TOKYO \u2014 US President Donald Trump\u2019s unusual fixation on criticizing the Federal Reserve is alarming policymakers and investors worldwide. However, here in Asia, it\u2019s a uniquely personal threat, given that this region is the largest holder of US Treasury securities.<\/p>\n
The dollar-is-about-to-crash trade remains something of a widowmaker. Despite a national debt topping\u00a0US$38 trillion<\/a>, a Congress in disarray and Trump\u2019s tariffs doing their worst, 10-year Treasury yields are around 4%. Though the dollar is down versus the euro this year, it\u2019s flat versus the yen.<\/p>\n 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\u2019s top dollar hoarders are sitting on around $3 trillion worth.<\/p>\n So, you can imagine the sense of dread in Asian capitals as Trump goes after\u00a0Fed Chair Jerome Powell<\/a>\u00a0once again. After threatening to fire Powell all year, Trump this week\u00a0threatened to sue<\/a>\u00a0the central bank head, whose term ends in May.<\/p>\n 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.<\/p>\n It\u2019s 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\u00a0industrial overcapacity<\/a>\u00a0leads to a new wave of global protectionism.<\/p>\n The year ahead could be the one in which many of these strains explode into bigger pains that roil global markets.<\/p>\n Take Trump\u2019s assault on the Fed. His threatened lawsuit would be, ostensibly, over a costly renovation of Fed headquarters in Washington. But it\u2019s part of a pattern.<\/p>\n The strategy is Trump\u2019s 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\u2019s trade war may be fomenting. US prosecutors are also targeting Fed Governor Lisa Cook for alleged mortgage fraud.<\/p>\n 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\u2019s campaign for a\u00a0weaker dollar<\/a>\u00a0also suggests he knows little about how Japan\u2019s now-decades-long undervalued yen policy is backfiring on Asia\u2019s No 2 economy.<\/p>\n Part of the problem is Trump\u2019s 1985 mindset. Back then, the top industrialized nations could agree in a New York Plaza Hotel ballroom to weaken the dollar.<\/p>\n Forty years later, his desire for a \u201cMar-a-Lago Accord\u201d 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.<\/p>\n Even so, Trump\u2019s top economic officials, including Treasury Secretary\u00a0Scott Bessent, clearly haven\u2019t schooled him on why the \u201cexorbitant privilege<\/a>\u201d that Washington enjoys, including the ability to issue debt at markedly low yields, is a plus for America.<\/p>\n Might all this come to a head in 2026? Again, it hasn\u2019t yet. Even the May decision by Moody\u2019s Investors Service to revoke Washington\u2019s last AAA rating caused little more than a ripple in debt markets.<\/p>\n The reaction seemed to be that the dollar, for better or worse, remains the global system\u2019s primary currency, despite intensifying efforts to find alternatives.<\/p>\n One wild card here is how the Trump-Xi relationship evolves \u2014 or devolves \u2014 in 2026. As the year progresses, Chinese leader Xi could hold the specter of massive US Treasury sales over Trump World\u2019s head.<\/p>\n Japan, too, of course. So far, Prime Minister\u00a0Sanae Takaichi<\/a>, in office just 71 days, has chosen to coddle Trump rather than stand Tokyo\u2019s ground \u2014 just like her mentor, 2012-2020 leader Shinzo Abe. This is despite most of Trump\u2019s Asia policies running counter to Tokyo\u2019s national interests \u2014 including on Taiwan, North Korea and Russia.<\/p>\n For all Abe\u2019s obsequiousness \u2014 including nominating Trump for a Nobel Peace Prize \u2014 Trump 1.0 still pulled out of the Trans-Pacific Partnership free trade pact that overtly excluded China.<\/p>\n Now, as Trump pursues a \u201cgrand bargain\u201d trade deal with China, Japan is a mere bystander, hoping such a pact doesn\u2019t leave its economy on the cutting room floor.<\/p>\n As such, it\u2019s hard to envision Takaichi playing hardball with Tokyo\u2019s vast dollar holdings. There is, of course, a mutually assured destruction dynamic at play here.<\/p>\n Dumping large blocks of Treasuries would sharply raise borrowing costs, reducing US consumers\u2019 ability to buy Japanese goods. Yet Takaichi could use Tokyo\u2019s role as Washington\u2019s top financier as leverage if Trump decides to increase tariffs again.\u00a0<\/p>\n Surely, Trump will notice at some point that Tokyo isn\u2019t wiring the $550 billion \u201csigning\u00a0bonus\u201d 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.<\/p>\n And that\u00a0600 billion<\/a>\u00a0euro \u201cgift\u201d Trump is waiting on from the EU? As the wait grows longer, who knows where EU tariffs might go next year?<\/p>\n Trump World might grow impatient that China isn\u2019t sitting down to forge the \u201cgrand bargain\u201d trade deal of Trump\u2019s dreams. Given the\u00a0one-year truce<\/a>\u00a0Trump gifted Xi in late October, a US-China pact might materialize in\u00a0early\u00a02027, at the earliest.<\/p>\n News in November that China\u2019s\u00a0trade surplus<\/a>\u00a0reached\u00a0$1 trillion<\/a>\u00a0for the first time, despite a\u00a047.5% US tariff<\/a>, must have had Team Trump fuming.<\/p>\n As slowing US job growth hurts Trump\u2019s 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.<\/p>\n The AI bubble is its own wildcard. The \u201cpossibility that the boom in data center construction will result in a glut\u201d remains a \u201ckey risk,\u201d says Howard Marks, co-founder of Oaktree Capital Management. \u201cWe\u2019ll see which lenders maintain discipline in today\u2019s heady environment.\u201d<\/p>\n Jonas Goltermann, analyst at Capital Economics, says the valuations environment \u201cnow has many of the hallmarks of a bubble\u201d amid \u201chyperbolic beliefs about AI\u2019s potential within the industry and among investors.\u201d<\/p>\n Some are less concerned. Goldman Sachs analyst Jim Schneider thinks that AI\u2019s portion of the overall data center\u00a0market will double to 30% over the next two years. \u201cWe believe [data center] occupancy will continue to tighten through the medium term before the market loosens,\u201d he notes.<\/p>\n Or might China\u2019s\u00a0myriad imbalances<\/a>\u00a0be the ones to go awry in 2026? The nation\u2019s multi-year property crisis is its own widowmaker trade. Yet China Vanke\u2019s recent success in avoiding a default may just delay the pain.<\/p>\n Lulu Shi, analyst at Fitch Ratings, notes that China\u2019s 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.<\/p>\n \u201cThe softer performance,\u201d Shi says, \u201cis primarily due to subdued homebuyer confidence amid a weak economic environment, labor market softness and expectations of further price declines.\u201d<\/p>\n It means Beijing\u2019s policy support \u201chas 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.\u201d<\/p>\n Analysts at Capital Economics note that \u201cthe big picture is that the structural headwinds from the property downturn and industrial overcapacity are set to persist in 2026.\u201d<\/p>\n