Citi analysts indicate that the $550 billion investment fund, as part of the Japan-US tariff agreement, could significantly tap into Japan's $1.3 trillion foreign exchange reserves.

US Treasuries form the core component of Japan's foreign exchange reserves, and Citi analysts believe that Japan's utilization of these bonds could trigger a chain reaction, leading to rising long-term US Treasury yields. This could, in turn, prompt the United States to pressure Japan to extend the maturity of its US debt holdings.

"We are not expecting a major shift in multilateral exchange rate policy that would result in something like a 'Mar-a-Lago Agreement,' but there is a possibility of reaching some kind of bilateral 'mini Mar-a-Lago Agreement,'" Citi analysts including Osamu Takashima noted in their report. "From an exchange rate policy perspective, we believe there will be a continued tilt toward US dollar weakness and yen strength."

Citi states that Japan's US Treasury holdings are estimated to have maturities of 3-5 years, but the investment financing mechanism under the tariff agreement is expected to invest in the US in the form of 10-20 year terms.

Trump signed an executive order last week implementing the trade agreement reached with Japan, which includes Japan's commitment to establish a $550 billion fund. However, numerous questions remain about the fund due to different descriptions of its operating mechanism provided by both countries.