Japan may reduce its holdings of US Treasuries, triggering a chain reaction; USDT depegging risk draws renewed attention

Expectations are rising that Japan may conduct large-scale sales of U.S. Treasuries, and this potential shock is spreading from traditional financial markets to the crypto industry—especially Tether (USDT), which is deeply tied to U.S. Treasuries. Japan currently holds $1.189 trillion in U.S. Treasuries, making it the largest foreign holder globally. However, as Japanese government bond yields reach multi-year highs, the appeal of continuing to hold U.S. Treasuries is diminishing.

Analysis indicates that the U.S.-Japan interest rate spread has narrowed from 3.5% to 2.4% in the past six months. If it drops to around 2%, it will significantly boost the motivation for capital to flow back to Japan, potentially prompting Japanese institutions to sell up to $500 billion in U.S. Treasuries. The broader yen carry trade is worth as much as $1.2 trillion; should rates rise and the yen strengthen, this structure could rapidly unwind, triggering a chain of global asset liquidations.

As a result, the market is turning its attention to Tether’s risk exposure. Over 80% of USDT reserves are held in U.S. Treasuries, making Tether the world’s 17th largest holder. Treasuries are usually highly liquid and low risk, but if large buyers like Japan exit and yields become volatile, Tether’s liquidity management could come under pressure. This has already prompted warnings from some analysts that systemic stress in Treasuries could spill over to USDT’s peg stability, ultimately impacting Bitcoin and the wider crypto market.

Recently, S&P downgraded USDT’s anchoring ability rating from “4 (limited)” to “5 (weak),” citing an increased proportion of high-risk assets in its reserves and insufficient transparency in disclosures. The report noted that USDT still holds Bitcoin, gold, corporate bonds, and other assets, which could further amplify market risk.

Nevertheless, mainstream markets remain largely unconcerned about a large-scale USDT depeg. Prediction markets put the probability of this risk at just 0.5%. Tether has repeatedly withstood market pressures while maintaining its peg, and the company expects profits to surpass $10 billion in Q3 2025, providing a buffer against potential market volatility.

Overall, if Japan reduces its U.S. Treasury holdings, it will likely be a gradual process, and the U.S. Treasury market is large enough to absorb some shocks. However, amid rising yields, rating pressures, and the complexity of Tether’s reserve structure, USDT’s stability remains a key risk point that the crypto industry needs to monitor closely.