Analysts warn that Japan may reduce its $1.189 trillion stake in U.S. government debt as domestic bond yields climb to multi-year highs. The potential shift has drawn attention to USDT, the stablecoin issued by Tether, which holds more than $113 billion in U.S. Treasuries as its primary reserve backing.
Japan remains the world's largest foreign holder of U.S. government debt, but the economic calculus that drove those purchases is changing.
What Happened: Treasury Concentration Risks
Japan extended its nine-month buying streak in September, pushing its holdings to $1.189 trillion, the highest level since August 2022, according to U.S. Department of the Treasury data. Total overseas holdings of U.S. Treasuries edged down to $9.249 trillion during the same period.
The yield spread between U.S. and Japanese bonds has narrowed from 3.5% to 2.4% in six months. One analyst noted that hedged returns on Treasuries have become "increasingly unattractive" and warned that if the spread approaches 2%, Japanese institutions may sell U.S. government bonds and reallocate capital domestically. Some models suggest as much as $500 billion may exit global markets within 18 months.
"They bought foreign debt because Japanese bonds yielded almost nothing," an analyst stated.
Experts warn that Japan's debt crisis is surfacing as its 230% debt-to-GDP burden collides with fiscal expansion under Prime Minister Sanae Takaichi. "A shock in Japan could reverberate worldwide, especially given Tokyo's role as the largest buyer of U.S. Treasuries, raising the stakes for global markets already strained by rising borrowing costs and shrinking fiscal room," she stated.
Japan's potential Treasury sales could hurt the U.S. if the country needs cash to defend their currency exchange rate or to use for domestic bailouts or other expenditures.
One analyst added that the yen carry trade, roughly $1.2 trillion borrowed in yen and deployed globally, could unwind. "As Japanese rates rise and the yen strengthens, those trades turn toxic. Positions unwind. Forced selling accelerates," the analyst stated.
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Why It Matters: Stablecoin Reserve Pressure
Tether's transparency report shows more than 80% of its reserves are in U.S. Treasuries. The company ranks as the 17th largest holder of U.S. government debt worldwide, surpassing many sovereign entities.
S&P Global Ratings downgraded its assessment of Tether's ability to maintain its peg, moving USDT from a score of 4 to 5. The rating agency cited "the rise in exposure to high-risk assets in USDT's reserves over the past year and persistent gaps in disclosure," including Bitcoin, gold, secured loans and corporate bonds.
"Japan will be forced to sell US bonds, the rest of the world will follow. Tether will suffer a sharp depeg and Bitcoin will sink as a result. MicroStrategy will be forced to sell and this will further depress the Bitcoin price," a market watcher wrote.
Traders on the Opinion prediction market assign a 0.5% probability to a USDT depeg scenario. Tether generated $10 billion in profit through the third quarter of 2025, offering a buffer against reserve swings.
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