Japan, China Slash U.S. Treasury Holdings as Gulf War Fallout Sparks Currency Defense

Foreign holdings of U.S. Treasuries declined significantly in March as central banks moved to defend local currencies amid the economic fallout from the U.S.-Iran conflict. According to data released by the U.S. Treasury Department, total foreign holdings fell to $9.25 trillion from $9.49 trillion in February.

China reduced its Treasury holdings to $652.3 billion, marking a roughly 6% monthly decline and the country’s lowest level of U.S. debt ownership since September 2008. Japan, the largest foreign holder of U.S. government debt, also cut its exposure sharply, shedding approximately $47 billion to $1.191 trillion.

The retreat from Treasuries came as soaring oil prices following the outbreak of war in the Gulf region placed severe pressure on oil-importing economies, particularly across Asia. The Japanese yen and several regional currencies weakened sharply as higher energy costs widened trade deficits and increased fears of prolonged inflation.

Analysts said central banks likely sold portions of their dollar-denominated reserves to fund currency intervention programs aimed at stabilizing exchange rates.

“Given increased financial volatility since the start of the war in the Gulf, and resultant pressure on exchange rates, especially in Asia, it is not a surprise that U.S. Treasury holdings by central banks have fallen,” said Frederic Neumann, chief Asia economist at HSBC.

Treasury markets themselves also came under pressure during the period, as investors demanded higher yields to compensate for inflation risks tied to rising energy prices. Foreign investors recorded an estimated $142.1 billion valuation loss on long-term Treasury holdings in March alone as bond prices declined.

Despite the broader selloff, the United Kingdom increased its holdings by approximately $29.6 billion to $926.9 billion, partially offsetting reductions from Asian economies and other smaller holders.

China’s Treasury exposure has been steadily declining for more than a decade, down from a peak near $1.3 trillion in 2013. However, analysts noted that official figures may understate Beijing’s true holdings because Chinese state-linked entities often use financial hubs such as Belgium and Luxembourg as custodial centers for indirect Treasury ownership.

Belgium held roughly $454 billion in U.S. government debt in March, while Luxembourg maintained holdings near $439 billion, levels that remained relatively stable despite broader market volatility.

“China’s overall holding of USTs is staying largely stable for the time being, with short-term market volatility being the key factor driving a decline in near-term holding,” said Becky Liu, managing director of global research at Fidelity International.

Japan’s Treasury sales have also drawn increased attention in Washington, especially after reports that the Bank of Japan intervened in foreign exchange markets in late March and early April to support the yen after it weakened beyond the politically sensitive 160-per-dollar threshold.

The weakening yen has been exacerbated by rising oil import costs, which have strained Japan’s current account balance and intensified concerns about a prolonged depreciation cycle.

Some analysts believe U.S. officials are hoping Tokyo avoids large-scale Treasury liquidation as a long-term strategy for currency stabilization.

Vikas Pershad, portfolio manager at M&G Investments, said Washington appears to prefer alternative solutions, including expanded trade partnerships and strategic cooperation in areas such as defense, advanced technology, and critical minerals, rather than sustained Treasury sales that could further destabilize bond markets.

With geopolitical tensions still elevated and energy markets remaining volatile, investors are now closely watching April Treasury data for signs of whether foreign governments will continue reducing their exposure to U.S. debt in the months ahead.