Foreign investors hold approximately $8.5 trillion of the United States’ national debt. Japan tops the list, with approximately $1.13 trillion. This financial relationship has long been framed as a win-win: Japan secures a stable return on its foreign exchange reserves by investing in what are effectively risk-free assets, while the United States benefits from continued demand for its debt, which helps keep interest rates relatively low.
Yet in a shifting geopolitical landscape marked by rising protectionism and escalating trade tensions, including a renewed wave of tariffs proposed by the United States, this dynamic is taking on new strategic significance. Japan’s stake in U.S. debt is no longer just a passive investment, as it may soon become a powerful diplomatic lever, one that can either stabilize or strain bilateral relations depending on how it is wielded.
Since the Trump administration came to power, the United States has imposed significant tariffs on Japanese imports, including a 24 percent “reciprocal” import duty, now under a 90-day “pause.” Despite ongoing trade discussions, Japan continues to face a 10 percent baseline tariff and sector-specific duties, particularly affecting its vital automotive industry. These measures have led to economic uncertainty in Japan, with the Bank of Japan reducing its growth forecast and the yen declining in value.
Some in the Japanese government understand that it must deal with President Donald Trump from a position of strength. Finance Minister Kato Katsunobu recently suggested that Japan’s U.S. debt holdings could serve as a “card on the table” in trade negotiations with Washington, marking a shift from previous positions where Japan refrained from linking its bond holdings to trade discussions.
The idea of Japan selling off U.S. Treasuries is often referred to as a “nuclear option,” as such a move could have significant repercussions for both countries. For the U.S., it could lead to a spike in interest rates and financial instability. For Japan, it could result in a stronger yen, making its exports more expensive and potentially harming its economy.
Japan’s use of economic tools in diplomatic negotiations over U.S. trade relations isn’t new. One of the most notable historical precedents is the 1985 Plaza Accord. Under intense pressure from the United States to correct trade imbalances, Japan, alongside France, West Germany, and the United Kingdom, agreed to a coordinated currency intervention that would weaken the U.S. dollar and strengthen the yen. While the agreement temporarily appeased U.S. concerns about its trade deficit, it had far-reaching consequences for Japan. The rapid appreciation of the yen severely undercut Japanese exports, plunging its economy into a prolonged slowdown and setting the stage for the asset bubble and “Lost Decade” of the 1990s.
The Plaza Accord became a cautionary tale in Japanese policymaking circles about the costs of capitulating too readily to U.S. economic pressure. Today, as the United States again turns to aggressive tariff measures and Japan reevaluates its $1.1 trillion in Treasury holdings, many economists and diplomats see parallels and potential lessons in that historic episode. Japan’s current hesitation to weaponize its U.S. debt stake reflects a desire to avoid repeating the economic self-harm it endured under the Plaza framework, even as it considers more assertive posturing in trade diplomacy.
Yet even before the current tariffs, Japan had a history of deploying unconventional monetary tools, most notably its yield curve control policy. The Bank of Japan has maintained ultra-low interest rates and capped long-term government bond yields to stimulate domestic lending and keep debt service costs manageable. While these measures aim to support Japan’s fragile recovery and inflation targets, they have also contributed to capital outflows and yen depreciation. In late 2022 and again in 2024, the Japanese government intervened directly in foreign exchange markets, actions not taken since the late 1990s, to stabilize the yen and prevent further economic fallout from imported inflation. These defensive moves illustrate the complexity of Japan’s position: while it wishes to avoid the economic pain of a Plaza Accord repeat, it must still preserve currency stability in the face of both internal deflationary risks and external trade shocks.
Beyond purely economic calculations, Japan’s U.S. Treasury holdings sit at the intersection of rising geopolitical friction between the United States and China. As the world’s fifth-largest economy and a close U.S. ally, Japan is under growing pressure to align with Washington’s efforts to economically contain Beijing, especially through tech decoupling and trade realignment. However, China remains Japan’s largest trading partner, leaving Tokyo caught between strategic allegiance and economic pragmatism. In this context, Japan’s $1.1 trillion in U.S. Treasuries represents more than financial ballast; it is a stabilizing hedge against U.S. policy unpredictability and a potential bargaining chip in regional diplomacy. How Japan chooses to wield or protect this leverage will signal not only its stance in the current tariff war, but also its broader geopolitical posture in an increasingly polarized world.
Despite its theoretical leverage, Japan is unlikely to weaponize its U.S. Treasury holdings in a drastic fashion. Domestically, the country faces persistent economic headwinds – including an aging population, sluggish productivity, and structural deflation – that make financial stability a paramount concern. A rapid sell-off of U.S. assets could trigger an appreciation of the yen, choking off export competitiveness and risking another downturn reminiscent of the 1990s. Moreover, Japan’s domestic institutional investors, such as pension funds and insurers, heavily rely on Treasuries to balance their portfolios and secure predictable returns. For these reasons, Japan’s vast U.S. debt holdings are more likely to be used as a symbolic and strategic card rather than a literal threat.
The “nuclear option” remains just that: an option so mutually destructive that its power lies more in suggestion than in execution.