Japan's impact on US Treasuries comes from its long-term capital structure rather than short-term political statements. Its holdings peaked at $1.325 trillion in November 2021, after which the relative attractiveness of US assets for Japanese institutions decreased due to the normalization of Japanese interest rates, changes in currency hedging costs, and rising domestic bond yields.

The key to the funding path is Japan's foreign exchange intervention. Traditionally, the Japanese Ministry of Finance sells dollar assets and buys yen; if dollar assets are primarily US Treasuries, the intervention could spill over into impacting long-term US rates. The FIMA repo changes "selling US Treasuries for dollars" to "collateralizing US Treasuries to borrow dollars," replacing outright sales with term liquidity financing.

Historically, China has been viewed as a major risk source for changes in foreign demand for US Treasuries, but its holdings are about $700 billion, lower than Japan's approximately $1.2 trillion; Japan's uniqueness lies in its financial institutions being long-term significant buyers of US term assets while facing dual constraints of yen appreciation and rising Japanese bond yields.

This represents a shift in pricing power. When Japan stops increasing its holdings, the US Treasury cannot finance overseas official and institutional capital at old yields; new issuances will be handed over to market buyers who place more emphasis on risk compensation. Rising yields do not require panic selling from Japan; as long as its marginal buying decreases, it will force US Treasuries to be repriced at higher term premiums.

ABAB News · Law of Cognition

When the largest buyer stops increasing positions, prices must learn to concede.
The endpoint of currency intervention is often the interest rates of another country.
The real debt risk is not the absence of buyers, but that buyers demand higher returns.