This Week in Review | Japan Election, US Inflation, China US Treasury Holdings

Transcript

Ben Thistlethwaite:

Hello and welcome to This Week in Review. This weekly segment is designed to highlight a few important developments that you might have missed this week, talk about what they mean for markets, and most importantly, the potential impact for investors.

To stay up-to-date with our latest market insights, subscribe to our YouTube channel or visit FisherInvestments.com. Now, let's review what happened this week.

First, Japanese election results.

Last Sunday, Japan's incumbent Liberal Democratic Party, or LDP, defied polling expectations and won the general election, taking 316 out of 465 seats and securing a supermajority in the lower legislative house.

Led by Prime Minister Sanae Takaichi, the LDP now holds enough seats to bypass upper house gridlock. While this creates an opportunity for Takaichi to advance her economic priorities, it also introduces some legislative risk for markets by reducing gridlock, though intraparty dynamics could limit any of the more radical policy shifts.

Historically, investors have cheered economic agendas like the late Prime Minister, Shinzo Abe's "three arrows," which included fiscal stimulus, monetary easing and reforms. Similarly, Takaichi has touted suspending Japan's consumption tax and increasing public investment. Yet, "Abenomics" failed to deliver the economic growth that many hoped for, and we would caution against assuming that this time will be any different.

And we believe Japan's economy is already on quite solid footing. Yes, Japanese GDP contracted earlier in 2025, but this was primarily driven by regulatory changes, and underlying consumer spending and business investment remained very resilient. Loan growth has also been rising in Japan, hitting 4.5% year-over-year growth in January.

Initial market enthusiasm for Takaichi's victory was high, but false fears remain, including worries over Japanese debt, foreign policy tensions and a potential for Chinese tourism boycotts. All of this helps provide a counterbalance for some of the more positive sentiment. So while we think the initial enthusiasm for Takaichi's victory may be overly optimistic, there's plenty of skepticism to keep stocks from getting too far ahead of themselves as the year rolls on.

Next, US inflation data.

Today, the Bureau of Labor Statistics released the latest US Consumer Price Index, or CPI. The CPI report showed January headline inflation at 2.4% year-over-year. This reading was slower than consensus forecasts and December's reading of 2.7%.

While monthly readings bounce around and fluctuate, inflation has fallen since its recent peak in July of 2022 and has remained near its long-term average of around 3% year-over-year since early 2024.

Despite some lingering fears, there's little evidence that tariffs are reigniting US inflation. That's because inflation is a monetary phenomenon that stems from too much money chasing too few goods and services. This leads to price increases across the entire economy.

Now, tariffs might raise prices for certain products or services. They don't increase the overall money supply. Monetary policy decisions from central bankers around the globe primarily decrease or increase money supply. And today, global money supply growth remains modest.

So, while some worry about a return of runaway inflation, we really believe that current money supply growth levels suggest that inflation should stay fairly muted.

Finally, is China selling its US Treasury holdings?

On Monday, reports surfaced that Chinese regulators are urging banks to reduce their holdings of US Treasury bonds. For many investors, this fuels the "Sell America" narrative, where investors dump dollar denominated assets due to concerns over US debt. And this aligns with Chinese regulators' directive, which reportedly cited US debt market volatility, along with concentration risk as reasons to scale back their US Treasury holdings.

If Chinese banks reduce their US Treasury holdings, what would that mean for US Treasury yields? To us, this is unlikely to have as dramatic an impact as some may fear. That's because China is just one buyer of US Treasurys. US investors and the US government itself are by far the largest holders of US debt. China's percentage? It's actually fallen from around 6% in 2018 to around 2% in June of 2025. So if China decides to reduce its holdings, other buyers would likely see Treasurys trading at a discount and sense a buying opportunity. That could push bond prices back up and yields back down.

While political tensions often dominate headlines, China unwinding some of its US debt holdings is really unlikely to move markets materially. We think focusing too heavily on day-to-day shifts in bond holdings and yields can obscure the reality that nations and large institutional investors constantly are adjusting their portfolios to manage risk.

That's it for this week.

Thanks for tuning in to This Week in Review. If you're looking for more insights, then don't miss our other series, 3 Things You Need to Know This Week. It's released every Monday.

You can also visit FisherInvestments.com anytime for our latest thoughts on markets. Thanks again for joining us and don't forget to hit like and subscribe!