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 due to 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.”

Investment from Japan could see an even bigger surge in the coming years. In July, the U.S. reached a trade deal that lowered the tariff rate on Japan to 15% from Trump’s earlier 25%. In exchange, Japan agreed to pour $550 billion in key U.S. industries via a “Japanese/USA investment vehicle” that will be deployed “at President Trump’s direction.“

They include energy infrastructure and production, semiconductors, critical minerals, pharmaceuticals, and shipbuilding, according to a fact sheet from the White House at the time.

Wall Street had expressed serious doubts that the $550 billion will actually materialize. Analysts at Piper Sandler said in July that Trump’s tariffs are illegal—and face an ongoing court challenge—while noting the Japanese investment pledge comes with few concrete specifics.

“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.”

Meanwhile, on the other side of the trade deal, a revival of U.S. manufacturing will require more workers with the right skills, and Ford CEO Jim Farley has been sounding the alarm that the labor force has shortages.

The country is short 600,000 factory workers and 500,000 construction workers right now, and will need 400,000 auto technicians over the next three years, he wrote in a LinkedIn post in June.

And on Monday, he said the U.S. has overlooked the labor needed to build and sustain data centers and manufacturing facilities.

“I think the intent is there, but there’s nothing to backfill the ambition,” Farley told Axios. “How can we reshore all this stuff if we don’t have people to work there?”