Could japan ever sell off us treasuries? Not to follow china but only in the unlikely case of massive usd liquidity crunch

As the US-China trade disputes escalate, financial markets have become increasingly concerned about the possibility of China stepping up their retaliation tools all the way to selling off US Treasuries. Given Japan’s relative importance in the foreign holdings of US Treasuries (second – but very close - to China) , it seems important to understand what role could Japan play in such scenario. In other words, could there be reasons for Japan to sell off Treasuries as well? Given the critical importance of such asset class, it is a question worth asking. We argue that such scenario is highly unlikely as Japan does not really need to sell foreign assets in as far as it keeps a positive saving balance and continues to accumulate reserves. At a sectoral level, the government’s chronic deficits have been large ly financed by domestic savings. Furthermore, Japan has no political motivation to confront the US by selling Treasuries . Acknowledging that the likelihood of Japan following China in a potential sell-off of US Treasuries is very low, one need to focus on other potential triggers for Japan to sell off US Treasuries. The only one which could deserve some attention is a global USD liquidity crunch. The reason is that Japanese domestic financial institutions have been rapidly increasing their share of overseas assets (both loans and securities in the case of banks) so as to limit the impact of very low domestic rates on their profitability. While banks and lifers ’ exposures to foreign securities have been sensitive to USD funding costs, their appetite for foreign assets have remained strong through larger foreign direct investments. Although a good part of Japan’s financial institutions open USD positions are hedged, the trend towards more USD assets is to continue given their preference toward s overseas investment . This is why, in the event of an acute USD liquidity crunch, with a widening of the Yen-USD cross-currency swap rates, could one think of Japanese financial institutions being forced to sell-off part of their portfolio in USD, being US Treasuries the most obvious choice for their liquidity. It should be noted that the fact that Bank of Japan (BoJ) already has two USD swap lines in operation (one with the FED and one on its own) – although very limited in size – reduces the likelihood of such scenario even further.