Near as I can tell, and I’ve checked on this infrequently over the past few years, Japan’s holding of US debt have always been within spitting distance of China’s, where spitting distance is a few hundred billion give or take. So the news in itself isn’t surprising.
That is to say, I think it would be a mistake to read much into this. The largest share of Federal debt is held domestically, really the lion’s share. China and Japan are generally within the trillion dollar range, and are always #1 and #2 foreign holders of US debt.
To my knowledge China has intentionally be reducing its holding of US treasuries as part of the ongoing trade... kerfuffle. Yes, China and Japan are usually close, but this delta was closed not because Japan bought more T-bills but because China sold theirs off over the last few months, and is continuing to do so. They're down to the lowest level of holdings since 2017. [1,2,3]
To your point the majority is held domestically but this does create pressure on the instruments at the margins and raises the cost of borrowing both now and over time. Some of that is being masked now by the flight of capital to safety, particularly domestically, over concerns of the same recession.
Less buyers of T-bills raises interest rates, which in turn raises the cost of borrowing money, which in turn pushes down equities. I doubt the Chinese could sell off their T-bills any faster without risking de-valuing their holdings. With that said, I doubt their holdings go up until this trade war ends, if ever, and this will prove problematic once the dust settles. A worst-case scenario for the US is higher interest rates [wiping out current bond investors] combined with lower equities [wiping out current stock investors]. This yields inflation and removes the levers of economic control from the federal reserve -- it could be devastating.
Long-term interest rates are lower now than in recorded history.
> flight of capital to safety, particularly domestically
Is there any evidence that domestic demand is stronger than foreign demand?
> over concerns of the same recession
Europe is much closer to recession than the US. Maybe they're the marginal buyers of US bonds and driving down rates?
German manufacturing just fell off a cliff. European banks are in crisis. European bonds have negative rates from 3 months to 30 years, while US bonds still have a positive yield. The dollar is strengthening.
> A worst-case scenario for the US is higher interest rates
This is a bizarre conclusion given dramatic and relentless reductions in US rates, and negative rates in Europe and Japan.
I'd say the worst-case scenario is if rates go negative in the US and policymakers lose the ability to stimulate in response to recession. Zero and negative rates push the pension crisis into catastrophe. Then US and global economies turn deflationary at the same time. Very difficult problem to fix.
> This is a bizarre conclusion given dramatic and relentless reductions in US rates
It's based on past scenarios that have little to do with the current scenario. A common mistake even among economists. X thing happened in the 1960s or 1970s, therefore it will happen now. Their dogma is the same reason they are nearly all baffled by the lack of wage growth, productivity increases, dynamism, etc. in the economy.
There is no scenario where the US experiences rampant inflation (traditional consumer inflation) and soaring interest rates. The only guaranteed bet in fact, is on low interest rates 'forever' (or until default).
$35 trillion in debt * 3% = hahaha, very funny, stop kidding around!
Take the Japan scenario to the bank. The Fed is going to do everything in its power to pursue that route, as it's the only one left (short of the miracle of spending cuts with tax increases and spending locked to ~1% annual growth).
> A worst-case scenario for the US is higher interest rates [wiping out current bond investors] combined with lower equities [wiping out current stock investors]. This yields inflation and removes the levers of economic control from the federal reserve -- it could be devastating.
I think "wiping out" is grossly overstated, but setting that aside... why do you think this yields inflation and removes the levers of economic control from the federal reserve?
I have the opposite conclusion, but I'm not sure.
It seems to me that if rates are higher and stocks are lower, that should make both of those more appealing investments, which would cause more dollars to flow into financial assets. Which would continue the existing trend whereby the financial world soaks up the excess dollars and very little of it gets into the "real economy" where it would increase wages of workers and cause inflation.
How long are these debt/bond terms usually? Would Japans large 80s boom still be playing a role in their debt ownership or is it all new debt that they keep buying?
T-bonds are a maximum of 30 years, so no. There could be a few months left where they could potentially be holding from 1989, but not a major component.
That is to say, I think it would be a mistake to read much into this. The largest share of Federal debt is held domestically, really the lion’s share. China and Japan are generally within the trillion dollar range, and are always #1 and #2 foreign holders of US debt.