Japan and China Dumped US Treasuries Before Trump’s Election Win

Overview

In the months leading up to the 2016 US presidential election, Japan and China, the two largest foreign holders of US Treasuries, significantly reduced their holdings of these assets. This decrease raised concerns about the potential impact on the US economy and financial markets. The reasons for the sell-off are complex and include a combination of economic and political factors.

Economic Factors

One of the primary economic factors driving the sell-off was the increasing divergence in monetary policy between the US and other major economies, including Japan and China. The Federal Reserve had begun raising interest rates in December 2015, while other central banks, such as the Bank of Japan and the People's Bank of China, were maintaining accommodative monetary policies.

The divergence in interest rates made US Treasuries less attractive to foreign investors, as they could earn higher returns on their investments in other countries. Additionally, the strengthening of the US dollar against other currencies made it more expensive for foreign investors to purchase US Treasuries, further reducing demand.

Political Factors

Political factors also played a role in the sell-off of US Treasuries by Japan and China. The election of Donald Trump as president in November 2016 raised concerns among foreign investors about the future direction of US economic and foreign policy.

Trump's campaign rhetoric on trade and foreign relations was seen as potentially damaging to the US economy and its relationships with other countries. This uncertainty led some foreign investors to reduce their exposure to US assets, including US Treasuries.

Impact on the US Economy

The sell-off of US Treasuries by Japan and China had a mixed impact on the US economy. On the one hand, the reduced demand for US Treasuries led to a slight increase in interest rates. This made it more expensive for businesses and consumers to borrow money, which could potentially slow economic growth.

On the other hand, the sell-off also contributed to a stronger US dollar, which made US exports cheaper and boosted the profits of US companies that do business overseas. This helped to offset the negative impact of higher interest rates on the economy.

Conclusion

The sell-off of US Treasuries by Japan and China in the months leading up to the 2016 US presidential election was a significant event that had a complex impact on the US economy. The reasons for the sell-off included a combination of economic and political factors, and the impact on the US economy was mixed.