Analyzing Japan’s $550 Billion Pledge to Invest in the U.S.

In July 2025, the United States and Japan reached a major trade agreement that includes Japan’s pledge to invest $550 billion in U.S. industries in return for lower tariffs on Japanese imports. The details of this investment pledge became clearer on Sept. 4, when U.S. Secretary of Commerce Howard Lutnick and Ryosei Akazawa, then Japan’s top trade negotiator, signed a memorandum of understanding (MOU).The Japanese government has posted the official MOU (PDF). In addition, a Sept. 5 report by the Hudson Institute outlined structures for how the $550 billion investment will be carried out.

According to the MOU, several key features of the investment arrangement have emerged. First, Japan must commit the full $550 billion by the end of President Donald Trump’s second term. Second, investment projects will be selected and managed by the United States.For further details, see the MOU (PDF). While Japan has the right to veto the proposed project, the U.S. can respond by raising tariffs on Japanese imports.

Third, the agreement includes a profit-sharing arrangement: Cash flows generated by the investments are split equally until Japan recoups its “deemed allocation amount,” which is the principal investment plus interest payment, after which 90% of the cash flow goes to the U.S. and 10% to Japan.

In practice, this structure makes Japan’s commitment resemble a loan rather than an equity investment, since Japan does not become a shareholder in the projects. The interest rate of this “loan” is called “deemed interest rate,” which is based on a benchmark rate plus a spread that depends on the project’s risk profile. Once the principal and accrued interest are fully repaid, Japan begins receiving returns through its 10% profit share. Nevertheless, it remains unclear what would happen if Japan were unable to fully recoup its deemed allocation amount. In that case, the “loan” would likely become unrecoverable, and Japan would have to write it off.

How Will the Investments’ Profits Be Distributed?

Although many details remain unclear, the MOU suggests that the U.S. government could benefit significantly from this investment arrangement. To illustrate the potential gains or losses for both countries, we provide a simple present value calculation based on several key assumptions. The results naturally depend on these assumptions, which we state explicitly so that readers can judge their reasonableness.

Assume that the investment generates a 10% annual return for 30 years, after which it yields nothing. Based on our understanding of the MOU, Japan’s cash flow will vary according to the deemed interest rate. To provide upper and lower bounds for the present value, we consider two extreme scenarios.

In the first scenario, the deemed interest rate is set high enough that Japan is unable to recoup its deemed allocation amount until the project ends. For example, if the deemed interest rate is 5%, which is equal to half of the investment return, the cash flow to Japan is just enough to cover its interest payments and is insufficient to repay the principal. After 30 years, when the project ends, the remaining deemed allocation amount —the initial principal that has not been repaid—is written off. In this case, Japan’s cash flow would be 5 cents per year for each $1 invested—reflecting half of the 10% return—and would last for 30 years. The U.S. cash flow would be identical to Japan’s, given the equal split of profits.

In the second scenario, the deemed interest rate is assumed to be zero. With no interest, all cash flow to Japan is applied to its investment principal, and it therefore takes 20 years for Japan to fully recoup its $1 principal investment (1 ÷ 0.05 = 20). In this case, Japan’s cash flow would be 5 cents per year for each $1 invested for the first 20 years, and it then falls to 1 cent per year for the remaining 10 years. The latter reflects Japan’s 10% profit share once the deemed allocation amount is fully repaid. For the U.S., the cash flow corresponding to each $1 invested by Japan is also 5 cents per year for the first 20 years, but it rises to 9 cents per year (90% of profits) for the final 10 years.

By comparing the cash flow streams in these two scenarios, it is clear that the first and second scenarios provide upper- and lower-bound estimates for Japan’s present value, with the opposite holding true for the United States. It is also evident that in both cases, the United States’ cash flow is always at least as large as Japan’s.

