Japan and the United States: How 2026 Policy Alignment Is Reshaping Global Trade

The economic relationship between Japan and the United States has entered its most productive phase since the post-war reconstruction era. In 2026, the two nations have completed 78 bilateral agreements spanning semiconductor manufacturing, defence procurement, digital trade standards, and critical-mineral supply chains. This is not diplomatic theatre; it is a structural realignment of the world’s first and third largest economies around a shared strategic objective: reducing dependence on Chinese manufacturing while building resilient technology infrastructure.

The centrepiece is the Joint Semiconductor Investment Framework (JSIF), signed in December 2025, which commits $52 billion in combined public and private capital to advanced chip fabrication. Under the framework, TSMC’s Arizona facility will prioritise capacity for Japanese automotive and robotics firms, while Rapidus, Japan’s nascent 2-nanometre chipmaker, receives co-investment from Intel Foundry Services and the US CHIPS Act fund. The goal is clear: by 2028, 30 percent of the world’s leading-edge chip capacity should sit outside East Asia.

Japan’s defence budget reached 2.0 percent of GDP in fiscal year 2026, fulfilling a commitment made in the 2023 National Security Strategy to double military expenditure within five years. The budget allocates $48 billion to procurement, with a significant share directed at joint development programmes with US defence contractors.

The most consequential project is the Global Combat Air Programme (GCAP), a sixth-generation fighter jet jointly developed by Japan’s Mitsubishi Heavy Industries, BAE Systems, and Leonardo. The programme’s $40 billion total investment will sustain 100,000 engineering jobs across the three partner nations through 2040.

Beyond direct defence, the spending creates industrial spillovers. Japanese companies like IHI and Kawasaki Heavy Industries, which manufacture jet engines and naval platforms, are integrating US-origin AI and sensor technologies into their product lines. This cross-pollination accelerates Japan’s broader technology capabilities in areas like autonomous systems, materials science, and electronic warfare.

The US-Japan Digital Trade Agreement (DTA), expanded in January 2026, sets the most advanced standards for cross-border data flows, algorithmic transparency, and AI governance of any bilateral trade instrument. It prohibits data localisation requirements for non-security applications, eliminates customs duties on digital transmissions, and establishes mutual recognition of AI safety certifications.

This framework is strategically important because it bypasses the paralysed WTO e-commerce negotiations, which have stalled since 2019 over developing-country objections to data-flow liberalisation. By setting bilateral standards that other nations can adopt, the US and Japan are establishing de facto global norms for the digital economy.

The practical impact is already visible. Japanese cloud providers like NTT Communications and KDDI are expanding data-centre capacity in US markets under the DTA’s streamlined licensing provisions. Conversely, Amazon Web Services and Microsoft Azure have received expedited approvals for Japanese government cloud contracts, a market previously dominated by domestic incumbents.

The policy alignment extends beyond government. Corporate Japan is undergoing its most significant governance transformation since the introduction of the Stewardship Code in 2014. The Tokyo Stock Exchange’s (TSE) 2025 directive requiring all Prime Market companies to articulate capital-efficiency strategies has forced boards to address chronic under-valuation.

The results are striking. Share buybacks by TSE Prime companies reached $85 billion in 2025, a record, as firms responded to activist pressure and TSE guidance to reduce cross-shareholdings. Toyota, Sony, and SoftBank have all appointed independent board majorities for the first time, while Hitachi’s successful conglomerate breakup is cited as a model for value creation through portfolio simplification.

US institutional investors are the primary beneficiaries. Funds like Elliott Management, ValueAct, and Oasis Management have built significant positions in Japanese equities, arguing that governance reforms will close the persistent valuation discount. Japanese stocks trade at 14 times forward earnings compared to 21 times for the S&P 500, despite comparable return-on-equity improvements.

The US-Japan strategic alignment creates a compelling investment theme that spans multiple asset classes. In equities, Japanese exporters benefit from a weak yen (currently 152 to the dollar) and improved access to US government contracts. The Nikkei 225 has risen 9.4 percent year-to-date, with particular strength in semiconductor equipment (Tokyo Electron, Advantest) and defence (Mitsubishi Heavy, IHI).

In fixed income, Japanese government bonds offer structural hedging value for USD-based portfolios. The Bank of Japan’s gradual yield-curve-control normalisation has lifted 10-year JGB yields to 1.2 percent, creating a positive carry trade for institutions willing to accept yen currency exposure.

For thematic investors, the semiconductor supply-chain reshoring trade offers the highest conviction. ETFs tracking the VanEck Semiconductor Index (SMH) and the iShares MSCI Japan ETF (EWJ) provide efficient exposure. The more targeted WisdomTree Japan Hedged Equity Fund (DXJ) adds currency hedging, removing yen risk while capturing the corporate governance premium.