Why Japan Owns So Much US Debt

The United States government finances its operations by issuing debt, held by diverse investors including foreign entities. Foreign countries acquire this debt by purchasing U.S. Treasury securities, effectively lending money to the U.S. government. Japan stands out as a consistently significant holder of U.S. government debt. Understanding why Japan holds such a substantial amount involves examining these securities and Japan’s unique economic landscape and investment priorities.

Understanding US Treasury Securities

U.S. Treasury securities are debt instruments issued by the Department of the Treasury to fund government spending. Marketable securities, most relevant for foreign investment, include Treasury bills (T-bills), Treasury notes (T-notes), Treasury bonds (T-bonds), and Treasury Inflation-Protected Securities (TIPS). T-bills are short-term obligations maturing in one year or less, typically issued at a discount. Treasury notes mature in two to ten years, while Treasury bonds are long-term debt maturing in 20 or 30 years. Both T-notes and T-bonds pay fixed interest payments, known as coupons, every six months.

These instruments are among the safest investments globally, backed by the “full faith and credit” of the United States government. This pledge ensures repayment, contributing to their reputation as low-risk assets. The U.S. Treasury market is also the largest and most liquid government bond market in the world. This high liquidity allows investors to buy or sell significant quantities with ease, making them attractive for managing risk and holding reserves.

U.S. Treasury securities serve as a benchmark for global interest rates, influencing various financial products. Their stability and reliability make them a preferred choice for central banks and large financial institutions worldwide. Investors often seek them as safe-haven assets during periods of economic uncertainty or market volatility.

Japan’s Economic Position and Investment Strategy

Japan’s significant holdings of U.S. debt are rooted in its economic characteristics and investment strategies. A primary factor is Japan’s historically high domestic savings rate, measured at 24.73% of GDP in 2023. This consistent accumulation of capital seeks avenues for stable and relatively higher-yielding investment.

Another element is Japan’s persistent trade surpluses, particularly with the United States. When Japan exports more than it imports, it accumulates large amounts of U.S. dollars. These dollars become foreign exchange reserves managed by the Bank of Japan (BOJ) and other Japanese financial institutions. These reserves are invested in safe, liquid assets to maintain financial stability and facilitate international trade.

Japan’s domestic monetary policy, characterized by prolonged low or negative interest rates, incentivizes Japanese investors to look abroad for better returns. The Bank of Japan’s accommodative monetary stance has resulted in very low yields on domestic fixed-income assets. Consequently, Japanese institutional investors, such as pension funds and insurance companies, face challenges generating sufficient returns from domestic sources alone.

Given the scarcity of attractive yields at home, U.S. Treasury securities become a compelling option. They offer a relatively higher yield compared to Japanese domestic bonds, while providing the safety and liquidity large institutional investors require. This search for stable, higher-yielding assets abroad, combined with accumulated U.S. dollars from trade surpluses and a high savings rate, drives Japan’s sustained demand for U.S. Treasury debt.

How Japan Acquires US Debt

Japan acquires U.S. debt primarily through the secondary market. While the Department of the Treasury issues new securities in primary market auctions, foreign entities often purchase them after initial issuance. The secondary market allows previously issued Treasuries to be bought and sold, offering flexibility and continuous trading.

The Bank of Japan manages Japan’s substantial foreign exchange reserves, largely held in U.S. Treasury securities. These external assets, controlled by the central bank, include foreign currency reserves and securities. The BOJ invests these reserves to maintain stability in the Japanese yen’s exchange rate and ensure liquidity for international transactions.

Private Japanese financial institutions are also major purchasers of U.S. debt. Commercial banks, pension funds, and insurance companies seek diversified portfolios and stable returns. These private investors participate in the global bond market, including the U.S. Treasury market. Their investment decisions balance risk, liquidity, and yield, making U.S. Treasuries a suitable asset class.

Magnitude of Japan’s US Debt Holdings

Japan has consistently been the largest foreign holder of U.S. Treasury securities for an extended period. As of June 2025, Japan’s holdings were around $1.15 trillion, maintaining its status as the largest foreign holder of Treasuries. This positions Japan significantly ahead of other major foreign creditors.

Historically, Japan and China have been the top two foreign holders of U.S. debt for the last two decades. For instance, as of December 2024, Japan’s holdings were estimated at $1.1 trillion, while China’s were approximately $0.8 trillion.

While the total U.S. national debt has grown, Japan’s absolute volume of holdings has generally increased. This consistent investment underscores Japan’s ongoing reliance on U.S. Treasury securities as a foundational component of its external asset management.