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No country holds more provable Treasury debt than Japan with roughly $1.1 trillion, equivalent to a quarter of its entire economy. Since dumping U.S. sovereign bonds would severely hurt both Japan and the United States, investors view the threat as a psychological tactic to exert pressure as the clock ticks down on Trump’s 90-day tariff pause.
Call it the nuclear option—a last resort that could unleash mutually assured financial destruction for two allies joined at the hip. Japan is prepared to use its role as America’s single largest creditor as a bargaining chip in ongoing trade negotiations with the Trump administration.
On Friday, a senior member of the government said the stockpile, primarily maintained to periodically intervene in foreign exchange markets, would also serve as an emergency deterrent to protect against maximal demands from the White House.
“We obviously need to put all cards on the table in negotiations. It could be among such cards,” Finance Minister Katsunobu Kato was quoted as saying. “Whether we actually use that card, however, is a different question.”
No other country is proven to currently own more U.S. sovereign debt. Japan’s holdings of some $1.1 trillion in Treasury bonds represent a gargantuan sum, equivalent to roughly a quarter of its gross domestic product.
Treasury yields are the Achilles’ heel of the U.S. economy. If a bondholder were to dump enough sovereign bonds it could tank their price, causing borrowing costs for a debtor nation like the U.S. to spiral out of control. Already servicing the U.S. national debt is more expensive than funding the military.
Ripple effects could radiate outward affecting maturities along the entire yield curve and raising the cost of home mortgages and car loans. All securities, equities included, are furthermore priced off Treasury bonds, since their interest rate guarantees the risk-free return every investor can expect.
While the fallout from unloading bonds would undoubtedly be severe for Tokyo, with the yen soaring versus the dollar, the consequences for a U.S. economy dependent on foreign goodwill to underwrite its consumer-driven lifestyle could potentially be far more devastating.
That’s why investors believe it is little more than a negotiating tactic to exert psychological pressure. “Playing the card early while the U.S. bond market is in the minds of the administration after recent weeks is a smart move,” said Martin Whetton, head of financial markets strategy at Westpac in Sydney, in comments reported by Reuters.
