Japan’s economy, meanwhile, is just showing signs of emerging from stagnation and deflation, which have haunted the country for decades.Įven if the US government runs out of money and extraordinary measures to pay all its bills - a scenario that Treasury Secretary Janet Yellen has said could happen as early as June 1 - the likelihood of a US default may still be low.

Another major concern is the soaring unemployment rate for young people, which hit a record level of 20.4% in April. Deflationary pressure has worsened as consumer prices barely moved during the past few months. “That is a serious concern for all countries but poses a particular risk to China’s fragile economic recovery,” Lipsky and Meng said.Īfter an initial burst in activity following the abrupt lifting of pandemic restrictions late last year, China’s economy is now sputtering as consumption, investments, and industrial output all show signs of slowing. Nevertheless, the “real risk” comes from the global economic fallout and likely US recession that could follow from a default, they said. That means they would have less money available to pay for essential imports, service their own foreign debts, or prop up their national currencies. The falling value of Treasuries would lead to a drop in Japan and China’s foreign reserves. “Japan and China’s large Treasury holdings could hurt them if the value of Treasuries plummets,” said Josh Lipsky and Phillip Meng, analysts from the Atlantic Council’s GeoEconomics Center. Al Drago/Bloomberg/Getty ImagesĪmerica's borrowing is its superpower. The US Treasury building in Washington, DC, US, on Monday, March 13, 2023. Tokyo now holds $1.1 trillion, to China’s $870 billion, and that heavy exposure means both countries are vulnerable to a potential crash in the value of US Treasuries if the doomsday scenario for Washington were to unfold. But an escalation of tensions with the Trump administration in 2019 saw Beijing pare back its holdings, and Japan surpassed China as the top creditor that year.

US Treasury bonds are widely regarded as one of the safest investments on Earth, and China’s holdings of US government debt ballooned from $101 billion to peak at $1.3 trillion in 2013.Ĭhina was the largest foreign creditor to the United States for more than a decade. That generated vast amounts of dollars for China and it needed a safe place to stash them. Together they own $2 trillion - more than a quarter - of the $7.6 trillion in US Treasury securities held by foreign countries.īeijing started to ramp up buying of US Treasuries in 2000, when the United States effectively endorsed China’s entry into the World Trade Organization, triggering an export boom.

As the clock ticks down toward an unprecedented US debt default, the world’s second- and third-biggest economies are watching in fear.Ĭhina and Japan are the largest foreign investors in American government debt.

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