MW How Japan became America's banker - and why the money's running out

By Charlie Garcia

For American investors and homeowners, the message is crystal clear: Prepare for higher interest rates

Japan's quiet subsidy of American prosperity is ending.

Over the past 40 years, Japan has helped bankroll Americans' lifestyle while its own economy sank into decades of stagnation. Now the tab's due, and it might cost the U.S. a fortune

The Japanese have been floating America's boat since the mid-1980s. Not out of kindness. Not out of stupidity. But because of a deal so sweet that nobody wanted to talk about it.

Now the deal's going bad. Japan's drowning in debt, its politics are in chaos and it needs its money back. And when your biggest lender starts heading for the exits, it's time to pay attention.

Japan holds $1.1 trillion in U.S. Treasury bonds. It's got more U.S. paper than any other country. But unlike China - the second-largest Treasury holders - Japan has never complained about it. Japan just kept buying, kept lending, kept quiet.

But here's the thing about quiet money - when it stops being quiet, you've got problems.

Look at Japan today: government debt at 235% of GDP - that's like owing your annual salary times 2.3 to Visa. Prime Minister Shigeru Ishiba hanging on to power like a cat on a screen door, with 21% approval after a series of fundraising scandals and economic missteps. You know what happens when your biggest lender is both broke and paralyzed? America's reliable ATM is about to display "INSUFFICIENT FUNDS."

How Uncle Sam got a banker

Picture this: 1945. World War II is over. America's got the guns, Japan's got the ruins. The U.S. cut a deal - military protection for economic cooperation. But the real magic trick came later.

For the next 40 years, Japan rebuilt itself, accumulating dollars and using them for its own development. Japan went from making tin toys to Toyotas (JP:7203) $(TM)$, from cheap radios to world-class electronics. By 1985, they'd completed their first miracle.

Then came the second act. The Plaza Accord of 1985 - five finance ministers in a New York hotel room deciding to dismantle Japan's export machine. Japan signed on too, thinking they could manage it.

They couldn't. The yen $(USDJPY.FOREX)$ shot up 50% against the U.S. dollar DXY in two years. Japan faced a choice: Watch its economic miracle turn into a pumpkin, or get creative.

They got creative. Instead of converting their mountain of trade-surplus dollars to yen (which would have pushed the yen even higher), the Japanese did something beautiful. They started buying U.S. Treasury bonds. Mountains of them.

It was perfect. The U.S. got to keep borrowing. Japan got to keep exporting. Nobody had to mention that the whole thing was a shell game. As economists have long warned, this recycling machine couldn't last forever. But that's a problem for the next guy.

For the next 40 years - from 1985 to now - this recycling machine has been running nonstop. Japan made our Walkmans (Google it, kids), Americans would buy them with dollars, and then - here's the beautiful part - Japan would loan those dollars back to the U.S. by purchasing Treasury bonds. It's like paying your bartender with an IOU, then having him loan you money to keep drinking. Genius!

Why the party's over (Hint: Everyone's broke)

Three major shifts are killing this arrangement, and they're all happening at once.

First, demographics. Japan's aging population needs those savings for retirement, not for subsidizing American consumption. Turns out, elderly Japanese people prefer eating actual food to dining on Treasury bonds.

Read: Why America's aging population will be a problem for stocks - and your retirement

Second, debt. At 235% of GDP, Japan's government debt makes America's national debt look positively prudent, like comparing a shopaholic to someone who merely forgot to cancel their gym membership. As Japan's bond rates rise, the math becomes more impossible than explaining cryptocurrency to your grandmother.

Third, politics. Prime Minister Ishiba's government hangs by a thread, with 21% approval after a series of fundraising scandals and economic missteps. You can't run a corner store with 21% approval, let alone a country.

Adding to the pressure, there's declining demand for Japanese government bonds domestically. This forces Japan to raise interest rates, which in turn makes holding U.S. Treasurys even less attractive. When your own bonds can't find buyers, it's hard to justify buying someone else's.

Trump's card: A new deal (Now with 100% more Masayoshi Son)

Enter Masayoshi Son, the SoftBank (JP:9984) $(SFTBY)$ billionaire who's become President Donald Trump's favorite Japanese dealmaker. He pledged $100 billion in U.S. investments in December, but that was just the warm-up act.

