects included in the second batch of investment include a plan for GE Vernova Inc. and Hitachi Ltd. to build small modular nuclear reactors in Tennessee and Alabama, and the construction natural gas power generation facilities in Pennsylvania and Texas.
The initial round included the construction of a gas-fired power plant in Ohio, the largest of its kind in U.S. history, to run artificial intelligence data centers, as well as a deepwater crude oil export terminal in Texas and a synthetic industrial diamond manufacturing facility in Georgia.
