Japan has signalled that it’s willing to use what some refer to as its “nuclear option”, utilizing the fact that it’s America’s largest foreign creditor by making its $1.1 trillion worth of US Treasury holdings a bargaining tool, as per a report.Japanese Finance Minister Katsunobu Kato said “We obviously need to put all cards on the table in negotiations. It could be among such cards,” also mentioning, “Whether we actually use that card, however, is a different question,” quoted Fortune.
A $1.1 Trillion Pressure PointJapan’s US sovereign debt holdings are huge, amounting to approximately a quarter of its own GDP, as per the report. Although the stockpile is kept for intervention in the foreign exchange market to stabilize the yen, officials now indicate that it can also be used as leverage over Washington in deterring extreme demands, according to Fortune.
If Japan were to dump even a fraction of its Treasury bonds, it would cause a ripple effect, borrowing costs for the US would soar, and interest rates on everything from home loans to auto loans could increase, as per the report. Fortune wrote that “All securities, equities included, are furthermore priced off Treasury bonds, since their interest rate guarantees the risk-free return every investor can expect.”A Double-Edged SwordThe consequences of Japan selling off its US bonds would also have an impact on Tokyo, with the yen shooting up against the dollar. But the threat would be more on the US economy, which depends on foreign investment to fuel its consumer-based economy, as per Fortune. 
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According to the report, most investors consider Japan’s threat to be more of a psychological pressure rather than an actual plan. The head of financial markets strategy at Westpac, Martin Whetton said, “Playing the card early while the U.S. bond market is in the minds of the administration after recent weeks is a smart move,” quoted Fortune.FAQsHow could Japan using its US debt holdings affect the US economy?
If Japan sells a significant portion of its US Treasury bonds, it could raise borrowing costs in the US, as per Fortune.
Could Japan really sell off its US Treasury bonds?
While it’s technically possible, doing so would have serious consequences for both Japan and the US economies, making it more of a negotiating tactic.
AloJapan.com