Trump’s Plan Backfired, Japan is Crashing US economy

Trump’s Plan Backfired, Japan is Crashing US economy

Japan holds $1.1 trillion of US treasuries. And if they ever decide to dump all of those treasuries, it is going to crush the US market. And it seems like the time finally has come and Japan is massively selling off US treasuries, which is freaking out the US markets. It’s going to increase the cost of borrowing for the US government, which is going to cost the US government hundreds of billions of dollars. Back when Donald Trump announced his universal tariffs on all the world, Japan was one of the countries that suffered the most because they rely on exports, especially to the United States. The Japanese economy is an export-driven economy. But they signed a deal with Donald Trump, a deal that was a humiliation for Japan. Japan will pay a 15% tariff by selling anything in the United States, while the US will pay a 0% tariff. When your largest client is telling you that you are going to pay an extra 15% tax, I don’t think that’s good news for you. In fact, cars account for 20% of Japanese exports. So, when you’re buying those Toyotas and Hondas, this is the main source of income for Japan. Well, there is zero tariffs on all the US companies selling in Japan. When iPhones are being sold in Japan, there is 0% tariff. When Facebook and other US tech companies are operating in Japan, there is 0% chariffs. So, it’s the Japanese companies that are going to suffer. Japan was also required to invest $550 billion in the United States and the profits will be split between Japan and the United States which is another humiliation. $550 billion is a lot of money even for a country like Japan. I mean that’s a lot of money even for the United States. So you can see that Japan didn’t actually like this deal. So is Japan is retaliating to Donald Trump? Japan is the largest holder of the US debt. Yes, there are other nations such as China, the UK, Canada, Belgium, but none of them even come close to Japan. So if Japan starts selling, it is going to cause a panic between other nations and it’s going to make it much harder for the US to sell its debts. Which means that you have to rise the yields on the US debt which is going to cost the US taxpayers extra hundreds of billions of dollars to maintain that $ 38 trillion debt. But that’s not the full picture. The reality is that the nature of the Japanese and the US economy are changing. Over the last 30 years, Japan was going through a period of deflation, which means that prices are falling down. And that forced the Japanese central bank to lower interest rates to 0%. They literally had like negative interest rates since 2015 or 2016 up until 2024. And the United States was having a very high interest rates. So investors would borrow money from Japan and would buy US treasuries. And that’s one of the reasons why Japan holds so many US treasuries. If you’re borrowing money from the Bank of Japan at 0.5% interest rate and then you are buying the US treasuries at 5% interest rate, you can pocket the difference. The US treasuries are safe haven assets. You know for a fact that the US government is not going to default on that debt. So you can do this transaction. You can’t be borrowing money from Japan and dumping it into the US stock market because you don’t know what’s going to happen if the markets collapse tomorrow. Then you won’t be able to pay the principle. And that’s called a car trade. And that carrot trade is collapsing because the United States is lowering interest rates. And there are also news that the United States will further lower interest rates in December of this year. And that will bring the average interest rate in the US to about 3.75% to 3.5%. In fact, the chairman of the Fed will be replaced and by the summer of the next year, most likely interest rates in the US will be about 3%. On the other hand, Japan is actually increasing interest rates. Yes, they had ultra low interest rates, but since 2024, interest rates in Japan have been risen to about.5%. And within the last couple of days, the chairman of the Bank of Japan hinted that Japan intends to further increase interest rates. What does that mean? That means now you can buy Japanese treasuries and invest in Japan. and higher interest rates in Japan, while lower interest rates in the United States will make it impossible for these hedge funds and huge financial institutions to carry trade, borrow cheaply from Japan and invested in the United States. So imagine you have a hedge fund that would borrow from Japan cheaply and invested in the US treasuries. Usually you would do that with short-term treasuries because if something happens, you can exit your position very quickly. Now, you would be receiving interest on that six-month treasuries. When that treasury would expire, you would take that principle, reinvest it back in the US treasuries, and continue receiving that interest. But now, since the Bank of Japan is increasing interest rates, this deal no longer makes sense. So, when your treasuries expire in the United States, you’re not going to reinvest that principle. You will take that principle and give it back to the Bank of Japan. and that’s why you’re selling your treasuries, which is why the yields on 10-year treasuries, for example, have been rising over the last couple of days because of that. While if you look at the Japanese government bonds, you can see that since 2022, they have been rising and now they’re about 1.8%. In fact, the yields across all Japanese bonds, starting from 2-year government bonds up to 30-year government bonds, have been rising dramatically. you can make up to 30% on the long-term Japanese government bonds. And this hasn’t happened for a very long time. Part of the reason that Japan ended up as the largest holder of the US debt is because every time a Japanese company would sell in the United States, they will make a profit. Now, most of that profit, yes, a portion of it will go back to Japan, but a portion of it will be invested in the US markets. And if you are Toyota or Honda in the US, what are you going to do with those billions of dollars that you made in profit, you want to keep it in cash in case you need that cash, but you don’t want to hold a lot of cash because there is inflation. So you would keep it in the US Treasury market. So you can easily convert it into cash whenever you need it. And at the same time, you’re receiving interest on that investment. But now because there is like a 15% tariff, you’re making less sales in the United States. you’re making less profits in the United States and you simply have less money to reinvest back into the US treasuries. The third reason is that since Japan had very ultra low interest rates over the last 30 years, imagine you are a Japanese pension fund and you are collecting more money that you’re spending in pensions. What will you do with that extra money? The only option that you have is to invest it in a very safe haven asset. It’s either the Japanese government bonds or most likely it is the US treasuries because you know for a fact that the US treasuries are safe havens. If you invested in Japan and you’re getting.1% in interest rate or.5% in interest rate that is not a decent return. So the Japanese pension funds over the last 30 years have been dumping a lot of their revenues into the US treasuries and collecting interest. But now, because the interest rates in Japan are rising, the pension funds no longer see a point to keep their investments in the United States, which is why they’re not reinvesting when their treasuries are expiring and bringing that money back to Japan and investing it in the Japanese government bonds, which is increasing the supply of US treasuries in the US market, which is leading to this increase in the yields. Pension funds cannot invest in risky assets. they cannot even invest in the S&P 500 because on one side you are receiving pensions on the other side you’re paying off the pensions and you’re investing the extra money you are making but you have to be able to convert that money into cash whenever you need it so even investing it outside Japan into the United States is also a risk because exchange rates change consistently and if the exchange rate flips against you then you won’t be able to pay the pensions and that’s why it’s much better to invest it back in Japan. But when you’re getting no interest from Japan and you’re getting such a great interest from the United States, you are going to invest it in the United States. The real question is, will Japan continue selling off US treasuries? Well, if the United States will continue lowering interest rates and the yields on the US debt will keep falling while Japan will continue increasing interest rates, there is a very high probability that Japan will continue dumping. That’s not because they want to retaliate to Donald Trump, but rather it simply makes no economic sense to keep invested in the US treasuries when you can make as much money in Japan. Everyone is simply looking for the best way to invest their money. Whether these are the hedge funds from Wall Street or the Japanese pension funds, the real question is that do you know what’s the best investing strategy for you? If you haven’t found that yet, then check out the first link in the description of this

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