One of America’s closest allies recently raised eyebrows for threatening to fire off the ultimate financial weapon against Washington in trade talks: dumping US debt. Japanese Finance Minister Katsunobu Kato, whose country is the biggest holder of US Treasuries, said on Friday that selling the assets is a “card on the table” in tariff negotiations, according to The Associated Press. “It does exist as a card, but I think whether we choose to use it or not would be a separate decision,” Kato said. Two days later, the Japanese official walked back the comment, stressing on Sunday that the longtime US ally is “not considering the sale of US Treasuries as a means of Japan-US negotiations.” Japan was unlikely to fire this big bazooka in the trade war anyway, since selling US Treasuries is considered an extreme move — one that would likely backfire, experts say. Still, the short-lived threat raises an ugly truth: The United States relies on other countries buying its $36 trillion mountain of debt. It’s another way that President Donald Trump’s aggressive trade war could hurt the American economy: Tariffs have the potential to reduce the amount of capital seeking a home in American assets, which could lift interest rates and hurt the value of the US dollar. Even if a large-scale Treasury selloff is unlikely, other nations — including one of America’s closest allies — are clearly considering all options. As America’s biggest foreign creditor, Japan sits on $1.1 trillion of US Treasuries. That gives Tokyo some leverage as it seeks to hammer out a trade deal with the White House. If Japan sold massive amounts of US debt, it would very likely spark a massive Treasury selloff. Treasury rates would in turn sharply increase, making it more expensive for Washington to borrow and freaking out investors along the way. “It would send shockwaves around world financial markets if one of the most reliable buyers of Treasuries is no longer reliably in the market for it,” said Ernie Tedeschi, director of economics at the Budget Lab at Yale and a chief economist in the Biden administration. Recall that fears of a bond market catastrophe helped convince Trump decided to pause so-called “reciprocal tariffs” on April 9. A trade tactic with dire consequences And Washington doesn’t just rely on Japan to buy its debt. China has been slapped with tariffs of at least 145% on most goods, but it is also America’s second-biggest foreign creditor, with $784 billion of Treasuries as of February, according to federal data. The United Kingdom, which faces a 10% tariff, is America’s third-largest foreign creditor, with $750 billion of US Treasuries. And the fifth-biggest holder of US Treasuries, Canada, is being threatened with more tariffs if it does not join the United States as the 51st state. But for these nations, dumping US debt, especially in a fire sale, would risk destabilizing global markets as well as their own. Moreover, it would hurt their own investments and that of their banks and citizens. Their own currencies could also sharply increase in value, making it harder to sell their goods overseas. “Threatening to dump an asset of which it is a major holder means that Japan can hurt itself in the process,” Win Thin, global head of market strategy at Brown Brothers Harriman, wrote in a note to clients on Monday. He wrote that this kind of threat is “always a double-edged sword.” Maury Obstfeld, senior fellow at the Peterson Institute for International Economics, told CNN that Japan’s comments seem “very rash” and amount to “just a silly response.” “No one wants to sell a lot of Treasuries quickly because they would take losses on their entire portfolio, and Japan’s is vast,” Obstfeld said. “This would also invite massive tariff retaliation.” Moreover, as Obstfeld notes, Japan needs Washington to defend itself in the volatile Asia-Pacific region. It wouldn’t want to do anything to cast doubt on that support from the American military. “The fact is that US Treasuries are so central to world financial markets that it’s really hard to damage the United States – without hurting yourself in the process,” said Yale’s Tedeschi. Still, the warning from Japan does speak to a broader issue. “Both theory and data show that trade tariffs reduce net capital inflows,” said Kent Smetters, professor of business economics and public policy at the University of Pennsylvania’s Wharton School. Smetters, who runs the Penn Wharton Budget Model, noted that capital was indeed leaving the United States and rates were rising before Trump announced his pause on reciprocal tariffs. “If the tariffs are fully implemented, the US will need to sell its future debt… at lower prices and higher yields,” Smetters said. “More tax cuts, instead of helping offset some of the negative effects of tariffs, will add to the debt at a time when it will become more costly to do so.”
America’s trading partners have a massive bazooka in the trade war. They may never use it
TruthLens AI Suggested Headline:
"Japan Hints at Selling US Treasuries Amid Trade Negotiations, but Retracts Statement"
CNN
6.9
TruthLens AI Summary
In a recent statement, Japanese Finance Minister Katsunobu Kato hinted at a significant option in the ongoing trade negotiations with the United States: the potential to sell off US Treasuries, a move that could be seen as a financial weapon in the trade war. Japan, holding approximately $1.1 trillion in US debt, is the largest foreign creditor of the United States. Kato's remarks suggested that while this option exists, the decision to act on it would be carefully considered. However, he quickly retracted this statement, emphasizing that Japan is not actively considering such a drastic measure. The suggestion of selling US Treasuries raises concerns about its potential repercussions, as experts warn that such an action could destabilize both the US and global financial markets. A significant selloff could lead to increased Treasury rates, making borrowing more expensive for the US and potentially harming the value of the US dollar.
