We pay particular attention to the purchases of China, Japan and other reserve accumulators. The most recent data from the U.S. Treasury, reflecting July purchases, suggest that Japan is closing in on China’s status as the largest foreign holder of Treasurys. China and Japan both have over US$800 billion in U.S. Treasurys and are by far the greatest foreign Treasury holders. They also have not insignificant stocks of agency debt. Chinese demand, at least through direct channels, has been waning, while Japan’s purchasing of Treasurys has crept up.
The increased demand from Japanese investors for Treasurys coincided with an increase in Chinese purchases of Japanese debt, as we note in a Strategy View: Is China Passing the Buck. These purchases, about US$25 billion in January-July 2010, added pressure on the yen, which had been near a 15-year high until the Bank of Japan/Ministry of Finance intervened.
Although China’s purchases were more than offset by net sales of JGBs and short-term securities by other Asian countries, the shift in its asset allocation (and its extensive coverage in the financial press) may have encouraged others to pile on, including Japanese exporters through their hedging techniques, as we discuss in a recent Analysis. Given the pressure on the yen, Japan may well intervene again, despite the pressure that it will face from the U.S. and EU for its unilateral intervention.
Chinese Demand for Japanese Debt
Source: Ministry of Finance, Japan, RGE
Editor’s Note: This post is excerpted from a much longer analysis available exclusively to RGE Clients: U.S.: Back to Fed Watching and Japanese Intervention; Canada: Deteriorating Household Balance Sheets
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