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posted on 19 April 2015

Japan Is Now the Top Foreign Holder of Treasuries

Written by , GEI Associate

Japan overtook China as the top foreign holder of U.S. government debt for the first time since the financial crisis in 2008. According to Treasury Department, over the past year Japan's holdings of Treasuries increased $13.6 billion, while China's holdings dropped by $49.2 billion. By the end of February, Japan owned $1.2244 trillion of U.S. government securities; the holdings of China decreased to $1.2237 trillion.

However, this is not surprising to many people. Over the last few months, China has been slowly cutting back on its Treasury holdings as Japan has continued to build them up. In fact, many analysts had been forecasting that Japan would become America's largest foreign creditor for some time now.

There are several reasons that contribute to this change.

First, China’s economic growth has been slowing and its growth of its exports has been tapering. As the latest data proves, the growth rate declined to 7% in the first quarter of 2015, the slowest rate in six years. As a result, China has less money to invest overseas. Moreover, it is less necessary for the government to buy Treasuries in order to keep the yuan from strengthening too much.

Second, China has also been seeking to diversify its investments. Data from Trading Economics shows that China has been decreasing its foreign-exchange reserve. China is trying to shift these reserves toward higher-yielding assets, such as foreign corporate bonds, equities and real estate, rather than U.S. government bonds.

Third, with regard to Japan, its central bank is boosting money supply aggressively to fight low inflation. Consequently, it has more money to invest overseas. Furthermore, Japanese investors are attracted to buy Treasuries instead of Japanese government bonds. According to the Wall Street Journal, dollar holdings have higher rates of return:

"The 10-year Japanese government bond yielded 0.322% Wednesday, compared with 1.900% on the comparable U.S. Treasury note."

The fact that the yen that has declined 30% in value and momentum in that direction appears to be continuing also makes Treasuries more attractive.

Of course, there's some controversy over the reliability of the data. It is released with a two-month lag, and merely reveals where Treasury debt is held, instead of which country actually owns it. Many analysts believe that China has bought considerable holdings through intermediaries such as Belgium. Therefore, the data does not show the ownership changes in the foreign holdings of Treasury precisely. But for those reasons mentioned above, it is inevitable that Japan's holdings of the U.S. government bonds would grow faster than China's. And this trend is likely to continue.

Related article:

Is China disguising itself as Belgium to buy US government bonds?

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