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Japan dethrones China as top foreign holder of US Treasuries

A stock board displays index levels in Tokyo last week. Photo: Bloomberg News

Japan surpassed China as the top foreign holder of US Treasuries debt for the first time since the global financial crisis amid signs of economic and policy shifts in Asia's two largest economies.

In its monthly report on bond holdings, the Treasury Department said on Wednesday that total foreign holdings of Treasury debt dipped 0.9 percent in February to $6.16 trillion, down from a record of $6.22 trillion in January.

Private investors and official institutions in Japan owned $1.2244 trillion of US government securities at the end of February, compared with $1.2386 trillion at the end of January, according to the latest monthly data released by the Treasury on Wednesday.

China held $1.2237 trillion of Treasury debt at the end of February, compared with $1.2391 trillion a month earlier.

Over the past year, Japan has boosted its holdings by a net $13.6 billion, while China's holdings dropped by $49.2 billion.

The Treasury data, released with a two-month lag, do not capture all of the Treasury-bond holdings China may have parked at middlemen in places such as the UK and Belgium. Many analysts and investors believe that China has considerable holdings bought through such intermediaries. The Treasury notes on its website that "it is difficult to draw precise conclusions about changes in the foreign holdings of US financial assets by individual countries" from the capital-flow data.

China overtook Japan for the top spot in ownership of US Treasury debt in 2008 as the financial crisis and a deep recession pushed up US government borrowing to finance government deficits. The US deficit topped $1 trillion annually for four consecutive years.

Economic slowdown

Private analysts had been forecasting that Japan would surpass China's holdings of Treasury debt this year given current economic trends in both nations.

China's economy has been slowing and growth of its exports has been tapering, giving the country less to invest overseas. It has also been seeking to diversify those investments, leaving less to invest in US government bonds.

The Japanese central bank, meanwhile, is engaged in an aggressive effort to boost the country's money supply to bolster the economy and fight low inflation. That means there is more money to invest overseas. Japanese investors have been attracted to dollar holdings because of higher rates of return on dollar-denominated investments.

Sung Won Sohn, an economics professor at the Smith School of Business at California State University, Channel Islands, sees those trends continuing, with Japan's holdings of Treasury debt growing faster than China's.

"Economic growth and export growth are slowing in China and as a result China has less money to invest overseas, while Japan's central bank is pursuing policies that will keep the Japanese yen weaker against the dollar and thus make dollar investments more attractive to Japanese investors," Sohn said.

"The dynamic between Japan and China has shifted, in part due to foreign-exchange-reserve needs and the currency dynamics between the two countries," said Edward Acton, a US government-bond strategist at RBS Securities Inc. in Stamford, Connecticut, a primary dealer. "It's a global-macro investing signpost."

Undervalued currency

China is also being pressured by the Obama administration to allow its currency to rise in value against the dollar.

American manufacturers have complained for years that China is manipulating its currency, keeping it undervalued against the dollar as a way to gain trade advantages. A weaker Chinese currency compared to the dollar makes American goods more expensive in China and Chinese goods cheaper for US consumers.

Political preference

There may even be some preference among US policy makers to have Japan as the country's largest foreign creditor, given the diplomatic differences that color many aspects of relations between the US and China, according to Gary Pollack, who manages $12 billion as head of fixed-income trading at Deutsche Bank AG's private wealth management unit in New York.

"If you have a nation that has the potential to be an adversary at some point, does that pose a risk?" Pollack said. US officials may prefer that their largest creditor not be "a country that may not be fully aligned with them from a geopolitical point of view."

Biggest holders

The single largest holder of US long-term debt is the Federal Reserve, with more than $2 trillion. The amount has surged from $755 billion at the end of 2007, fueled by Fed purchases of long-term securities in response to the financial crisis.

Japan's purchases will help soothe lingering concerns that US bond prices could decline as China slows its buying.

"China is currently the 800-pound gorilla in the US Treasury market," said James Sarni, a managing principal at investment manager Payden & Rygel, which oversees $90 billion of assets. "However, it is not the only gorilla in the jungle."

Investors have fretted over a possible bond-market reversal for years, "but guess what: There has always been a willing buyer," said David Ader, head of government-bond strategy at CRT Capital Group LLC.

The US market remains key to how China allocates its foreign-exchange reserves, advisers to the central bank said, especially in light of a strengthening dollar that is expected to make it more attractive for Beijing to invest in dollar assets.

In addition to Japanese and Chinese buying, analysts say demand from Europe has been rising amid tumbling yields there. The 10-year German government-bond yield fell to a record closing low of 0.102 percent on Wednesday.
 


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