China's Japanese debt buying spree soars

Aug 10, 2010

It bought 7 times previous full-year record in first half
TOKYO: China bought 456.7 billion yen (S$7.1 billion) worth of Japanese debt in June, Japan's Finance Ministry said yesterday, as Beijing further surpasses its previous full-year buying record.
For the first half of the year, China bought 1.73 trillion yen worth of debt, nearly seven times the full-year record of 253.8 billion yen in 2005.
In May alone, China bought a net 735.2 billion yen in Japanese government bonds, exceeding the 541 billion yen purchased in the four months previously.
China has sought to diversify its vast investments away from the United States and Europe since the onset of the financial crisis.
Most of the bonds bought by China are thought to be used by the government to manage its foreign reserves.
The increase coincides with renewed doubts about the pace of recovery in the US and Europe, and indicates that China is putting more of its swelling foreign exchange reserves into relatively stable Japanese bonds as a result, say analysts.
Japan's risk of default is perceived to be much lower than that for debt-hit Greece or other eurozone countries, even though its gross public debt is nearing 200 per cent of its gross domestic product, the highest among developed countries.
With around 95 per cent held by domestic investors, Japanese bonds are seen as a relatively safe bet.
China's foreign exchange reserves have ballooned in recent years.
The reserves, already the world's largest, grew 25.2 per cent to a record US$2.447 trillion (S$3.305 trillion) at the end of March from US$1.954 trillion a year earlier, the People's Bank of China said in April.
One way Beijing has diversified its investments is through sovereign wealth fund China Investment Corp, which manages around US$300 billion and has been investing heavily in resources companies.
Separately, a former senior Bank of Japan official said the yen's current rise is too rapid and may prompt the Japanese authorities to step up their verbal warnings.
Mr Eiji Hirano said Tokyo, however, is unlikely to be able to convince the US and Europe of the need to intervene in markets to weaken the yen.
'If the pace of the yen's rise is too fast, Japan may try to check it by showing its readiness to intervene,' said Mr Hirano.
'But current foreign exchange levels are the natural reflection of changing monetary policies in the United States and Europe and the fact Japan has not changed its policy. Japan is thus unlikely to obtain other nations' consent for launching a solo intervention.'
The US dollar yesterday bounced back to around 85.40 yen after hitting an eight-month trough of 85.02 yen last Friday. However, traders say it has room to fall again on expectations the US Federal Reserve could ease monetary policy even further as early as this week.
AGENCE FRANCE-PRESSE, REUTERS