TOKYO — A trillion here, a trillion there and pretty soon you’re talking about real money. This, with apologies to 1960s US Senator Everett Dirksen, is where Washington finds itself in 2026 — and it puts Asia on the hook.
Dirksen was talking about billions, not trillions, of dollars. The Illinois lawmaker and fabled fiscal hawk would later have a Senate office building in Washington named after him. But his observation about government spending surging by unthinkably huge numbers has never been more relevant.
This year will see the globe’s biggest economy reach a dubious milestone: trillion-dollar interest payments on runaway US government debt. The nonpartisan Committee for a Responsible Federal Budget described it as the “new norm” as the national debt approaches the US$39 trillion mark (it ended 2025 at around $38.5 trillion).
As Donald Trump’s White House increases debt issuance to pay for this increasing shortfall, it will be looking Asia’s way. This region is home to many of Washington’s biggest holders of US Treasuries. The top two are Japan (nearly $1.2 trillion) and China ($689 billion).
The question, though, is why would officials in Tokyo and Beijing, in their right minds, increase their exposure to the US economy at such a precarious moment?
Tradition, partly. As major trading economies, Japan and China require substantial amounts of dollars. But given Washington’s fiscal trajectory, there are reasons to think Japanese Prime Minister Sanae Takaichi and Chinese leader Xi Jinping will be reluctant to continue loading up on Treasuries.
Evidence to this effect could reverberate through global markets in unpredictable ways.
Often, Asia’s US dollar holdings are discussed in conspiratorial terms. When Takeshi Yamaguchi, chief Japan economist at Morgan Stanley MUFG, asks whether Japan might “use US Treasury holdings as a bargaining chip,” it’s hard not to recall former Finance Minister Katsunobu Kato saying last May that “everything that could be a bargaining chip should be on the table” regarding Japan’s US Treasuries holdings.
Such hints harken back to 1997, when then-Japanese Prime Minister Ryutaro Hashimoto told a New York audience that “several times in the past, we have been tempted to sell large lots of US Treasuries” to make a point. One such episode was the heated auto negotiations a few years earlier.
So far, Takaichi has been rather obsequious toward Trump, not wanting to provoke the mercurial US leader. Yet Trump’s desire for a weaker dollar may collide with her “Sanaenomics” strategy to revive Japanese wage growth. It requires a weaker yen and for the Bank of Japan to keep its ultralow interest rate regime in place.
These preconditions would be made impossible if Trump were to pursue a weaker dollar. Yet there are valid reasons for Washington’s top bankers in Asia to worry about its fiscal trajectory.
The US national debt is expected to reach 100% of gross domestic product (GDP) by the end of fiscal year 2025. As this milestone approaches, interest on the national debt is rising rapidly. Just five years ago, in FY 2020, net interest totaled $345 billion. In 2025, it was $970 billion — nearly three times as large.
The official Congressional Budget Office (CBO) notes that spending on net interest payments on the public debt has surpassed $1 trillion for the first time. The Committee for a Responsible Federal Budget projects that interest payments will top $1.5 trillion in 2032 and $1.8 trillion in 2035.
Trump’s fiscal plans to date have been exceedingly tax-cut-heavy. The “One Big Beautiful Bill Act” that Trump’s Republican Party passed in 2025 made permanent earlier tax cuts, without offsetting spending cuts.
This has the CBO estimating that interest payments could reach $1.5 trillion in 2030, pass $2.0 trillion in 2034 and ultimately end the decade at $2.2 trillion in 2035.
One problem is that Trump 2.0’s attempts to cut government spending have been more stunt than reality. The Department of Government Efficiency, or DOGE, which Trump entrusted to Tesla billionaire Elon Musk to lead, saved taxpayers little money.
Trump’s tariffs, meanwhile, have likely done more damage to GDP than any revenue the US government might be collecting from the levies. There are decent odds the Supreme Court will rule Trump’s tariffs illegal, as the US Constitution spells out that only Congress has the power to impose import taxes.
Nearly one year ago, in February 2025, hedge fund celebrity Ray Dalio warned that the US head for a debt death spiral with vast implications for the global financial system.
“It’s like if I was a doctor and I was speaking with you about your condition, I would say to you, this is now very, very serious. All of these are major problems,” Dalio told CNBC.
“What you need to do is cut your deficit from about 7.5% of GDP to 3% of gross domestic product, and you can do that. There are certain things that you can do that cut it in a certain way that’ll make it much healthier, so the real problem is a political problem,” Dalio said.
Dalio concluded that “I want to help, you know, and so I feel like the doctor, and then I would say everybody, politically … if this doesn’t happen, and we have the equivalent of, you know, an economic heart attack, or a heart attack of the bond market, then you know who’s responsible, because it can happen.”
The question is whether Dalio’s warning will materialize in financial terms in 2026. Although the dollar ended 2025 flat against the yen, it lost 13.5% against the euro. That marked the sharpest decline since 2017.
One big worry is that Trump intensifies his attacks on the Federal Reserve, including threatening to fire Fed Chair Jerome Powell. “We expect that concerns around central bank independence will extend into 2026, and see the upcoming change in Fed leadership as one of several reasons why risks around our Fed funds rate forecast skew dovish,” Goldman Sachs strategists wrote in a report.
George Saravelos, global head of FX research at Deutsche Bank, notes that “we project further dollar weakness but at a slower pace than 2025, leaving the trade-weighted dollar 10% weaker by the end of 2026. If these forecasts materialize, they will confirm that this decade’s unusually long dollar bull cycle is over.”
Saravelos adds that “our conversations suggest that the hedging decisions are still in flux,” noting that “the outlook for hedging flows errs dollar bearish.”
TD Securities analyst Jayati Bharadwaj says that “for the dollar to benefit from a strong US outlook, you need the outlook for the rest of the world to materially deteriorate.” Instead, the global economy “has been resilient and held up much better than feared under tariff uncertainty.”
In the interim, Trump both wants a weaker dollar and needs one to, as Bharadwaj puts it, “sustainably shrink the trade deficit.” Yet, she notes, “the US is no longer shielded from exogenous global macro shocks but is instead the emanating source of them” due to Trump’s brawl with the Fed and uncertainty over tariffs.
All this is an opportunity for China’s Xi to accelerate his yuan internationalization push. Looked at one way, Xi, in his wildest currency domination dreams, couldn’t have imagined a better foil than Trump. Since 2013, Xi has made increasing the yuan’s global role in trade and finance a top priority.
It won’t be an easy transition, particularly given Xi’s reluctance to make the yuan fully convertible. As Cornell University’s Eswar Prasad puts it, “while China has indeed opened up its markets, nominally, both bond and equity markets, to international investors, the question is whether there is enough trust that the government has moved to durably lift the capital controls.”
Prasad argues that Beijing must build a more international capital markets framework, strengthen the rule of law and make the central bank independent.
“These are crucial for the trust of domestic and foreign investors,” Prasad says. “The US is losing the strength of its institutional framework, but what is very important in international finance is that you don’t need to be the paragon of perfection. You just need to have a better combination, and the combination that the US brings to the table is still very difficult to challenge.”
Marcello Estevão, chief economist at the Institute of International Finance, adds that the “structural foundation of dollar dominance remains intact, supported by deep and liquid markets, the global reach of US financial institutions, and an unmatched supply of safe assets.”
Yet given the Trumpian chaos emanating from Washington, 2026 could present Xi with a unique window of opportunity to make significant inroads against the dollar. The year ahead might be remembered as something of an inflection point for the yuan versus dollar debate as US debt payments spiral ever higher.
Follow William Pesek on X at @WilliamPesek
