Trade allies of America hold a formidable weapon in the ongoing trade conflict. They might choose not to utilize it.
In a bold move that's leaving many scratching their heads, Japan, one of America's closest allies and the biggest holder of US Treasuries, has hinted at the potential use of a financial weapon in their ongoing trade talks: selling US debt. Japanese Finance Minister Katsunobu Kato mentioned this option in a recent press briefing, but later walked back the comment, emphasizing that Japan isn't looking to sell US Treasuries as part of their negotiations with the White House.
Experts, however, stress that such a move would likely be an extreme one, with potential disastrous consequences. For one, selling US Treasuries could send shockwaves through the global financial markets, given Japan's significant role as a reliable buyer of Treasuries. Such a move would likely lead to a sharp increase in Treasury rates, making it more expensive for the US government to borrow and causing panic among investors.
It's no secret that the US relies heavily on other countries buying its massive mountain of debt, amounting to $36 trillion. If Japan were to sell substantial amounts of US debt, it could destabilize the market and potentially harm the US economy. Tariffs, as part of the ongoing trade war, could already be reducing the amount of capital seeking a home in American assets, which could lift interest rates and hurt the value of the US dollar.
Even though a large-scale selloff is unlikely, other nations, including Japan, are clearly considering their options. As the biggest foreign creditor, Japan holds $1.1 trillion in US Treasuries. This gives Tokyo some leverage in their negotiations with the White House. If Japan were to sell a significant portion of its Treasuries, it would likely lead to a massive Treasury selloff and might prompt other nations to follow suit.
China, with $784 billion in Treasuries, and the UK, with $750 billion, are also major foreign creditors. Canada, the sixth-largest holder of US Treasuries, finds itself in a precarious position, threatened with tariffs if it refuses to join the US as the 51st state. However, these nations would likely risk destabilizing global markets and hurting their own investments and that of their banks and citizens, if they were to engage in a fire sale of US debt.
The threat from Japan does highlight a broader issue: trade tariffs have the potential to reduce capital inflows, as both theory and data suggest. This could lead to the US needing to sell future debt at lower prices and higher yields, potentially straining the already significant US budget deficit. In such a scenario, more tax cuts would only add to the debt at a time when it would become more costly to do so.
In essence, foreign entities holding trillions of dollars in Treasuries and equities could orchestrate a coordinated selloff, leading to significant market volatility. This could compound existing fiscal challenges, disrupt consumer and corporate credit markets, and strain international economic relationships. The US might need to adjust its fiscal policies and reassess its trade strategies to avoid jeopardizing foreign investment inflows.
- The escalating trade talks between Japan and the United States have revealed Japan's potential use of a financial weapon: selling US Treasuries.
- Despite later retracting his statement about selling US Treasuries, Japanese Finance Minister Kato's comment sheds light on the ugly consequences of such a move, including shockwaves in global financial markets and increased Treasury rates.
- Experts are concerned that a large-scale selloff by Japan, as the biggest foreign creditor, or any other nation, could destabilize the market and harm their own investments and those of their banks and citizens.
- Overseas countries, including Japan, are considering their options to exert leverage in their negotiations with the White House, with potential reciprocal impact on the US economy and global finance.
- As the US relies heavily on foreign entities for the purchase of its massive debt, the current trade tariffs have the potential to reduce capital inflows, straining the US budget deficit and causing foreign entities to reconsider their investments.