Calculating the Present Value of This Investment

Present value is calculated as the sum of future discounted cash flows. Why discount future cash flows? The idea is that money in the future is worth less than the same amount today because today’s money can be invested to earn a positive return, is affected by inflation, and carries risk. Hence, if the investment is risky, a higher discount rate should apply. In our example, we use the discount rate implied by the 30-year U.S. Treasury yield, which was around 5% until recently. The discount rate can be thought of as the opportunity cost of not investing in an alternative asset with a similar level of risk. Since this investment is likely riskier than U.S. Treasury bonds, the 5% discount rate assumption is probably too low, meaning our present value estimates for both countries would be overstated.

Based on a 5% discount rate, our calculation shows that under the first scenario, the investment’s present value for both countries equals 76.9 cents per $1 invested by Japan. For the full $550 billion investment, this corresponds to a present value of $422.7 billion for both Japan and the United States. In the second scenario, for each dollar invested by Japan, Japan’s present value decreases to 65.2 cents, while that of the United States rises to 88.5 cents. Accordingly, for the full $550 billion investment, the present values are $358.7 billion for Japan and $486.8 billion for the United States.

The expected gains or losses for each country can then be calculated by comparing the present value to the initial investment amount. In the first scenario—which provides an upper bound for Japan’s profit under our assumptions—Japan incurs a net loss of $127.3 billion ($550 billion minus $422.7 billion) in today’s value, equivalent to about 3.16% of its 2024 gross domestic product (GDP). This means that the total cash flows Japan will receive over the next 30 years are worth less, in today’s terms, than the $550 billion it has today. This expected loss is likely larger in reality since our calculation treats the investment risk as equivalent to holding U.S. Treasuries; a higher risk profile would warrant a higher discount rate and therefore a lower present value.

In the second scenario, which could be considered a lower bound for Japan’s profit estimate, Japan incurs a larger net loss of $191.3 billion ($550 billion minus $358.7 billion) in today’s value, equivalent to about 4.75% of its GDP.

By contrast, the U.S. earns nearly $487 billion and $423 billion under the first and second scenarios, respectively, at no cost—though these figures could be somewhat overstated if a higher discount rate were applied. Note that they correspond to approximately 1.64% and 1.42%, respectively, of U.S. GDP in 2024.

Sensitivity Analysis of Different Discount Rates and Investment Returns

The above present value calculations are sensitive not only to the choice of the discount rate but also to the assumed investment return. Nevertheless, without knowing the investment details, it is difficult to evaluate the appropriateness of the discount rate or to estimate the actual return. In what follows, we conduct a simple sensitivity analysis based on variations in the investment rate of return and the discount rate.

The first figure displays the present value for Japan and the U.S. under different annual investment return rates, while keeping the discount rate fixed at 5%. The light green line represents the present value that both Japan and the U.S. receive when the deemed interest rate is high (the first scenario). Because Japan is unable to recoup its deemed allocation amount until the end of the projects, both countries receive the same return. The blue and orange lines display the present value under the scenario of zero interest rates for Japan and the U.S., respectively. These three lines show that the present value of cash flow rises for both countries as the assumed investment return increases. However, under many reasonable return scenarios, Japan’s present value remains below its original investment amount (the horizontal dashed line), indicating that Japan fails to achieve a positive net gain.

Even in the most optimistic scenario in which the interest rate is sufficiently high (light green line), the investment projects must generate an annual return of 13% or more. In other words, for Japan to achieve positive net gains, the investment project must be sufficiently profitable such that its overall present value is at least twice the initial investment amount, since at least half of the profits go to the United States.

Present Value of Japan’s Investment under Various Investment Returns

SOURCE: Authors’ calculations.

It is unlikely that government-directed investments could consistently generate returns (in present-value terms) that are twice the initial investment amount. The reason is straightforward: If such profitable opportunities truly existed, private investors would likely have already exploited them. By contrast, the U.S. gains increase sharply as returns rise, reflecting its larger profit share of at least 50% during the investment period. This suggests that only under implausibly high-return assumptions would Japan break even, whereas the U.S. benefits substantially even at moderate return levels.

