By Jacky Wong
The 1980s economic vibes are back. Japanese stocks scaled new heights in 2024. And the U.S. just stopped a Japanese acquisition of an American industrial icon on national security grounds.
The Biden administration's blocking of Nippon Steel's acquisition of U.S. Steel isn't only misguided. It has also rattled Tokyo and risks straining relations with one of America's closest allies in Asia.
While conditions are superficially reminiscent of the trade frictions of four decades ago, Japan and the U.S. are now deeply enmeshed in each other's economies, with new investment links flourishing even in the past few years. Japanese Prime Minister Shigeru Ishiba's warning about a potential chilling effect on Japanese investment in the U.S. should not be taken lightly.
The insular corporate culture in Japan has long frustrated foreign investors, but that has started changing. Years of governance reforms and pressure from regulators and investors for companies to improve governance and returns have finally started bearing fruit.
The bidding war currently under way for Japanese software developer Fuji Soft between two private-equity giants, Bain Capital and KKR, is a case in point. Even retail giant Seven & i Holdings, which operates the 7-Eleven convenience stores in Japan and the U.S., is in play, with Canada's Alimentation Couche-Tard circling what could be Japan's largest-ever takeover.
The total value of private equity-backed deals in Japan reached a record 5.9 trillion yen, equivalent to $39 billion, in 2023 -- twice the amount from the previous year, according to Bain & Co. U.S. equity giants like Bain, Carlyle and KKR have all stepped up their investments in the country.
This makes the U.S. government's intervention particularly poorly timed. The risk now is that protectionism could undermine the progress in opening up Japanese markets as national security is being thrown around as a reason for resisting foreign acquisitions. The next time a U.S. activist investor agitates for the breakup of an underperforming Japanese conglomerate, or an American private-equity giant takes an interest in an acquisition, they are quite likely to encounter a less friendly reception in Japan.
And that also hurts the alliance between the two countries against China. The Biden administration managed to convince Japan to sign up on chip restrictions against China at the expense of its equipment manufacturers like Tokyo Electron. A less trusting relationship between the two countries could hamper such efforts, especially if the incoming Trump administration adopts a similarly protectionist stance toward Japan.
Nations around the world are fretting over Chinese industrial overcapacity, which could flood the world with cheap goods. The merger of Nippon Steel and U.S. Steel, for example, would have strengthened the combined company's ability to compete against Chinese rivals. And Japan also is a key partner with the U.S. in tackling the challenging from China's rising dominance in new emerging sectors like electric vehicles or batteries. That makes the U.S.-Japan cooperation more vital than ever -- both sides would do well to remember that their economic relationship is no longer a zero-sum game.
In trying to protect American steel, President Biden risks forging something far more dangerous: cracks in a crucial political and economic alliance.
Write to Jacky Wong at jacky.wong@wsj.com
(END) Dow Jones Newswires
January 09, 2025 05:30 ET (10:30 GMT)
Copyright (c) 2025 Dow Jones & Company, Inc.
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