Why Japan Won’t Stop Trying to Invest in the U.S.

As signs emerged that President Biden was gearing up to stop the Japanese steel maker Nippon Steel from acquiring Pittsburgh-based U.S. Steel, top Japanese officials repeatedly warned that quashing the merger would hinder economic ties between the allies.

Japan’s biggest business lobby, Keidanren, said in September that America’s investability would be tarnished if Nippon Steel’s $15 billion bid was blocked. Prime Minister Shigeru Ishiba of Japan reached out to Mr. Biden asking him to approve the deal during what he called a critical juncture.

In the United States, during a heated presidential campaign, both Mr. Biden and his opponent, Donald J. Trump, came out against the Japanese acquisition of U.S. Steel, an iconic American company in a key electoral state. Mr. Biden on Friday stopped the merger from going forward, arguing that foreign control of U.S. Steel would jeopardize America’s national security.

Nippon Steel and U.S. Steel assailed Mr. Biden’s decision, calling the deal’s review “deeply corrupted by politics” and its rejection “shocking.” The companies said on Friday they would consider taking legal action to try to revive the deal.

But while Mr. Biden’s decision sends a worrying sign to Japanese leaders about the perils of American politics, it is not expected to stop other companies from seeking to do deals in the United States.

Japanese businesses have had little choice but to move significantly toward the United States in recent years, as they have had a harder time investing in China. Now, in anticipation of a second Trump administration, executives are even more busily lining up fresh investments in America.

For decades, Japanese companies have sought growth opportunities outside the country, where the population is aging and declining, and currency fluctuations have imperiled export activities. Much of that expansion has been aimed at the United States and China, which have long vied to be Japan’s biggest trade partner.

But it has gotten more difficult for Japanese firms to operate in China because of less-friendly regulations and competition from state-backed rivals. China’s share of Japanese foreign direct investment has declined steadily over the past half-decade, while it has climbed in the United States. Japan became the top investor in America in 2019 — a position it has maintained each year since.

While the volume of Japanese-led deals in the United States stalled slightly last year, trade experts expect investments to pick up again when President-elect Trump takes office. That is because the risk of increased tariffs gives Japanese and other foreign companies a greater incentive to invest and produce in the United States over other countries, especially China.

Japanese power companies are eyeing a number of potential investments in natural gas and other energy projects promoted by Mr. Trump. At a Trump news conference last month, Masayoshi Son, the chief executive of the Japanese technology company SoftBank, pledged to invest $100 billion in the United States over the next four years.

“Business leaders will not look at a unique case like Nippon Steel and make decisions to withhold investment in the United States,” said Masahiko Hosokawa, a professor at Meisei University and former senior official at Japan’s trade ministry. “This is not a case that will cause damage, especially in the mid- to long term.”

Japan’s biggest business publication, Nikkei, wrote on Saturday that Nippon Steel’s crushed bid was a result of a mistaken calculation that “economic rationality” would prevail even in a presidential election year.

In December 2023, when Nippon Steel announced its plans to acquire U.S. Steel, executives at the company thought the deal would proceed quickly. As the Committee on Foreign Investment in the United States reviewed the deal, Nippon Steel doubled down on its bet on the United States, withdrawing from a longstanding joint venture in China that might have elicited suspicion from regulators.

Nippon Steel’s bid instead drew intense backlash from some politicians and union leaders, who said the purchase of a storied American manufacturer by a foreign entity would undermine national security and local industry. Early on, both President Biden and President-elect Trump said they were against the deal.

As part of its bid, Nippon Steel offered a large premium on U.S. Steel shares and promised to invest billions in the American company’s plants. Takahiro Mori, the Nippon Steel executive in charge of the deal, traveled repeatedly to the United States to hold meetings with over 1,000 employees, local officials and others with a stake in the deal.

Late last month, the review committee, known as CFIUS, sent a letter to the White House saying it was unable to decide whether Nippon Steel should be allowed to buy U.S. Steel. That paved the way for President Biden to terminate the transaction.

China, at the same time, has been trying to bolster relations with Japan. Some speculate the moves were made in anticipation of a trade war between the United States and China that is expected to worsen when Mr. Trump takes office.

In November, Beijing restarted a policy allowing Japanese nationals to make short-term visits without visas. Japan has been working to ease visa requirements for Chinese visitors. In September, China said it would gradually resume Japanese imports of seafood after banning them in response to Japan’s release of treated radioactive water into the ocean.

William Chou, the deputy director of the Japan policy center at the Hudson Institute, a Washington think tank, said he viewed the Nippon Steel case as a “one-off.”

“The U.S. has a long history of being a stable environment, and China is not an attractive place to increase investments at the moment,” Mr. Chou said. “But that’s not to say Japan won’t feel the inclination to hedge its bets.”

In July, as signs emerged that Nippon Steel’s acquisition might not be approved, one of its distributors, Marubeni-Itochu Steel, said it would purchase a stake in a Spanish steel company.

A person with knowledge of the purchase said Nippon Steel was eager for Marubeni-Itochu Steel to expand its presence in Europe, an increasingly important market since hopes were fading that Nippon Steel would gain a bigger toehold in the United States.