TOKYO — US President Donald Trump’s unusual fixation on criticizing the Federal Reserve is alarming policymakers and investors worldwide. However, here in Asia, it’s a uniquely personal threat, given that this region is the largest holder of US Treasury securities.
The dollar-is-about-to-crash trade remains something of a widowmaker. Despite a national debt topping US$38 trillion, a Congress in disarray and Trump’s tariffs doing their worst, 10-year Treasury yields are around 4%. Though the dollar is down versus the euro this year, it’s flat versus the yen.
This matters because Japan is the largest holder of US government debt, holding nearly $1.2 trillion. China holds about $689 billion in US Treasury securities. More broadly, Asia’s top dollar hoarders are sitting on around $3 trillion worth.
So, you can imagine the sense of dread in Asian capitals as Trump goes after Fed Chair Jerome Powell once again. After threatening to fire Powell all year, Trump this week threatened to sue the central bank head, whose term ends in May.
This is but one US-related question for the global economy in the year ahead. Others include: whether markets might increase focus on its unsustainable debt; if tariff-fueled inflation backfires on the economy; whether the bubble in artificial intelligence investment implodes and destabilizes markets everywhere.
It’s not just the US, of course. China-related bubbles that could come to a head in 2026 include: whether deflation deepens; if the property crisis worsens; and whether industrial overcapacity leads to a new wave of global protectionism.
The year ahead could be the one in which many of these strains explode into bigger pains that roil global markets.
Take Trump’s assault on the Fed. His threatened lawsuit would be, ostensibly, over a costly renovation of Fed headquarters in Washington. But it’s part of a pattern.
The strategy is Trump’s latest attempt to (a) intimidate the Fed into bigger and faster rate cuts and (b) make Powell the fall-guy for the recession the president’s trade war may be fomenting. US prosecutors are also targeting Fed Governor Lisa Cook for alleged mortgage fraud.
This entire effort is more the stuff of Argentina, India and Turkey than a nation that prints the global reserve currency and issues the linchpin debt instrument. Trump’s campaign for a weaker dollar also suggests he knows little about how Japan’s now-decades-long undervalued yen policy is backfiring on Asia’s No 2 economy.
Part of the problem is Trump’s 1985 mindset. Back then, the top industrialized nations could agree in a New York Plaza Hotel ballroom to weaken the dollar.
Forty years later, his desire for a “Mar-a-Lago Accord” seeks to recreate a global trade dynamic that no longer exists. Not when so much of the global wealth needed to command markets is in the broader BRICS (Brazil, Russia, India, China, South Africa) universe, including oil-rich states such as Saudi Arabia and the United Arab Emirates.
Even so, Trump’s top economic officials, including Treasury Secretary Scott Bessent, clearly haven’t schooled him on why the “exorbitant privilege” that Washington enjoys, including the ability to issue debt at markedly low yields, is a plus for America.
Might all this come to a head in 2026? Again, it hasn’t yet. Even the May decision by Moody’s Investors Service to revoke Washington’s last AAA rating caused little more than a ripple in debt markets.
The reaction seemed to be that the dollar, for better or worse, remains the global system’s primary currency, despite intensifying efforts to find alternatives.
One wild card here is how the Trump-Xi relationship evolves — or devolves — in 2026. As the year progresses, Chinese leader Xi could hold the specter of massive US Treasury sales over Trump World’s head.
Japan, too, of course. So far, Prime Minister Sanae Takaichi, in office just 71 days, has chosen to coddle Trump rather than stand Tokyo’s ground — just like her mentor, 2012-2020 leader Shinzo Abe. This is despite most of Trump’s Asia policies running counter to Tokyo’s national interests — including on Taiwan, North Korea and Russia.
For all Abe’s obsequiousness — including nominating Trump for a Nobel Peace Prize — Trump 1.0 still pulled out of the Trans-Pacific Partnership free trade pact that overtly excluded China.
