Why Japan just passed China as the number-one buyer of US debt

Japan has just overtaken China as the largest foreign government buyer of US government debt, which hopefully can mark a time to finally retire dumb talking points about China somehow owning the United States or possessing vast leverage over our foreign policy through its debt purchases.

Everyone from Richard “What if they dumped all their bonds at once” Shelby to Hillary Clinton has made some version of this argument over the years, and it’s never made very much sense. Enough misleading political rhetoric about this was getting tossed around that somehow voters ended up telling pollsters most US debt was owned by China, which has never been anywhere close to true.

The simple truth is that all that Chinese debt-buying in the aughts was a way of subsidizing Chinese export industries — it was a central element to the “currency manipulation” American officials often complained about.

Chinese factories were selling lots of manufactured goods to consumers in the United States. Ordinarily, this would have pushed up the value of China’s currency, the yuan, relative to the US dollar. That, in turn, would have made Chinese goods more expensive in the US and hampered the growth of Chinese exports. The Chinese government decided it didn’t want to let that happen, so it needed to cycle export earnings back into something else priced in dollars.

China chose to buy lots of federal debt — and also lots of Fannie Mae and Freddie Mac debt that was guaranteed by the federal government — because it’s very safe and also very easy to buy in large quantities.

Whatever its origins, the China bond surge is clearly over as China has moved on to a new era of slower growth and somewhat different political thinking about its desired path of development. In its place has come a rush of Japanese money. This money is coming from the Government Pension Investment Fund, which is kind of like Japan’s equivalent of our Social Security Trust Fund.

The difference is that America’s Social Security Trust Fund invests (or “invests”) exclusively in US government debt, which makes it functionally equivalent to an accounting device rather than a proper trust fund.

Japan’s GPIF, however, moved away from that model a few years back in favor of acting more like a real sovereign wealth fund, of the sort you see in Norway and the Gulf states. Over the past 12 months, that’s generated a lot of stories about GPIF buying foreign stocks. But before it dove all the way into the stock market, it tested the waters with the relatively safe move of buying US Treasury bonds.

The point of all this is that Japan’s population is declining, which means Japan’s retirees can’t necessarily count on the next generation of Japanese people to produce enough income to support them all. Japan needs to look outside its borders to more demographically vibrant countries to find the investment opportunities it needs.

All this points to the awkward truth about America’s national debt — the federal government has no need to borrow money. If you want to buy a house, you probably need to borrow some cash to afford it. Lots of businesses face the same problem. So do towns, states, school districts, and other public agencies all around the country. But the US government makes US dollars out of thin air and thus can never be in a position where it needs to borrow some US dollars from someone else.

The reason the government finances deficits by selling bonds rather than printing dollars is because other people like to buy the bonds.

For some, like the Chinese government, buying a bunch of US government bonds is the most convenient way to gain exposure to the overall value of the US dollar. For others, like the Japanese government, buying a bunch of US government bonds is a safe and predictable store of value in a world where some countries are facing severe demographic or geopolitical risks. Many bond buyers, of course, are private individuals or companies who also have these motives.

The point, however, is that nobody can “threaten” the United States by refusing to buy our federal government’s debt. The debt is there because people want to buy it. If nobody wanted it, there would be a logistical challenge in switching from debt finance to money finance — either Congress or the Federal Reserve would have to promulgate a new policy — but economically speaking, life would go on as before.