Fears rise that Japan could sell off U.S. debt
Some lawmakers and market analysts are expressing rising concerns that a demand for capital by earthquake-ravaged Japan could lead it to sell off some of its huge holdings of U.S.-issued debt, leaving the federal government in an even tighter financial pinch.
Others say a major debt sell-off by Tokyo is unlikely, but noted that the mere fact that questions are being raised speaks volumes about the risks involved in relying so heavily on foreign investors to fund U.S. debt.
“This natural disaster in Japan concerns me that it could speed up what’s coming, because they are the second leading buyer of our debt,” Sen. Rand Paul, Kentucky Republican, told The Washington Times. “Small degrees of differences in how much they buy of our debt, I think, can make a big difference in interest rates that we have to pay people to buy our debt.”
With the federal government having piled up $14.2 trillion in debt, budget experts are warning that the country is on an unsustainable fiscal path. Congress, they say, must find cuts in all areas of the budget, while reforming the entitlement programs — Social Security, Medicare and Medicaid — that are the biggest drivers of national spending.
“They have a lot of bonds,” former Sen. Pete V. Domenici told The Times this month after testifying before Congress about the country’s mounting debt woes. “Are they in such bad trouble that they are not going to buy anymore? If they don’t, who do we look to?”
But some two weeks after the earthquake, uncertainty still reigns over whether Japan will reduce its purchases of Treasury debt and other foreign assets — a decision that could force the U.S. to pay higher rates on its securities to attract buyers and possibly drive up U.S. interest rates.
“It’s not unreasonable to think their appetite will probably diminish somewhat simply because Japan is going to have to fund its reconstruction by issuing more debt,” he said. “So we are going to have more competition from Japan itself going forward.”
Still, lawmakers remain concerned that the amount of foreign-held debt represents a bigger financial gamble than people realize.
“Many people I’ve been talking to in Washington are worrying about Japan because they have nearly 200 percent of their GDP in debt,” Mr. Paul said. “We’re at 100 percent and some people worry that this might not necessarily be a problem for Japan, but more of a problem for us if Japan in this crisis cannot buy our debt any longer.”
Karl Denninger, founder of market-ticker.org, said that could become a real concern in the coming months, as the heavy reconstruction costs in Japan threaten to slow down or even reverse the current flow of goods and services out of the country, and dollars coming into the country.
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