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Kimberly Amadeo

Will Japan Sell U.S. Treasuries to Pay for Disaster?

By March 28, 2011

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It's estimated that Japan's earthquake/tsunami/nuclear disaster will cost as much as $235 billion and five years to rebuild. Japan is the second largest owner of U.S. Treasuries. Japan's debt level is twice as high as its annual economic output. If it does sell Treasuries, interest rates could go higher...at a time when the U.S. housing market can least afford it.

However, this is unlikely. That's because the largest holders of Japanese debt are its people. If Japan needs cash, people in the undamaged portion of Japan will put more into savings, giving the Japanese government the funds it needs to rebuild.

Even if Japan needs the cash, it would be unlikely to sell Treasuries. Japan needs the dollar higher so its currency, the yen, will be lower in value. This will help Japanese exports. This would be a bad time for the yen to rise, since shutdowns at many plants are limiting exports as it is. Japan's economy needs every export it can muster at this time.

Finally, Japan does not want to get into a currency war with the U.S. at this time. If Japan sells Treasuries, this could start a sell-off by China and other foreign holders. It would further complicate budget negotiations for U.S. legislators, who are faced with a $14 trillion federal debt, and the need to fund further budget deficits. Japan knows that a Treasury sell-off would make things difficult for its strongest ally -- at a time when Japan needs all the friends it can get.

Economic Impact of Energy Disasters

Economic Impact of Other Natural Disasters

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Comments

March 29, 2011 at 12:09 pm
(1) Kathleen says:

Thank you for the blog on this topic!
“Japan….unlikely to sell Treasuries. Japan needs the dollar higher so its currency, the yen, will be lower in value.”

It makes perfect sense.

I am relieved to hear that statement.
I think, the Dollar has gained ground over the last few days (which is disturbing to the Gold Bugs.)

With all the Dollar Troubles, it is good to hear that Japan’s crisis will not be a big negative for the US Dollar.

How do you think the Dollar will fare with the $14 Trillion debt and budget problems?
Can they be fixed?

March 29, 2011 at 10:15 pm
(2) Kimberly Amadeo says:

Hi Kathleen,

Over the long-term, the budget deficits and $14 trillion debt will continue to depress the dollar.

For detailed explanation as to why, see The Value of the U.S. Dollar.

Kimberly

April 6, 2011 at 2:18 am
(3) Robert Gentz says:

Doesn’t Japan own its own central banking system so is not benevolent to the whims of a bunch of private bankers like our Federal Reserve?

April 6, 2011 at 12:28 pm
(4) Kimberly Amadeo says:

Great question, Robert.

Actually, in 1997 the Japanese government revised a law to give the Bank of Japan operational independence.This revision significantly diminished the scope for the Ministry of Finance to influence central bank decisions, thus strengthening the Bank of Japan’s autonomy in setting monetary policy.

Kimberly

April 8, 2011 at 8:11 pm
(5) robin says:

i disagree with you japan needs a higher yen so it can import raw materials like copper steel because it do not have natural resources.
it will most likely sell us treasuries

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