2026 could mark a turning point for U.S. debt dependency and Asian holdings

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.

According to the Joint Economic Committee (JEC), the U.S. national debt surged to roughly $38.4 trillion in December 2025, a rise of about $2.23 trillion over the preceding year that averaged $6.12 billion per day. JEC updates through 2025 show the debt crossing successive milestones this year after having stood at $36.22 trillion in March 2025 and $38.09 trillion by November 2025. Congressional Research Service data underscores the point that foreign holders , notably Japan and China , remain large backers of U.S. Treasuries, with Japan accounting for roughly 12.4% and China about 8.9% of foreign investment in U.S. privately held federal debt as of December 2024.

The immediate problem is interest. Net interest on the public debt has climbed rapidly, passing the $1 trillion mark in 2025 and prompting warnings that trillion‑dollar annual interest payments are becoming the “new norm,” according to the Committee for a Responsible Federal Budget. Projections from nonpartisan and private forecasters cited in recent commentary put interest payments on an upward path that could reach well into the trillions over the coming decade unless fiscal policy is altered.

That fiscal picture , heavy tax cuts made permanent by the Republican‑led “One Big Beautiful Bill Act” in 2025 and meagre, largely symbolic attempts at spending restraint , has fed concern in Asia about further accumulation of dollar assets. The lead article notes that Japan holds “nearly $1.2 trillion” of Treasuries and China “$689 billion,” figures that align with market reporting but sit alongside other accounts. The Global Times reported China’s holdings at $759 billion in December 2024 after a prolonged decline, while official U.S. data and CRS breakdowns indicate Japan and China together have accounted for a substantial share of foreign private holdings. Those discrepancies highlight the fluidity of reserve allocations and the opacity that can surround headline numbers.

Why would Tokyo or Beijing continue to expand exposure to U.S. federal debt at a moment when Washington’s borrowing is accelerating? Tradition and trade patterns are part of the answer: large exporters and trading economies need dollar liquidity for settling cross‑border flows. Yet policymakers also weigh strategic and domestic considerations. For Japan, the article argues, Prime Minister Sanae Takaichi’s push for higher wages under “Sanaenomics” depends on a weak yen and continued ultralow policy from the Bank of Japan , conditions that could be complicated by U.S. moves that push the dollar down. For China, leader Xi Jinping’s long‑running campaign to internationalise the yuan stands to gain if confidence in dollar governance wanes.

The political overlay in Washington intensifies these calculations. The article recounts comments from hedge fund founder Ray Dalio, who in February 2025 warned on CNBC that the U.S. risked a “debt death spiral” unless the deficit was sharply reduced. It also notes market anxiety over presidential pressure on the Federal Reserve and talk of removing central bank independence, which Goldman Sachs and other strategists flagged as a material source of policy and currency risk. Deutsche Bank’s George Saravelos is quoted projecting further dollar weakness, and TD Securities analysts say the dollar’s fortunes now hinge on how global conditions evolve relative to the U.S.

For Asia’s central banks and sovereign reserve managers, several concrete considerations follow. First, diversification: China has been trimming U.S. Treasury holdings for months, a trend the Global Times recorded through December 2024, while other official reports show Japan has at times hinted at using its holdings as diplomatic leverage. Second, hedging behaviour is in flux , Deutsche Bank sees hedging flows as dollar‑bearish , meaning portfolio shifts could occur even without outright large selloffs of Treasury inventories. Third, structural constraints remain: Cornell University’s Eswar Prasad and Institute of International Finance chief economist Marcello Estevão emphasise that while U.S. institutional strength has been dented politically, the dollar’s dominance rests on deep, liquid markets, the global reach of U.S. financial institutions and an unmatched supply of perceived safe assets.

Those structural advantages do not render the status quo immune to shocks. The article argues 2026 may present an inflection point: continued growth in U.S. interest costs, sustained fiscal deficits and overt political interference with monetary policy could cumulatively erode some of the implicit trust underpinning dollar primacy. Conversely, transitioning away from dollar dominance would require Beijing to take politically sensitive steps , lifting capital controls, strengthening legal protections and building deeper, more open markets , actions Prasad says are essential if the yuan is to win durable trust.

Market signals through 2025 provide mixed evidence. The dollar finished the year flat against the yen but weakened sharply versus the euro, posting its steepest annual decline against that currency since 2017. Forecasts from major banks suggest more moderate dollar depreciation through 2026, not a sudden collapse, but market positioning and policy rhetoric mean risks are skewed.

For Tokyo and Beijing the calculus is evolving from one of passive accumulation to active risk management. Whether they choose to lean harder into diversification, use their holdings as leverage, or simply hedge exposures will be influenced as much by domestic politics and macroeconomic strategy as by Washington’s fiscal choices. If the United States addresses its deficit trajectory, much of the immediate stress on dollar confidence could ease; if it does not, 2026 may be remembered as the year the long post‑war equilibrium began to bend under the weight of mounting interest obligations and shifting geopolitical finance.