Japan’s Finance Minister Katsunobu Kato said on May 4, 2025 that the country will not use its over US$1 trillion in US treasuries holdings as leverage in trade negotiations with the US.

This clarification followed earlier comments that suggested the possibility of using these holdings as a bargaining tool.

Kato explained that his earlier remarks during a television interview were in response to a hypothetical question. “The comments weren’t meant to suggest selling treasury holdings,” he said.

Kato emphasized that Japan’s primary reason for holding US Treasuries is to maintain liquidity for possible intervention in currency markets. He reiterated that the government does not intend to use the sale of these holdings as a negotiation tactic.

🔗 Source: South China Morning Post

🧠 Food for thought

1️⃣ The mutual financial dependence creates a “financial deterrence” between major economies

Japan’s position as the largest foreign holder of U.S. Treasuries at $1,061.5 billion represents a form of economic interdependence that limits either side’s ability to use these holdings as genuine leverage 1.

This massive investment creates what economists call “mutually assured economic destruction,” where any significant sell-off would harm both economies, as Japanese sales would devalue their own remaining holdings while raising U.S. borrowing costs 2.

The market’s sensitivity to even the suggestion of using Treasuries as a bargaining chip necessitated Japan’s rapid clarification, demonstrating how these financial relationships constrain aggressive negotiating tactics 3.

This pattern extends beyond Japan. Other major holders like China have similarly discovered that their Treasury investments function more as economic ties than as negotiating leverage, explaining why threats to sell rarely materialize 4.

2️⃣ Japan’s Treasury holdings reflect a 40-year evolution from investment to strategic asset

Japan’s massive Treasury holdings originated in the 1980s economic boom when the country began investing between $50-100 billion annually abroad, primarily in U.S. debt, creating what Nomura Securities analysts then called “potentially the largest capital flow in history” 5.

By 1984, Japan’s outflow had reached $49.8 billion annually, establishing a pattern that would grow to today’s trillion-dollar position, fundamentally changing from purely financial investments to assets with potential diplomatic implications 5.

The primary purpose of these holdings has evolved, from simply managing trade surpluses to ensuring sufficient liquidity for currency interventions, as Finance Minister Kato repeatedly emphasized 3.

This evolution mirrors broader changes in the international financial system, where the percentage of U.S. debt held by foreign entities has declined from a peak of 45% in 2008 to 36% by 2019, indicating a shift in global investment strategies 6.