With Japan the United States has had one of its most important and most difficult trading relationships. Japan ranks second to Canada as the largest U.S. export market. It is also the second largest single source of imports to the United States. Trade issues are likely to become even more important as the whole U.S.-Japanese relationship changes in the post-Cold War period. How each country views and reacts to the other is changing as economic issues replace foreign policy and national security issues as the driving force of the relationship.

Japan emerged as the largest foreign direct investor in the U.S. economy in 1992, despite a sharp drop in the total value and number of U.S. businesses acquired and established by foreign investors. This change in Japan's status was spurred by a slight increase in investment spending by Japanese investors combined with a decrease in the British investment position. The foreign direct investment position in U.S. businesses and real estate - or the accumulated book value of all foreign investments - increased by $5 billion in 1992, the smallest change in two decades. Economists generally believe that foreign direct investment yields positive net benefits to both the host and the investing countries. For some American firms, the foreign investment inflows have been especially beneficial because they supplied the firms with funds during times when many U.S. commercial banks were unwilling to finance them.

Sluggish U.S. economic growth over the past few years has raised concern in the United States over the state of U.S. "living standards." The focus of this concern is often centered on the position of U.S. "living standards" compared with those of other industrialized nations. However, there is no clear and precise definition of the standard of living concept, especially one that allows for international comparisons. This report analyzes the standard of living concept within an economic framework, where a nation's standard of living is measured according to its gross domestic product (GDP) on a per capita basis. For the purposes of international comparisons, per capita, GDP data are converted to a common currency using purchasing power parities. Based on this measurement, data indicate that the The United States currently maintains the highest standard of living among the world's top seven industrialized powers, also known as the G-7 countries, although it appears that other industrialized countries, including Japan, are quickly closing the gap.