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I came across this unsourced answer which claims that the Japanese government buys US treasury bonds at a loss to make exports to the US cheap for US consumers in exchange for military protection by the United States. This seems vaguely plausible, but what is the evidence that this kind of arrangement does or doesn't exist? Is there a more mainstream theory that explains Japan's actions with respect to US treasury bonds?

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No. The Treaty of Mutual Cooperation and Security Between the United States and Japan is the governing document between the United States and Japan on military relations following World War II and is Billateral defense pact between both nations requiring one to come to the aide of the other if attacked. Though in this matter, Japan's is blocked from rendering such aid to the United States as their constitution does not allow for an offensive military force. Considering how the U.S. enter WWII in the first place, they were rather happy with the seemingly one sided nature of the arrangement. The Treaty is second only to The Peace of Westphalia in terms of longest treaty between two great powers.

One of the most suspect claims in the answer is that Japan does not have a military, which is false in and of itself. Japan's military, the Japanese Self Defense Force (JSDF) is the worlds 4th most powerful military and Japan has the 8th largest military budget in the world. And although popular stigma is against the idea, nothing in Japan's constitution prevents it from owning a Nuclear Weapon, which analysts calculate they could produce within a year, and many consider Japan to be a De Facto Nuclear State.

Among the critics of the Treaty's critics, it largely stems from Japanese citizens and largely from the Okinawa area, which as seen damage to the coral reefs from run off from Kaneada Air Base as well as an increase in crime in the area surrounding it, the most shocking of which is the rape of a 14 year old girl by an American Service man. I can find no mention of U.S. Treasury Bonds in this article nor any Japanese miliary article.

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    Re longest (extant) treaty between two great powers - weren't Portugal and England (and its successor states) once great powers? – RedGrittyBrick Jun 18 at 16:03
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    @RedGrittyBrick: I'm quoting the linked article. Take it up with them. – hszmv Jun 18 at 16:35
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Is there a more mainstream theory that explains Japan's actions with respect to US treasury bonds?

Any country that exports more to another country than it receives in imports has two things:

  1. A trade surplus.
  2. A current account surplus (equal in magnitude to the trade surplus).

Now, what can a country do with a current account surplus?

  1. Trade it to a third country for imports.
  2. Invest it in the country with which it has the trade surplus.
  3. Invest it in a third country, leaving the third country with a current account surplus.

Japan has an overall trade surplus (not just with the US). So the first option doesn't make sense. Japan apparently prefers to invest in the US to investing in other countries, so it prefers the second option to the third option.

Now, if you invest it, you have to invest in something. Options include

  1. Real estate. But then you pay taxes and are subject to regulation without representation, because you aren't a local citizen.
  2. Stocks. Which pay business taxes and are subject to regulation without representation, because you aren't a local citizen.
  3. Corporate bonds. Now you don't even have control of the business.
  4. Government bonds. If a government doesn't treat its bondholders well, it has to pay higher premiums on its debt.

Remember, the exporting country has to compete with citizens of the importing country for each of these things. For real estate, stocks, and corporate bonds, citizens have a better deal. For government bonds, the deal is much closer.

Government bonds are also easier to evaluate. Because there is only one national government, but there are many different businesses and real estate locations.

And of course, Japan also invests in those other things (and more esoteric options, like derivatives and commodities).

To get back to the question, Japan invests in US treasury bonds because it has US dollars and nothing better to do with them. US treasury bonds have historically been a safe investment.

Japan's other options aren't as palatable to it. Those include increasing their other investments, but it already faces criticism for owning things that the US considers its own. And it could always export less, but it has the export capacity. And it may sometime want to import more from the US or buy other investments. Or import from other countries that would accept US dollars.

Japan is not the only country with which the US has a trade deficit. China and Mexico are larger. Vietnam, Russia, etc. are smaller but still significant. Are China, Vietnam, and Russia also deliberately subsidizing the US in return for ...?

  • This is a great answer. I will say, it's not about a current account surplus as much as a tendency to buy US treasuries specifically. What made this theory ever so slightly plausible is that Japan does have a huge amount of US sovereign debt even relative to its GDP and other countries. – lazarusL Jun 18 at 17:39

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