Sunday, August 8, 2010

China Added to Japanese Bond Holdings for Sixth Month in June

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By Masaki Kondo and Keiko Ujikane

Aug. 9 (Bloomberg) -- China bought more Japanese bonds than it sold for a sixth straight month in June, heading for the biggest annual increase since at least 2005.

China purchased a net 456.4 billion yen ($5.3 billion) of Japanese debt in June, following a record net buying of 735.2 billion yen in May, according to a report released today by the Ministry of Finance in Tokyo.

The dollar’s slide against all 16 major currencies monitored by Bloomberg since the start of June has reduced the attractiveness of U.S. assets for some investors. China should pare its holdings of dollar assets to counter the risk of a “sharp depreciation,” former adviser to the central bank Yu Yongding wrote in the China Securities Journal last month.

“China may want to diversify risks in its foreign reserves,” Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo, said before the report. “It may prefer yen assets as it wouldn’t want the drop in the dollar to erode the value of its assets.”

At $2.45 trillion, China’s foreign-exchange reserves are the world’s largest. It held $867.7 billion of Treasuries at the end of May, down from $900.2 billion in April. Japan, Taiwan, South Korea, Hong Kong, India, and Singapore are also among the world’s 10 biggest holders of reserves that reduced their ownership of U.S. government debt that month.

Welcome Purchases

Luring more foreign investors to Japanese government bonds is critical for the government as a shrinking domestic population threatens to erode the pool of savings that has sustained demand for the debt. Finance Minister Yoshihiko Noda last month said China’s purchases are welcome given policy makers’ efforts to diversify the investor base of bonds.

About 95 percent of Japan’s debt is held domestically, which sovereign-debt agencies have said supports the country’s creditworthiness even as borrowings approach 200 percent of gross domestic product. In a sign that base is waning, Japan’s public pension fund, a holder of 12 percent of outstanding debt, sold more government bonds than it bought for the first time in nine years.

The yield on Japan’s benchmark 10-year bond dropped to a seven-year low of 0.995 percent on Aug. 4. Ten-year bond futures for September delivery added 0.24 to 142.11 as of 9:07 a.m. in Tokyo.

Japan has been bolstering its ties with China, which became its largest customer for exports in 2009. Japanese shipments to China tripled from 2000 to 2009, and Chinese demand has helped sustain Japan’s recovery from its deepest postwar recession.

Japan’s government revised how it calculates bond-purchase data in 2005. Today’s figures don’t include breakdowns of government bonds, corporate debt and other securities.

To contact the reporter on this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net; Keiko Ujikane in Tokyo at kujikane@bloomberg.net