"…Most foreign exchange reserves (such as the dollars owned by the Japanese and Chinese) are held in the form of dollar-denominated securities (such as T-bills/notes/bonds); one reason for this is that foreign governments like the highly liquid market for U.S. Treasury securities…"
"…The sale of dollar-denominated reserves (such as T-bills/notes/bonds held by the Japanese and Chinese) could have negative effects along several dimensions of the U.S. economy. First, it would tend to depress the value of the dollar vis-à-vis other currencies (as the dollars come flooding into circulation)…"
Lastly, a quick read of Setser & Roubini reiterates the points above:
I have no idea why you think that the dollars accumulated by the Japanese and Chinese and others are in circulation. $2.1 trillion of those dollars are 'on ice' at the Treasury.
Remember, the entirely separate source of financing for the '90s U.S. stock market boom then subsequent '00s U.S. real estate boom was, in large part, the cheap yen printed and made available via credit by the Bank of Japan in the '90s.