Son doesn't look like a financial revolutionary. He looks more like your accountant's fun uncle. But this billionaire who makes Elon Musk look risk-averse has reportedly floated an idea more radical than Trump's Gaza resort plan: transform Japan's passive Treasury holdings into active investments in American companies through a joint sovereign wealth fund. According to financial press reports, this would mean converting government bonds into equity stakes in U.S. technology, infrastructure and energy projects.

Picture this: Instead of Japan parking $1 trillion in government bonds yielding less than a savings account at the Bank of Mattress, this money would flow into U.S. technology, infrastructure and energy projects. Both nations would share the profits. Americans might even be able to buy shares, receiving dividends from Japanese investment in the U.S. economy. Of course, converting $1 trillion in bonds to equity investments would be fraught with risks - currency fluctuations, market volatility and political backlash on both sides of the Pacific.

U.S. Treasury Secretary Scott Bessent would face a delicate task in making this transition without triggering a bond-market crisis - kind of like defusing a bomb while riding a unicycle. If Japan simply dumped its Treasury holdings, interest rates would spike faster than blood pressure at a tax audit.

What this means for investors

Time to panic? Not yet. But keep your running shoes handy. The immediate risks are clear:

-- If Japan stops buying America's bonds, U.S. interest rates could spike.

-- Homeowners with adjustable-rate mortgages could see costs jump.

-- New car loans and credit cards would get more expensive.

-- The U.S. government's interest payments would soar, potentially affecting everything from Social Security to defense spending.

But the opportunity is equally significant. A U.S.-Japan investment fund could:

-- Channel foreign capital into productive assets rather than government debt.

-- Create jobs through infrastructure and technology investment.

-- Generate returns that benefit both nations' citizens.

-- Establish a model for unwinding other financial imbalances with Germany, South Korea and Saudi Arabia.

Free markets in international finance have always been about as real as professional wrestling - entertaining, but heavily choreographed.

This isn't just about financial engineering - though let's be honest, financial engineering is sexier than it sounds, like accounting's dangerous cousin who rides a motorcycle. It's about whether America can maintain access to foreign capital while reducing its debt dependence, kind of like keeping your rich friends while learning to pay for your own drinks.

For 40 years, the U.S. has run its economy on other nations' savings like a teenager with Dad's credit card. That model is more exhausted than a parent of triplets.

Critics will call this government interference in free markets. But free markets in international finance have always been about as real as professional wrestling - entertaining, but heavily choreographed. Every major economy practices industrial policy; America just outsourced its policy to allies and called it "free trade." Now the U.S. is bringing it home like a college kid with dirty laundry.

Read: Why Trump's tax and spending bill isn't getting the bond market's vote

Japan's quiet subsidy of American prosperity is ending. The U.S. Federal Reserve can't print its way out of this one - they've tried that trick more times than a birthday party magician. Congress can't tax its way out either, though God knows they'll probably try. The only path forward is a new bargain that transforms debt into equity, dependence into partnership.

For American investors and homeowners, the message is crystal clear: The era of cheap money is over. Lock in fixed-rate mortgages while you can. Prepare for higher interest rates. And watch for announcements of new investment vehicles that could reshape global finance.

The greatest risk isn't change - it's pretending the old system can continue. Japan's bondholders are already voting with their wallets. The only question is whether Washington can engineer an economic soft landing for the U.S. or whether the country is headed for the kind of turbulence that has flight attendants reaching for their own oxygen masks.

Here's what to watch as these transitions unfold:

-- Japanese 10-year bond yields (if they spike, trouble ahead).

-- Any announcement of a U.S.-Japan investment fund.

-- The stability of Japan's government. (If Ishiba's government falls, markets could panic.)

-- Adjustable-rates move up - might be time to lock in fixed rates.

For 40 years, Americans' have been drinking champagne on Japan's tab. Now it's closing time and they want to be paid in something besides IOUs.

Welcome to the morning after.

Charlie Garcia is founder and a managing partner of R360, a peer-to-peer organization for individuals and families with a net worth of $100 million or more. Email him at charlie@R360Global.com.

MW How Japan became America's banker - and why the money's running out

By Charlie Garcia

For American investors and homeowners, the message is crystal clear: Prepare for higher interest rates

Japan's quiet subsidy of American prosperity is ending.

