When most investors think about Trump’s renewed trade war tactics, they look to China. But according to Jeff Park, Head of Alpha Strategies at Bitwise, the real danger may lie in the U.S. misplaying its hand with a very different player.
“It made sense to me at some level that he might go after Canada and Mexico … but Japan’s a little different,” Park explained. “The security guarantee that was shared with Japan is ultimately at the core of how Japan has therefore then basically invested in all our long term treasuries.”
Notably, Japan actually holds more U.S. debt than China. According to data from the U.S. Treasury, Japan holds more than $1 trillion in U.S. Treasuries, compared to the less than $800 billion that China holds. For the time being, Japanese officials have not signaled wanting to use those holdings as bargaining chips in regards to tariffs that President Trump has threatened over Japan. The country also quickly expressed a desire to come forward to negotiate away the more than 20% tariffs Trump had announced on Japan.
“Japan is a very important military ally. They’re [a] very important economic ally, and the U.S. has a lot of history with them,” Bessent said this week. “So I would expect that Japan is going to get priority just because they came forward very quickly.”
But the signal sent by Trump’s escalation — and his labeling Japan as a currency manipulator alongside China — may have already triggered a geopolitical realignment.
“China did come out and announce with Korea and Japan that they are now going to explore a multilateral trade agreement between the three … these are not totally natural allies that would all come together,” Park said. “The only reason it happened was because there was just not enough confidence being signaled in the U.S. that the Alliance would hold the way people had anticipated.”
Even if the U.S. offers Japan an olive branch now, the damage may be irreversible. “The reality is China already probably got some kind of deal out of the ability to negotiate for having to make that announcement,” Park warned. “Korea and Japan are now, at least at some level, going to feel indebted to China in a way that the U.S. would never have wanted that to be the case.”
But considering how large Japan’s holding of U.S. debt is now, things could rapidly change if they change their stance on not using that as a negotiating tactic. As Park explains, foreign debt matters as much, if not more than what the Fed chooses to do at this point. Most of that debt is denominated in longer-term bonds like 30-Year Treasuries.
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