Japan’s Debt Warning to USA: Asia Holds the Leverage Now

Japan’s Debt Warning to USA: Asia Holds the Leverage Now

Welcome to CBS deep. On Sunday, the Japanese finance minister Katsunobu Kato backtracked on comments that he’d made earlier, saying that Japan has no plans to threaten to sell its $1.13 trillion holdings of the US Treasuries in trade talks with Washington. He’s clarified that my comments were made in response to a question whether Japan could as a bargaining tool in trade negotiations explicitly reassure Washington that it wouldn’t sell its Treasury holdings easily. The comments weren’t meant to suggest selling Treasury holdings. basically saying that his comments had been hypothetical and not indicative of any policy direction by Japan. Now the finance minister said that the primary purpose of Japan’s US Treasury holdings is to ensure that it has sufficient liquidity to conduct yen intervention when it’s necessary. The yen is the Japanese currency. Yet earlier on May the 2nd, 2025, in a Japanese television interview, he suggested that Japan’s US Treasury holdings could be used as a card on the table, implying their potential use as this bargaining tool in trade negotiations with the United States because of the imposition of the 24% reciprocal tariffs it had done so on Japanese imports. By making this suggestion, he raised very loudly and explicitly for the first time that Japan had leverage as a massive creditor to the United States. In essence, he was calling out Americans for living off Japanese money and saying that they, as in the Japanese, held the cards. Now, whether he meant it or not, the message was received in Washington loud and clear. The Financial Times described it as the rare bearing of teeth. It was almost a play on the now famous President Trump’s blowup with the Ukrainian president Widimeir Zalinski in the Oval Office when Trump warned him, “You don’t have the cards right now. You’re not in a good position. You don’t have the cards right now with us. You start having cards.” Things are very bad for the United States when one of its rocksolid allies in the region makes such comments. So what repercussions would exist for the United States if Japan actually follow through and sold treasuries? Why is Japan upset? How does it use the US treasuries to intervene in its own currency market? And how do Asian countries fit into the story? Please like and share the video and do subscribe to the channel if you enjoy the content. Your engagement really helps my channel to grow. A major Japanese selloff of treasuries would amount to economic warfare by the country. It’s an utter disaster for the United States. The implication of such a move has raised concerns among investors about this possibility that Japan may offload US debt which would lead to increased US interest rates and financial stability which would lead to increased US interest rates and financial instability. The bond market experienced immediate large volatility following his initial comments. The United States Treasury yields went up, reflecting the market’s fears. The 10-year US Treasury yield, which is the most watched indicator for long-term interest rates. For example, central banks and investors use it as a reference for setting rates. The yield on this 10-year US Treasury note climbed up that day by five basis points to 4.317%. Which basically indicated a sell-off in treasuries as investors reacted to the news. Now, when yields go up, the prices of the bonds go down. Now, if Japan or other major holders of Treasury securities suddenly started dumping them, it would drive up United States interest rates and we would be looking at an economic crisis for the US. It would make financing that massive US budget deficit a huge burden potentially creating a fiscal crisis for the country. Rates would increase, for example, on home buyers, meaning that a potential housing market crisis may be on the cards, and firms very quickly could go bankrupt if rates jumped up too high too soon, bringing the whole of the United States economy very quickly to a standstill. The United States government has around $ 36 trillion of debt. A 1% rise in rates adds around $350 billion in interest costs alone. Japanese selling large amounts could trigger a global contagion where other global players also start to worry about the safety and the pricing of their holdings and they could decide to sell the treasury bills as well. It would create a global bond market panic and capital flight from United States assets overall. Remember, it was a significant turmoil in the bond market in early April 2025 this year, following President Donald Trump’s announcement of those sweeping tariffs, which led to a sharp sell-off in the Treasury bonds and a spike in yields that finally forced the administration to pause the tariff escalation on April the 9th. At the time, the 10-year Treasury yield surged from going from 3.86% 86% on April the 4th to 4.5% by April the 9th. It marked the largest 3-day increase since 1982. President Trump then told reporters that pre people were getting a bit yippy and they were a little bit afraid and hence he decided to implement a 90-day pause on certain tariff increases across the board except on China. Everybody was hit with just a 