The announcement comes as Japanese Prime Minister Shinzo Abe heads to Washington Thursday for meetings with Trump.
The decision by Nikkei 225-listed Nisshinbo Holdings marked the first time a Japanese company has publicly abandoned a Mexican facility in response to the new US president's protectionist outbursts, the Nikkei business daily said Thursday.
The announcement comes as Japanese Prime Minister Shinzo Abe heads to Washington Thursday for meetings with Trump aimed at cementing ties and underscoring Japan's commitment to investing in the US.
Mexico was among the locations being considered for Nisshinbo's vehicle brake parts plant, reportedly worth up to 10 billion yen ($89 million).
The firm is a leading maker of friction-reducing brake parts with about a 15 percent share of the global market.
Nisshinbo, which also makes a range of other products including electronics and textiles, already has a US plant and is looking for a new facility to service the North American market.
Nisshinbo's shares sank more than four percent to close at 1,040 yen ($9) Thursday.
Company spokesman Kiyohiro Kida said Mexico had been at the top of the list for possible sites.
"Mexico was the strongest candidate but we have taken a step back," he told AFP, confirming the decision was a response to Trump's trade policies.
His comments came a day after Nisshinbo's executive managing officer Takayoshi Okugawa told an earnings briefing that the country was off the list.
"Regarding Mexico, we've dropped it," he said. "We have to pick a site other than Mexico."
The US is the most likely alternative for the plant, the Nikkei said, as Trump moves to renegotiate the North American Free Trade Agreement with Canada and Mexico.
More Japanese companies could follow Nisshinbo's example and avoid Mexico, said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.
"It's likely that we could see similar moves" by other firms, he told AFP.
Trump's policies "could affect both companies which already have plants (in Mexico) and those planning to invest there", he added.
The tycoon has assailed Japan for allegedly devaluing the yen to boost exports, grouping it with other countries he says are taking "advantage" of the United States.
Trump has targeted Toyota with strong criticism of its ongoing project to build a new factory in Mexico, threatening it with painful tariffs if its goes ahead.
The Japanese auto giant has stuck to its Mexico plans, but said last month it intends to invest $600 million and create 400 jobs at one of its US plants..
Ford last month abruptly cancelled plans to build a new factory in Mexico.
But Japan Inc.'s possible move away from Mexico would have "little impact" on the economy given its relatively small presence in the nation, said Takashi Shiono, an economist at Credit Suisse in Tokyo.
Mexico has only about a 0.5 percent share of Japan's outstanding foreign direct investment, according to official data.