All this has combined to make Japan the largest current holder of US Treasuries, easily holding an astonishing $1.1 trillion in their own treasury bonds. This is a huge amount of money, representing a hefty financial stake. The current trade war between the US and nearly all its global trading partners only heightens the urgency. China has overtaken the UK again as the second largest holder as of February, with $784 billion. At the same time, the United Kingdom is not far behind with $750 billion, America’s third-largest foreign creditor. Canada is the second largest holder of US Treasuries. This little-known fact makes clear that for both countries, financing America’s quickly growing $36 trillion national debt is one of their most important roles.
Japanese Finance Minister Katsunobu Kato recently hinted that selling US Treasuries is a “card on the table” during negotiations with the United States. However, he later clarified that Japan is “not considering the sale of US Treasuries as a means of Japan-US negotiations.” Japan can’t afford to upset the apple cart with a political confrontation. Simultaneously, it needs to find its way through the thicket of regional security challenges across the Asia-Pacific.
The prospect of Japan or any other country dumping huge quantities of US debt is terrifying. The move would almost certainly precipitate a destabilizing selloff in global markets. This scenario would pose a grave threat to Japan’s economy, in turn hitting hard its trading partners. Analysts are warning that emergency US Treasury fire sales would likely serve as a bombshell that could rock world financial markets. Ernie Tedeschi noted, “It would send shockwaves around world financial markets if one of the most reliable buyers of Treasuries is no longer reliably in the market for it.”
The unintended consequences of trade tariffs add another layer of complexity to this already tricky landscape. Tariffs can scare capital from American assets, as investors flock to safer investments. Such a change would indeed tend to drive up interest rates and weaken the US dollar. Kent Smetters emphasized that “both theory and data show that trade tariffs reduce net capital inflows.” If tariffs are fully implemented, he warned, “the US will need to sell its future debt… at lower prices and higher yields.”
Japan’s budgetary strategy is therefore inextricably tied to Japan’s security requirements. Moreover, their very survival hinges on American protection against an increasingly belligerent North Korea and other possible threats across the restive Asia-Pacific region. Consequently, any policy or activity that undermined its economic soundness, like disposing of US Treasuries, would be destructive. Win Thin remarked, “Threatening to dump an asset of which it is a major holder means that Japan can hurt itself in the process.”
Global finance is more interconnected than ever before. Foreign creditors, especially Japan, are vital to keeping US Treasuries a safe haven. Maury Obstfeld pointed out, “No one wants to sell a lot of Treasuries quickly because they would take losses on their entire portfolio, and Japan’s is vast.” In the same testimony, he cautioned that such busybody tariff policies would result in “… massive tariff retaliation,” inflaming already-intense international relations.
Kato’s initial statements regarding the potential sale of US Treasuries reflect Japan’s attempt to assert its position in ongoing negotiations with Washington. The finance minister’s subsequent clarification indicates a preference for diplomatic solutions rather than drastic financial maneuvers that could destabilize both economies.