Correction On The Terms of Japan’s $550 Investment Package in the US

Sorry to have another post so soon. But I wanted to make sure you saw this necessary correction.

In my post the other day on the $550 billion investment package that Japan will finance for Trump-designated projects in the US, the ambiguity in the wording of the Memorandum of Understanding (MOU) led me a possible misinterpretation. This concerns how the money generated by these projects will be shared between the US and Japan. Giving some benefit of the doubt to the negotiators reduces my estimate of the possible harm to Japan. I have corrected that post on this, and I am publishing this separately to ensure that readers will be aware of the change. The changed passages are in italics.

In this investment deal, the Japanese government will provide $550 billion to the US government to invest as Trump sees fit. Should Japan decline to invest in any project named by Trump, he has the right to raise the tariffs on any products to whatever rate he wants (see my earlier post on this aspect).

Japan will be paid back on the following terms. Japan and the US share on a 50/50 basis (net of US taxes) the profits of the project until each country reaches a so-called “Deemed Allocation Amount.” What is the latter? It has two components.

The first component is interest on the investment, as in a loan. The rate will equal the rate on a “six-month SOFR”—now around 4%—plus a “spread” to be determined by the length of the project and a risk premium. If the total were 6%, then Japan would get 3% and the US would get 3%.

The second component is repaying the principal of the loan. Although the MOU does not say so, I am going to presume that this includes whatever interest the governmental agency JBIC has to pay on the bonds it issues. This is the part that my original estimate left out because it was not stated explicitly. It is one of those cases where the MOU is open to contending interpretations. If constructing the project is anticipated to take ten years, then Japan is supposed to get back 10% of its investment each year, and the US will also get 10% of Japan’s investment. However, that will only happen if the project generates enough operating profit to afford the repayment.

Here’s the catch. The money to pay back Japan comes from the project’s so-called “free cash flow.” The latter is the revenue from operations minus all expenses, including the investment expenses. Often, in a new complex project, the required investment can exceed the revenue for several years. Think of the years needed to build the Alaska pipeline project before it can carry any natural gas. In that case, there may not be enough money either to pay the interest or repay the initial loan for years, perhaps never. What if no one wants to buy the gas because companies have other and better sources, as I was told by Japanese sources? See this post and this article. Japan could lose a lot.

On the other hand, suppose in any given year that the project earns a 20% annual return on investment above and beyond the interest. 90% of the excess profits go to the US, just 10% to Japan. And that holds even if Japan’s original investment has not yet been paid back.