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Japan’s Finance Minister Katsunobu Kato said the country’s US Treasury holdings could be a card in its trade talks with Washington, referring to the largest stockpile of US debt held by a foreign nation.

“It does exist as a card,” said Kato, speaking on a TV Tokyo program Friday, when asked if Japan’s stance of not selling holdings could be a negotiation tool. “Whether or not we use that card is a different decision.”

While the comments were made in response to a question and don’t appear to suggest Japan is considering selling any of its US Treasury holdings, they open the possibility of large market ructions if action took place. 

“This is a very serious tactic to discuss publicly,” said Kathy Jones, chief fixed-income strategist at Charles Schwab in New York. “Just the threat of it could have implications for the Treasury market, although I think Japan’s finance officials are smart enough to know that actually following through on it could be harmful to their own economy.”

Related news: Japan Sees Trade Talks Speeding Up, Hopes for June Agreement 

The initial reaction of traders was calm on Friday, with Treasuries little changed during Asian hours, and muted moves in Japanese bonds and the yen. Stocks in Tokyo rose along with those in other major Asian markets.

Yet the leverage Japan possesses in the market is likely to keep investors on edge. It held roughly $1.13 trillion in Treasury Securities at the end of February, the biggest overseas holder of the US debt, followed by China’s $784 billion, according to the US Treasury. Japan holds Treasuries as part of a special account that can be used to fund currency interventions. 

Kato’s comments stand out because officials in Tokyo have typically been very guarded in their remarks on Treasuries, and misspoken words can have an unexpectedly big impact on markets. The minister himself as recently as last month had struck a different tone in parliament when asked if there was any agreement that prevented Japan selling Treasuries. Kato answered by linking the Treasury holdings to management of foreign exchange reserves. 

What he said Friday also comes against the backdrop of tumultuous trading in US debt over the past month as investors reacted to the heightened risks from the trade war.  

US bonds, stocks and even the dollar tumbled during a previous episode almost three decades ago when the then Prime Minister Ryutaro Hashimoto said Japan might sell US debt and buy gold if the yen remained volatile. He quickly backtracked given the outsized reaction and issued a statement saying he’d been misunderstood.

Kato’s remarks also differ from those made by the ruling party’s policy chief Itsunori Onodera in April, when he said that “as an ally, we would not intentionally take action against US government bonds, and causing market disruption is certainly not a good idea.” 

“It is there as a veiled threat,” Martin Whetton, head of financial markets strategy at Westpac Banking Corp., said of Kato’s comments. “As Theodore Roosevelt said, ‘speak softly and carry a big stick’ — and Treasuries are a big stick.”

Kato also said that Japan doesn’t hold US Treasuries to specifically support the US.

Japan’s chief negotiator Ryosei Akazawa is in Washington for a second round of talks this week with his US counterparts, as countries around the world watch to see where the negotiations end up. Akazawa indicated that Japan aims to achieve a trade agreement with the US in June, with the high-stakes bilateral discussions expected to gain momentum in mid-May.

MLIV Blog: Japan’s Huge Treasuries Hoard Is Too Big to Sell

Trump abruptly put a 90-day hold on his so-called reciprocal tariffs in April as his announcement triggered a massive selloff in Treasuries. 

“Japan has definitely opened Pandora’s box by mentioning Treasuries and potential trade deals in the same sentence,” said Shoki Omori, chief desk strategist at Mizuho Securities Co. in Tokyo. “There’s risks of higher yields for Treasury investors overall if indeed foreigners do abstain from buying — or sell — Treasuries ahead.”

--With assistance from Takashi Hirokawa and Sakura Murakami.

(Updates with contrasting previous comments from Kato.)

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