Over the past 40 years, Japan has helped bankroll Americans' lifestyle while its own economy sank into decades of stagnation. Now the tab's due, and it might cost the U.S. a fortune

The Japanese have been floating America's boat since the mid-1980s. Not out of kindness. Not out of stupidity. But because of a deal so sweet that nobody wanted to talk about it.

Now the deal's going bad. Japan's drowning in debt, its politics are in chaos and it needs its money back. And when your biggest lender starts heading for the exits, it's time to pay attention.

Japan holds $1.1 trillion in U.S. Treasury bonds. It's got more U.S. paper than any other country. But unlike China - the second-largest Treasury holders - Japan has never complained about it. Japan just kept buying, kept lending, kept quiet.

But here's the thing about quiet money - when it stops being quiet, you've got problems.

Look at Japan today: government debt at 235% of GDP - that's like owing your annual salary times 2.3 to Visa. Prime Minister Shigeru Ishiba hanging on to power like a cat on a screen door, with 21% approval after a series of fundraising scandals and economic missteps. You know what happens when your biggest lender is both broke and paralyzed? America's reliable ATM is about to display "INSUFFICIENT FUNDS."

How Uncle Sam got a banker

Picture this: 1945. World War II is over. America's got the guns, Japan's got the ruins. The U.S. cut a deal - military protection for economic cooperation. But the real magic trick came later.

For the next 40 years, Japan rebuilt itself, accumulating dollars and using them for its own development. Japan went from making tin toys to Toyotas (JP:7203) (TM), from cheap radios to world-class electronics. By 1985, they'd completed their first miracle.

Then came the second act. The Plaza Accord of 1985 - five finance ministers in a New York hotel room deciding to dismantle Japan's export machine. Japan signed on too, thinking they could manage it.

They couldn't. The yen (USDJPY) shot up 50% against the U.S. dollar DXY in two years. Japan faced a choice: Watch its economic miracle turn into a pumpkin, or get creative.

They got creative. Instead of converting their mountain of trade-surplus dollars to yen (which would have pushed the yen even higher), the Japanese did something beautiful. They started buying U.S. Treasury bonds. Mountains of them.

It was perfect. The U.S. got to keep borrowing. Japan got to keep exporting. Nobody had to mention that the whole thing was a shell game. As economists have long warned, this recycling machine couldn't last forever. But that's a problem for the next guy.

For the next 40 years - from 1985 to now - this recycling machine has been running nonstop. Japan made our Walkmans (Google it, kids), Americans would buy them with dollars, and then - here's the beautiful part - Japan would loan those dollars back to the U.S. by purchasing Treasury bonds. It's like paying your bartender with an IOU, then having him loan you money to keep drinking. Genius!

Why the party's over (Hint: Everyone's broke)

Three major shifts are killing this arrangement, and they're all happening at once.

First, demographics. Japan's aging population needs those savings for retirement, not for subsidizing American consumption. Turns out, elderly Japanese people prefer eating actual food to dining on Treasury bonds.

Read: Why America's aging population will be a problem for stocks - and your retirement

Second, debt. At 235% of GDP, Japan's government debt makes America's national debt look positively prudent, like comparing a shopaholic to someone who merely forgot to cancel their gym membership. As Japan's bond rates rise, the math becomes more impossible than explaining cryptocurrency to your grandmother.

Third, politics. Prime Minister Ishiba's government hangs by a thread, with 21% approval after a series of fundraising scandals and economic missteps. You can't run a corner store with 21% approval, let alone a country.

Adding to the pressure, there's declining demand for Japanese government bonds domestically. This forces Japan to raise interest rates, which in turn makes holding U.S. Treasurys even less attractive. When your own bonds can't find buyers, it's hard to justify buying someone else's.

Trump's card: A new deal (Now with 100% more Masayoshi Son)

Enter Masayoshi Son, the SoftBank (JP:9984) (SFTBY) billionaire who's become President Donald Trump's favorite Japanese dealmaker. He pledged $100 billion in U.S. investments in December, but that was just the warm-up act.

Son doesn't look like a financial revolutionary. He looks more like your accountant's fun uncle. But this billionaire who makes Elon Musk look risk-averse has reportedly floated an idea more radical than Trump's Gaza resort plan: transform Japan's passive Treasury holdings into active investments in American companies through a joint sovereign wealth fund. According to financial press reports, this would mean converting government bonds into equity stakes in U.S. technology, infrastructure and energy projects.

