Japan, the largest foreign holder of U.S. government debt, is causing market anxiety as analysts warn that a possible large-scale bond sale may be on the horizon.
Concerns are spreading to the crypto sector, where Tether, the issuer of the USDT stablecoin primarily backed by over $113 billion in U.S. Treasury bonds, is once again under scrutiny due to potential depeg risks.
Analysts warn: Japan may dump US Treasuries if domestic yields rise.
According to the latest data from the U.S. Department of the Treasury, foreign demand for U.S. Treasuries weakened in September. Total foreign holdings fell to $9.249 trillion, a slight decline from August.
Nevertheless, Japan was the exception to this slowdown. The country extended its nine-month buying streak and increased its holdings to $1.189 trillion, the highest amount since August 2022. This reinforces Japan's long-standing position as the largest foreign owner of U.S. Treasuries.
“They bought foreign debt because Japanese bonds yielded almost nothing,” said an analyst.
That difference made U.S. debt an attractive, low-risk yield alternative. But the macro backdrop is changing. As BeInCrypto noted earlier, yields on Japanese government bonds have risen to the highest levels in years.
With improving domestic yields, the incentive to pile into U.S. Treasuries is decreasing. It also raises the likelihood that Japan will reduce its exposure if market conditions or policy priorities shift further.
“Japan's long-ignored debt crisis is coming to the forefront, as its debt-to-GDP ratio of 230% collides with a massive new fiscal expansion under Prime Minister Sanae Takaichi, causing a sharp rise in bond yields and investor panic. A shock in Japan could reverberate globally, especially given Tokyo's role as the largest buyer of U.S. Treasury bonds, raising the stakes for global markets already under pressure from rising borrowing costs and shrinking fiscal space,” said Lena Petrova.
An analyst further emphasized that the yield spread between U.S. and Japanese bonds has narrowed from 3.5% to 2.4% in six months. The covered yield on government bonds has become increasingly unattractive. The post warned that if the spread approaches 2%, repatriation becomes economically attractive.
This could lead Japanese institutions to sell U.S. Treasuries and rearrange capital internally. Some models suggest that as much as $500 billion could leave global markets within 18 months.
“Then there is the yen carry trade, about $1.2 trillion borrowed cheaply in yen and deployed globally in stocks, crypto, emerging markets, all for yield. As Japanese interest rates rise and the yen strengthens, those trades become toxic. Positions are being unwound. Forced sales accelerate… For 30 years, Japanese yields have functioned as the anchor keeping global interest rates artificially low. Any portfolio built since the mid-1990s has quietly relied on that anchor. Today, it is broken,” the analyst added.
Tether's U.S. Treasury exposure is attracting attention
The question many analysts are now asking is simple: If Japan begins to reduce its Treasury holdings, what does that mean for USDT? Concerns arise because Tether's reserve structure is highly concentrated in the same asset class that could come under pressure.
According to Tether's transparency report, more than 80% of its reserves are in U.S. Treasuries. This makes it a significant player in the global treasury ecosystem and notably, the 17th largest holder of U.S. government debt worldwide, more than many sovereign entities.
Such concentration has benefits and vulnerabilities. Government bonds offer high liquidity and historically strong price stability. However, if a major foreign creditor like Japan begins to unwind its positions, the resulting volatility in bond prices or yields could tighten liquidity conditions, indirectly putting pressure on large holders like Tether.
“Japan will be forced to sell U.S. bonds, and the rest of the world will follow. Tether will experience a sharp depeg, and Bitcoin will consequently decline. Strategy (MicroStrategy) will be forced to sell, further pressuring the Bitcoin price. Japan ➡️Tether➡️Bitcoin in that order,” wrote a market observer.
Concerns are further heightened as S&P Global Ratings downgraded its assessment of Tether's ability to maintain its peg, lowering USDT from a score of 4 (limited) to 5 (weak). According to the evaluation,
“5 (weak) reflects the increase in exposure to high-risk assets in USDT's reserves over the past year and ongoing gaps in disclosure. These assets include bitcoin, gold, secured loans, corporate bonds, and other investments, all with limited disclosures and subject to credit, market, interest, and currency risks.”
Despite these macroeconomic concerns, most market participants see little chance of a forced Tether de-pegging. Traders on the Opinion prediction market assign a 0.5% chance to this scenario, indicating a high level of investor skepticism.
Several factors explain this skepticism. Tether has maintained its peg during previous market crises. The company generated $10 billion in profit through Q3 2025, providing a substantial buffer against fluctuations in reserves.
Although the exit of Japanese treasury may be significant, it will likely occur gradually. The U.S. treasury markets remain large and can absorb selling pressure without major disruptions. However, the combination of rising Japanese interest rates, the S&P downgrade, and Tether's reserve mix requires close monitoring.
