Who Holds More U.S. Debt Than China? Their Next Move Could Shake the Global Economy

Not personalized financial advice - your money, your choice

Ben walking through the Portland Japanese Garden.

The average number of cells in a human body can range from 20 to 40 trillion. If you include bacteria in the cell count, that number doubles in many cases (est. 38 trillion bacterial cells).

20 trillion is also the number of dollars estimated as part of Japan's massive foreign asset holdings and government pension fund investments in the Yen carry trade complex.

Fun fact: Did you know that, of all countries, Japan holds the most U.S. debt? Probably thought it was China but China is in third behind the UK.

So, Japan holds the most U.S. debt of any country, and the Yen carry-trade is massive. But what is the Yen carry-trade, anyway?

Imagine the global economy is a neighborhood block.

One of your neighbors (Japan) loves lending out tools to other neighbors allowing them to invest in things that improve their own property (economy). This neighbor charges just $1 at a 0.5% interest rate for using the tools.

As a result, most of your neighbors borrow the majority of their tools from this one generous neighbor. Many even rent those tools out to other people in the neighborhood for a profit because your nice neighbor let them use the tools for almost free.

So what happens when the nice neighbor starts charging more?

A lot of people would scramble to return the tools, or try to get them back from the people they'd loaned them to. It would also become less profitable (or outright unprofitable) for anyone who had been re-lending those tools down the chain.

If prices from the original lender go up too much, people start losing money.

This is how the Japanese carry trade functions. Japan lends money to countries, businesses, and in some cases individuals, at very low interest rates. Those loans are then used to spend, invest, or re-lend, and in the case of re-lending, the original loan holder gets to carry (pocket) the spread as extra income.

If Japan's central bank hikes interest rates quickly, that income disappears or flips negative. The amount of money flowing through the global economy dramatically shrinks.

This, naturally, is not good for economic growth anywhere in the world. And since Japan is the U.S.'s largest debt holder (not China, as most people assume), the consequences can be especially significant.

With less money trading hands, there is less economic growth. With lower growth, less employment. With less employment, more opportunity for recession, or worse.

If this helped you understand why the Japanese carry-trade matters, please consider subscribing to my YouTube channel or newsletter! I love writing these articles, and I love hearing from the people who read them.

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