Japan’s equal or bigger issue is a standoff with the eventual Trump administration over trade and tariffs. In reply, a small army of Japanese government officials is currently fighting the good fight in Washington. Negotiations still continue, primarily focusing on the impact of tariffs on Japanese exports – particularly to the auto industry. At the same time, U.S. plans a 25% tariff on imported vehicles and auto-parts—on top of a 10% baseline tariff.
Japan is by far the largest foreign holder of U.S. government debt. Like nearly everything it owns, the Fed’s balance sheet has lost value. Until late February, its holdings were worth about $1.13 trillion. That massive investment has gotten Japan’s new finance minister, Katsunobu Kato, flexing his muscles. He can now claim that these holdings serve as “a card on the table” in any threatened tariff negotiations. Rashid concluded by emphasizing the need to bring multiple perspectives to the table in these conversations. He proposed that a commitment to keep existing Treasury holdings might result in a more positive deal for Japan.
In his opening statements, Kato emphasized the 5 greater economic consequences of larger tariffs. He added that these tariffs would be damaging for Japan’s economy, which has already begun to experience the effects of weakening growth. “It does exist as a card, but I think whether we choose to use it or not would be a separate decision,” Kato stated, indicating a cautious approach regarding the use of Japan’s financial leverage.
The negotiations come as anxiety builds over escalating impacts from Trump’s tariff wars. Further, these policies have disrupted decades-old American trade practices and soured relations with critically important American allies, such as Japan and China. Japanese officials have stated repeatedly that they will not cash in their U.S. government bonds during tariff negotiations. This decision reflects their interest in maintaining a long-term constituent relationship with the United States.
Recent jumps in U.S. government bond yields have economic observers on edge. Analysts have cautioned that these jumps might jeopardize their status as a safe financial asset, particularly with a tariff war raging. Despite these uncertainties, Asian holdings of Treasurys—most notably those from Japan—have proven surprisingly resilient in recent years.
The negotiations have taken on essential and specific issues beyond tariffs that have major, long-lasting impacts on both countries’ economies. Japan, for its part, has resolved to protect Japan’s exports and offset the negative effects of U.S. trade policies. Now, we will see how its large Treasury portfolio affects or changes the negotiations.