The second figure illustrates how the present value changes with different discount rates while keeping the annual investment return fixed at 10%. As the discount rate rises, the value of future cash flow declines sharply for both countries. The U.S. retains a consistently higher present value than Japan across all rates, again underscoring the asymmetry in the distribution of returns after the recoupment. In addition, Japan’s present value remains well below the invested amount while that for the U.S. continues to record substantial gains because the U.S. contributed no funds to the investment; hence, any present value greater than zero represents a gain.

Present Value of Japan’s Investment under Various Discount Rates

SOURCE: Authors’ calculations.

It is also important to note that a higher rate of return (as illustrated in the first figure) may reflect greater risk; in this case, a higher discount rate should be applied, thereby reducing the present value. Hence, it would still be difficult for Japan to achieve a positive net gain, even in scenarios in which the assumed investment return is high.

The calculations also clearly show that, because of the profit-sharing arrangement, the investment income received by the U.S. is never less than that received by Japan. If these were investments undertaken directly by Japan, the Japanese government would be an equity holder rather than a lender, allowing it to capture the full profits generated. Instead, under the current structure, the profits earned by the U.S. government can be interpreted as a form of foreign investment tax imposed on the project. The implied tax rate exceeds 50%, since U.S. profits are consistently at least as large as those accruing to Japan.

How Would Japan Raise This Money?

The Japanese government is required to raise the $550 billion in U.S. dollars within the next three years, before the end of the Trump administration. This amount is equivalent to about 12% of Japan’s 2024 GDP, raising the question of how the government can mobilize such a large sum in U.S. dollars.

According to a recent updated report from the Hudson Institute, the Japanese government plans to raise the funding through the public financial institution—the Japan Bank for International Cooperation (JBIC)—in three ways: issuing JBIC dollar-denominated bonds, obtaining government loans in yen, and transferring funds from Japan’s foreign currency reserves.See this Oct. 7 report by the Hudson Institute.

Data from Japan’s flow-of-funds accounts (second quarter of 2025) show that the Japanese public sector holds a significant amount of foreign assets. Not only does the central government hold foreign assets equal to about 25% of GDP—most of which are foreign currency reserves—but Japan’s national pension fund also allocates around 27% of Japan’s 2024 GDP to foreign bonds and equities. As noted in the Hudson Institute report, the foreign reserves have been identified as a possible funding source. In addition, public pension funds may be directed to purchase JBIC-issued bonds.

As YiLi Chien, Harold Cole and Hanno Lustig argue in a recent working paper, these large and risky foreign investments mean that Japan’s public sector effectively operates a de facto sovereign wealth fund, financed by low-cost domestic borrowing, as a way to address its fiscal challenges.See YiLi Chien, Harold L. Cole and Hanno Lustig’s working paper, “What about Japan?” NBER Working Paper No. 31850, November 2023 (revised March 2025). Specifically, the working paper’s calculations suggest that the combination of Japan public sector’s risky asset holdings together with low borrowing costs has generated investment income of around 6% of GDP per year for Japan’s public sector since 2013. If the Japanese government were forced to liquidate these assets to fund its investment pledge to the U.S., the opportunity cost to Japan would be even greater.

Summary

Based on what we’ve gleaned from media reports and other sources of information about the MOU, Japan’s investment pledge effectively functions more like a low-cost but risky loan to the United States. Japan’s investment—or loan—appears to carry substantial risk without adequate compensation. As a result, if fully implemented, this deal could generate significant revenue for the U.S. government at the expense of the Japanese government and, ultimately, Japanese taxpayers. However, it remains far from certain whether Japan will fully invest the $550 billion, as the country may instead choose to opt out and accept a higher tariff.

Notes

1. The Japanese government has posted the official MOU (PDF). In addition, a Sept. 5 report by the Hudson Institute outlined structures for how the $550 billion investment will be carried out.
2. For further details, see the MOU (PDF).
3. See this Oct. 7 report by the Hudson Institute.
4. See YiLi Chien, Harold L. Cole and Hanno Lustig’s working paper, “What about Japan?” NBER Working Paper No. 31850, November 2023 (revised March 2025).