Picture this: Instead of Japan parking $1 trillion in government bonds yielding less than a savings account at the Bank of Mattress, this money would flow into U.S. technology, infrastructure and energy projects. Both nations would share the profits. Americans might even be able to buy shares, receiving dividends from Japanese investment in the U.S. economy. Of course, converting $1 trillion in bonds to equity investments would be fraught with risks - currency fluctuations, market volatility and political backlash on both sides of the Pacific.

U.S. Treasury Secretary Scott Bessent would face a delicate task in making this transition without triggering a bond-market crisis - kind of like defusing a bomb while riding a unicycle. If Japan simply dumped its Treasury holdings, interest rates would spike faster than blood pressure at a tax audit.

What this means for investors

Time to panic? Not yet. But keep your running shoes handy. The immediate risks are clear:

-- If Japan stops buying America's bonds, U.S. interest rates could spike.

-- Homeowners with adjustable-rate mortgages could see costs jump.

-- New car loans and credit cards would get more expensive.

-- The U.S. government's interest payments would soar, potentially affecting everything from Social Security to defense spending.

But the opportunity is equally significant. A U.S.-Japan investment fund could:

-- Channel foreign capital into productive assets rather than government debt.

-- Create jobs through infrastructure and technology investment.

-- Generate returns that benefit both nations' citizens.

-- Establish a model for unwinding other financial imbalances with Germany, South Korea and Saudi Arabia.

Free markets in international finance have always been about as real as professional wrestling - entertaining, but heavily choreographed.

This isn't just about financial engineering - though let's be honest, financial engineering is sexier than it sounds, like accounting's dangerous cousin who rides a motorcycle. It's about whether America can maintain access to foreign capital while reducing its debt dependence, kind of like keeping your rich friends while learning to pay for your own drinks.

For 40 years, the U.S. has run its economy on other nations' savings like a teenager with Dad's credit card. That model is more exhausted than a parent of triplets.

Critics will call this government interference in free markets. But free markets in international finance have always been about as real as professional wrestling - entertaining, but heavily choreographed. Every major economy practices industrial policy; America just outsourced its policy to allies and called it "free trade." Now the U.S. is bringing it home like a college kid with dirty laundry.

Read: Why Trump's tax and spending bill isn't getting the bond market's vote

Japan's quiet subsidy of American prosperity is ending. The U.S. Federal Reserve can't print its way out of this one - they've tried that trick more times than a birthday party magician. Congress can't tax its way out either, though God knows they'll probably try. The only path forward is a new bargain that transforms debt into equity, dependence into partnership.

For American investors and homeowners, the message is crystal clear: The era of cheap money is over. Lock in fixed-rate mortgages while you can. Prepare for higher interest rates. And watch for announcements of new investment vehicles that could reshape global finance.

The greatest risk isn't change - it's pretending the old system can continue. Japan's bondholders are already voting with their wallets. The only question is whether Washington can engineer an economic soft landing for the U.S. or whether the country is headed for the kind of turbulence that has flight attendants reaching for their own oxygen masks.

Here's what to watch as these transitions unfold:

-- Japanese 10-year bond yields (if they spike, trouble ahead).

-- Any announcement of a U.S.-Japan investment fund.

-- The stability of Japan's government. (If Ishiba's government falls, markets could panic.)

-- Adjustable-rates move up - might be time to lock in fixed rates.

For 40 years, Americans' have been drinking champagne on Japan's tab. Now it's closing time and they want to be paid in something besides IOUs.

Welcome to the morning after.

Charlie Garcia is founder and a managing partner of R360, a peer-to-peer organization for individuals and families with a net worth of $100 million or more. Email him at charlie@R360Global.com.

(MORE TO FOLLOW) Dow Jones Newswires

June 03, 2025 07:45 ET (11:45 GMT)

MW How Japan became America's banker - and why -2-

More: Jamie Dimon's bond-market warnings put investors on alert to diversify outside U.S.

Also read: The 'mother of all credit squeezes' is coming - hang on to your wallet

-Charlie Garcia

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(END) Dow Jones Newswires

June 03, 2025 07:45 ET (11:45 GMT)

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