Japan and the United States are two of the world's largest economies, accounting for nearly 40% of the world gross domestic product (GDP). The United States is the world's largest economy as measured by GDP, while Japan is the world's third largest economy.
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U.S. economic ties with Japan are very strong, and events impacting the Japanese economy can cause noticeable changes to the U.S. economy. (Everyone's talking about globalization, but what is it and why do some oppose it? To learn more, check out What Is International Trade?)
Trade with Japan
Japan is one of the largest trading partners with the United States. Japan buys 16.8% of the exports from the U.S. and accounts for 11.1% of U.S. imports according to 2006 figures reported by the Congressional Research Service. Although today's figures would be slightly different, their overall magnitude of importance is similar.
The U.S. imports three main categories of goods from Japan: automobiles, computers and machinery. The first category is by far the most important, with approximately 75% of U.S. imports being related to automobiles and automotive parts. U.S. exports to Japan are much more diverse, ranging from computers to agricultural products.
Many major Japanese companies are also major players in the U.S. economy. Sony, Nintendo, Honda, Toyota and Nissan, among others, are all household names in America. It is impossible to account for all of the ways in which the private sectors of the U.S. and Japan are interconnected. As noted above, however, one of the most prominent economic ties is from Japanese automakers. For example, recent estimates suggest that it was the source of employment for almost 152,000 U.S. private sector workers, and that even more U.S. jobs were created by Honda dealerships and Honda-related retail operations.
Together Toyota, Nissan and Honda operate about 30 auto factories in North America, according to figures compiled by CNN's "This Just In" blog.
On April 8, Honda announced that the earthquake had affected some of its suppliers' plants, and that the supply disruptions were expected to cause temporary decreases in North American output through at least mid to late April. Similar disruptions were anticipated by Nissan.
U.S. Debt Concerns
Japan is the second largest foreign holder of U.S. debt. According to the U.S. Treasury, Japan held $885.9 billion in U.S. debt in January 2011, nearly 20% of the total held by foreigners. This was second only to China which held $1.1 trillion in U.S. debt, approximately 26% of the total held by foreigners.
Following the disaster in Japan, speculation arose that economic disruptions in Japan could increase the cost of debt for the United States. Following the tsunami, Japanese efforts to rebuild could potentially freeze the funds which were intended to continue purchasing US treasuries. As a result, the demand for American paper would decrease and the cost of borrowing would rise.
The interest on the U.S. $14.2 trillion debt is one of the largest federal government expenditures. Rising interest costs could significantly increase that percentage. A 2010 report issued by the U.S. Congressional Budget Office reported that rising interest costs might force reductions in spending on other government programs and hamper the ability to use fiscal policy to stimulate the economy during downturns. (Find out why this particular piece of national financing gets so much attention from the media and investors. Check out Breaking Down The U.S. Budget Deficit.)
The Bottom Line
Japan is an important U.S. economic partner. If long-term economic disruptions arise in Japan, they can be expected to have noticeable effects on the U.S. economy through a variety of avenues.