Dollar Dominance Under Threat as Japan and China Reduce Treasury Holdings

Japan's shift in its Treasury holdings has sent shockwaves through financial markets. The country is reducing its $1.116 trillion holding of US Treasuries, which is a significant portion of foreign investment that finances US government debt. This reduction could lead to higher bond yields and make the dollar less attractive.

The Japanese government and businesses have been borrowing yen at near-zero interest rates and converting them into dollars to invest in US bonds and stocks. However, with Japan's recent increase in interest rates, this dynamic is changing. Higher Japanese rates are making Japanese bonds more attractive to investors, which could lead to a decrease in demand for Treasuries.

China is also reducing its holdings of US Treasuries, from $1.3 trillion to $633.4 billion since June 2026. This reduction is not just about dumping Treasuries but about diversifying reserves and reducing vulnerability to US financial sanctions. China is promoting RMB settlement in international trade and investment.

Pakistan's economy is particularly vulnerable to a disorderly weakening of the dollar, but it could also benefit from a gradual move toward a multipolar currency system. The country should focus on producing locally, exporting, and earning transactions in multiple currencies through bilateral trade.