The implications of Japan's threat to sell US debt extend beyond just the immediate economic impact. Other countries, such as China, the United Kingdom, and Canada, also hold substantial amounts of US Treasuries and are facing trade tariffs from the US. The prospect of dumping these assets poses a risk not only to the US economy but also to the economies of these nations, as it could lead to currency appreciation and reduced competitiveness in global markets. Analysts highlight that while the threat may be a negotiating tactic, it is fraught with risks that could backfire on Japan and its allies. The essential point raised by this situation is the interconnectedness of global finance; any significant action against US Treasuries could lead to a broader economic fallout. Experts caution that while tariffs may aim to protect domestic markets, they also have the potential to diminish capital inflows, which could exacerbate borrowing costs and lead to economic instability in the long run.
TruthLens AI Analysis
The article highlights a significant moment in U.S.-Japan trade relations, suggesting that Japan's Finance Minister hinted at a drastic measure involving the sale of U.S. Treasuries. This assertion, though quickly retracted, reveals underlying tensions and the potential leverage Japan holds as a major holder of U.S. debt. Analyzing the implications of this news provides insight into broader economic and geopolitical dynamics.
Potential Intentions Behind the Article
The article aims to draw attention to the fragility of U.S. economic stability, particularly in relation to its reliance on foreign creditors. By highlighting Japan's threat to sell U.S. Treasuries, the piece suggests that America’s economic power might be more vulnerable than traditionally perceived. This could serve to raise awareness and concern among policymakers and the public regarding the risks associated with aggressive trade policies.
Public Perception Goals
The news likely seeks to instill a sense of urgency and caution regarding U.S. trade practices. By discussing the potential consequences of Japan's actions, the article underscores the interconnectedness of global economies and the risks involved in trade wars. It may be designed to prompt discussions about the sustainability of America’s debt and the need for more diplomatic trade relations.
Information Omission
While the article mentions the implications of Japan selling U.S. Treasuries, it does not delve deeply into the reasons for Japan's swift retraction of its statement. This omission may lead readers to focus on the threat rather than on Japan’s commitment to maintaining strong ties with the U.S., potentially skewing public understanding of their relationship.
Manipulative Factors
The article carries a certain degree of manipulativeness through its choice of language and emphasis on potential threats. By framing Japan's comments as a "bazooka," it evokes imagery of drastic and destructive measures, which can amplify fears about economic instability. This choice of words may lead to heightened anxiety among readers regarding U.S. economic policies.
Credibility Assessment
While the article is based on factual statements made by officials, the framing and selective emphasis may detract from its overall reliability. The quick retraction of the threat by Japan suggests that the initial comments might have been exaggerated for effect. Thus, while containing elements of truth, the article's portrayal of the situation could be seen as alarmist.
Societal Impact Scenarios
The potential for Japan to act on its threat, even if unlikely, could lead to increased volatility in financial markets. If investors perceive a weakening of U.S. economic standing, stock prices and bond yields may fluctuate dramatically. This could influence public sentiment and investor behavior, ultimately impacting the economy on a broader scale.
Supportive Communities
The article may resonate more with economic analysts, policymakers, and those concerned about international relations. It appeals to communities interested in understanding the implications of trade wars, especially in light of historical U.S.-Japan relations.
Market Reaction Possibilities
News of a potential sell-off of U.S. Treasuries could affect various sectors, particularly those reliant on stable borrowing rates. Financial institutions and investors in U.S. debt would be particularly attentive, as shifts in Treasury yields could have direct consequences on their portfolios.
Geopolitical Relevance
This discussion is highly relevant to current global power dynamics, especially amid rising tensions between the U.S. and other nations regarding trade. The article reflects ongoing concerns about how trade policies could influence geopolitical stability.
AI Involvement Speculation
It is conceivable that AI tools were employed in crafting this article, particularly in data gathering and analysis. However, the narrative style suggests a human editorial touch, which may incorporate AI-generated data to support its arguments. AI’s role could have been in synthesizing complex economic information to present it in an accessible format.
Concluding Thoughts
The article illustrates the delicate balance of international economic relations and the potential consequences of policy decisions. While it raises important issues, the framing may evoke unnecessary alarm among the public. The reliability is moderate, as factual content is intertwined with a narrative that may exaggerate certain risks.