Now, as Trump pursues a “grand bargain” trade deal with China, Japan is a mere bystander, hoping such a pact doesn’t leave its economy on the cutting room floor.
As such, it’s hard to envision Takaichi playing hardball with Tokyo’s vast dollar holdings. There is, of course, a mutually assured destruction dynamic at play here.
Dumping large blocks of Treasuries would sharply raise borrowing costs, reducing US consumers’ ability to buy Japanese goods. Yet Takaichi could use Tokyo’s role as Washington’s top financier as leverage if Trump decides to increase tariffs again.
Surely, Trump will notice at some point that Tokyo isn’t wiring the $550 billion “signing bonus” the White House demanded. Neither is Seoul expediting the $350 billion payment that Trump seemed to think would be at the US Treasury by now.
And that 600 billion euro “gift” Trump is waiting on from the EU? As the wait grows longer, who knows where EU tariffs might go next year?
Trump World might grow impatient that China isn’t sitting down to forge the “grand bargain” trade deal of Trump’s dreams. Given the one-year truce Trump gifted Xi in late October, a US-China pact might materialize in early 2027, at the earliest.
News in November that China’s trade surplus reached $1 trillion for the first time, despite a 47.5% US tariff, must have had Team Trump fuming.
As slowing US job growth hurts Trump’s approval ratings, there are reasonable odds he might lash out at trading partners with new tariffs in 2026. These levies are both intensifying inflation risks and roiling global markets.
The AI bubble is its own wildcard. The “possibility that the boom in data center construction will result in a glut” remains a “key risk,” says Howard Marks, co-founder of Oaktree Capital Management. “We’ll see which lenders maintain discipline in today’s heady environment.”
Jonas Goltermann, analyst at Capital Economics, says the valuations environment “now has many of the hallmarks of a bubble” amid “hyperbolic beliefs about AI’s potential within the industry and among investors.”
Some are less concerned. Goldman Sachs analyst Jim Schneider thinks that AI’s portion of the overall data center market will double to 30% over the next two years. “We believe [data center] occupancy will continue to tighten through the medium term before the market loosens,” he notes.
Or might China’s myriad imbalances be the ones to go awry in 2026? The nation’s multi-year property crisis is its own widowmaker trade. Yet China Vanke’s recent success in avoiding a default may just delay the pain.
Lulu Shi, analyst at Fitch Ratings, notes that China’s new home sales in 2025 are likely to underperform its earlier forecasts for a 7% drop in sales. As of November, new home sales have decreased by 11.2% year on year.
“The softer performance,” Shi says, “is primarily due to subdued homebuyer confidence amid a weak economic environment, labor market softness and expectations of further price declines.”
It means Beijing’s policy support “has provided only temporary relief. The effectiveness of property-specific measures has diminished, and a sustained recovery is not likely unless there is improvement in the broader economy and household income, and a reduction in housing inventory.”
Analysts at Capital Economics note that “the big picture is that the structural headwinds from the property downturn and industrial overcapacity are set to persist in 2026.”
Trouble is, China’s manufacturing is heavily dependent on exports, meaning it may continue sharing its imbalances with the world. China’s growth model, explains Neil Shearing at Capital Economics, “continues to prioritize supply over demand, resulting in chronic excess capacity and persistently weak consumer spending.”
What’s needed, Shearing says, is for Xi’s government to make good on pledges to boost domestic consumption and stabilize the property market. “Policymakers are pledging to address the problem, but the imbalance will remain a defining feature of China’s economy in 2026,” he warns.
Xi could change the narrative on China’s 2026 by acting faster to construct the huge social safety nets needed to get households to save less and spend more. With mainland households holding $22 trillion in savings, this is also the key to placating major trading partners, especially the US.
Between the US and China, it’s entirely unclear whose financial bubbles will garner the most attention in 2026. But if any number of them pop, the global economy will feel the repercussions.
Follow William Pesek on X at @WilliamPesek