10% universal tariff. Well, I thought that people were uh well, I thought that people were uh jumping a little bit out of line. They were getting yippy, you know, they were getting a little bit yippy, a little bit What we also know is that during the turbulent period in April, rumors started that there was some foreign country that was dumping its Treasury holdings and many speculated it must be China. But in fact, we later found out that it was a Japanese investors who significantly reduced their holdings of the United States treasuries and that was what contributed to the bond market turmoil. According to Japan’s Ministry of Finance, Japanese investors during that period sold over $20 billion in foreign bonds in early April. And this included approximately 17.5 billion dollars in the longer dated international bonds during that first week and then an additional $3.6 billion in the following week. United States debt has been rising over time to where it currently stands close to $36 trillion. And with the last decade seeing the biggest increase in amount with 4 trillion growing during the co covid pandemic of 2020 to 2021 alone as the United States government undertook massive stimulus packages. Foreign countries hold around one quarter of all US debt and the rest is held domestically. The Japanese followed by the Chinese are the biggest holders of the United States debt with the Japanese holding around 1.1 trillion. And the Chinese who have significantly reduced it over the last couple of years at the end of August 2024 were holding around $770 billion in debt. Now this has come down from around 1.3 trillion in 2013. However, given the Japanese are the largest debt holders of US debt, to believe that they would suddenly start dumping treasuries knowing full well that the value of what they own themselves will collapse doesn’t really make sense. And this is the reason why after the Japanese finance minister Kato said his comments were taken out of context, the markets have recovered slightly. However, for the Japanese to even acknowledge the possibility represents a surprising turn of events, something that should make Americans pick up their ears. Japan was among the first countries to start open its negotiations with the United States on the trade talks. And I’ve done a whole vlog on this and we’ll put a link in the description over the differences between the two countries and the compulsions and difficulties that Japan faces when dealing with the Trump administration. The Japanese team is not happy with the progress. This weekend we saw a second round of talks and the Japanese want the trade negotiations to cover not only the reciprocal tariffs of 24% but also the 25% separate tariffs that the US has imposed on steel, aluminum, autos and auto part. Now these are big industries in Japan and they account for some serious export value. Remember Trump is saying that 10% universal tariff stays. So in essence, they’re talking about reducing that 14% so far. In negotiations, Japan has tried to emphasize its substantial investments in the United States economy and its role as a key ally. Furthermore, it said that in 2019, Trump offered Shinszi Abbe, who was the uh Japanese prime minister at the time, a verbal commitment that he would not put on tariffs on auto cars. However, none of this is helping so far. Earlier in April, the Japanese Prime Minister Ishiba used strong words and told his parliament that Tokyo would not just keep conceding to United States demands to reach a deal over tariffs. In his words, if Japan concedes everything, we won’t be able to secure our national interest. Washington has excluded automobiles and other key items from the scope of the current talks between the two parties and it’s only willing to discuss the reciprocal tariffs pot. On the other hand, Tokyo is insisting that it was not going to make any concessions and is pressing that there has to be a complete overhaul of all the duties. The prime minister has refused partial trade deal and said that there’ll be no deal without a total roll back and he’s called the additional tariffs on automobiles as being absolutely unacceptable. After the meeting on Saturday, he said there is still a wide gulf between Japan and the United States positions and no common ground has emerged. He’s also under huge pressure not to submit to American demands. The Japanese opposition leader earlier Shinji Oguma of the constitutional democratic party described Trump as being a delinquent kid extorting somebody and he said if you get mugged and put money in their hands they will come back to muggers again. Now coming to Japan’s finance minister Kato. He said that Japan could also use its massive United States Treasury bonds for yen intervention. And he’s referring to the process of selling United States dollar assets like the treasuries to buy yen in order to strengthen or weaken the yen’s value in the foreign exchange market. Now, Japan occasionally intervenes in its currency markets when it feels that the currency is either weakening too much or strengthening too much. So, in 2022, for example, the yen had fallen to a 24-year low, hitting around yen 145 for every dollar. Now, this was due to that widening interest rate gap. The United States Fed at the time was still