When most investors think about Trump’s new trade tactics, they turn to China. But according to Jeff Park, head of Bitwise’s Alpha Strategies, the real danger could be in misplaying hands with very different players in the US.
“On a level, it makes sense that he might follow Canada and Mexico… but Japan is a little different,” Park explained. “The security guarantees shared with Japan are at the heart of how Japan ultimately invested in essentially all long-term finances.”
In particular, Japan actually holds more US debt than China. Japan has more than $1 trillion in US Treasury Department compared to China’s under $800 billion, according to data from the US Treasury Department. For the time being, Japanese officials did not want to use their holdings as negotiation tips regarding the tariffs that President Trump threatened Japan. The country also quickly expressed its desire to move forward to negotiate the 20% or more tariffs Trump announced in Japan.
“Japan is a very important military alliance. They are (a) a very important economic alliance, and the US has a lot of history with them,” Bescent said this week. “So, just because Japan has made such a rapid progress, we would expect Japan to be given priority.”
However, the signals sent by Trump’s escalation — and his labelling of Japan as a currency manipulator alongside China — may have already caused a geopolitical reorganization.
“China has come out and announced to South Korea and Japan that it will explore a multilateral trade agreement between the three… and not all natural allies that will come together,” Park said. “The only reason it happened is that they didn’t have enough confidence to be signalled in the US that the alliance would retain the way people expected.”
Even if the US currently provides olive branches to Japan, the damage could be irreversible. “The reality is that China is probably getting some sort of contract because of its ability to negotiate to have to make that announcement,” Park warned. “We feel that South Korea and Japan are benefiting China, at least at a certain level, in a way that the US didn’t want it.”
However, given how big Japan’s debt retention is, things can change rapidly if we change our attitude of not using it as a negotiation tactic. As Park explains, foreign debt is even more important, if not more than what the Fed chose at this point. Most of that debt is sected on long-term bonds like the 30-year Treasury Ministry.
The story continues