aggressively hiking interest rates while the Bank of Japan basically maintained those very low ultra uh rates which it had for many many years. Japan feared that a weak yen would actually worsen inflation because it would bring in imported inflation especially since Japan imports energy and a lot of food. So Japan started selling its United States dollars and bought yen. Now, it’s the first action it did since 1998, and the operation is said to have cost around 20 billion dollars in one day. Japan tapped its foreign exchange reserves, which include a large portion of those US Treasury bonds that we’re talking about. And to raise cash, Japan sold some of those treasuries on the market. And the yen immediately surged to around 140 yen to the dollar. But subsequently is continued to face that downward pressure in the months that followed afterwards. Japan intervened again in October 2022 with one estimate putting that in intervention the second time round at around $65 billion over several weeks. Now this is the kind of yen intervention that the finance minister was referring to when he said that this is why we hold our US treasuries. Now, while many countries have started approaching the Trump administration on trade talks, they are aware of what is happening as being unilateral bullying as the Chinese recently described US actions. And they are also aware that they need to work together for them to succeed. The Trumpian policy that really intended to isolate China is actually achieving the exact outcome and it’s isolating the United States instead. In the recent meeting held by 10 nations plus three in the Asseon region, China, Japan, and South Korea, they called for enhanced regional unity and cooperation, and they sounded alarm over the rising protectionism that was happening. Their statement highlighted that amid these rising uncertainties and long-term structural shifts, we reaffirm our full commitment to multilateralism and a rules-based, nondiscriminatory, free, fair, open, inclusive, equitable, and transparent multilateral trading system with the World Trade Organization at its core. Now, China is the top partner for all the ASEAN region countries, and Donald Trump’s policy of protectionism across the board tariffs for all friends and foe has just helped all these countries come closer to China. President Xi Jinping just took his tour across several Southeast Asian countries where basically the red carpet was rolled out for him and country after country signed various and agreements with China. Last month, top diplomats from China, Japan, and South Korea were said to have met in Tokyo and pledged to promote cooperation among the countries. This was seen as a significant event given the historical grievances that each of these countries have with each other. China is currently Japan’s top bilateral trade partner. However, Japan’s economy is deeply integrated with both the United States and China, and the top position often changes year on year. On trade, Tokyo has told to anyone in the administration who will listen that it cannot decouple from China. So, when Scott Bent, the Treasury Secretary, signaled that the administration’s aiming to reach a quicker agreement with those trading partners that align with the United States policies designed to counter China. and he talked of a grand encirclement policy. Japan has clearly told the United States it will not be part of any economic trade block against China. Now, this is a massive failure by the Trump team given that it has been United States policy in the past one decade to get Japan to align with them against China on different forums including taking a very active role in the Quat. Do share with me your thoughts on the Japanese finance minister’s comments. What needs to happen for Japan to make good on its threats of selling bots? Thank you for giving me your time again today.

In this GVS Deep Dive, Najma Minhas unpacks Japan’s sharp warning to the United States and what it means for global markets. After Finance Minister Katsunobu Kato suggested that Tokyo’s $1.1 trillion in U.S. Treasury holdings could be used as leverage, the bond market shuddered — sending 10-year yields spiking and investors scrambling.
As Washington imposes harsh tariffs, Tokyo is pushing back — signaling that Asia now holds real financial power. What happens if Japan dumps U.S. debt? How does yen intervention work? And is the Trump administration’s trade war isolating the U.S. instead of China?
Japan isn’t alone. ASEAN nations and even South Korea are moving closer to China as regional unity grows in the face of U.S. protectionism. Could this be a turning point in the global order?
📉 U.S. debt crisis risk
🇯🇵 Japan vs. Trump trade talks
🪙 Bond market turmoil
🌏 ASEAN-China-Japan cooperation
🔥 Global economic realignment

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Najma Minhas is Managing Editor, Global Village Space. She has worked with National Economic Research Associates (NERA) in New York, Lehman Brothers in London and Standard Chartered Bank in Pakistan. Before launching GVS, she worked as a consultant with World Bank, and USAID. Najma studied Economics at London School of Economics and International Relations at Columbia University, NewYork. She tweets at @MinhasNajma.