Japan Plans to Seek Discussions With China on Bond Purchases

Japan’s government said it will seek discussions with China over the nation’s record purchases of Japanese bonds as an appreciating yen threatens to undermine an economic recovery.

Japan is closely watching the transactions and will seek to maintain close contact with Chinese authorities on the issue, Vice Finance Minister Naoki Minezaki told lawmakers in Tokyo. Finance Minister Yoshihiko Noda suggested at the same hearing that it’s inappropriate for China to buy Japan’s bonds without a reciprocal ability for Japanese to invest in China’s market.

A surge in the yen to a 15-year high against the dollar has prompted Japanese companies to warn their overseas earnings are under threat, with almost half of manufacturers seeing a hit to sales, one survey showed last week. China, by contrast, has kept the yuan’s gain to less than 1 percent since June, in the process accumulating foreign exchange that it needs to invest.

“I feel strange that China can buy Japanese government bonds while Japan can’t buy theirs,” Noda said in answering lawmakers’ questions at a hearing on the economy today. “There is room to discuss that” with Chinese officials, he said.

China bought more Japanese bonds than it sold for a seventh straight month in July, acquiring a net 583.1 billion yen ($6.97 billion) and heading for a record annual increase, Japan’s government reported yesterday.

Photographer: Haruyoshi Yamaguchi/Bloomberg

Yoshihiko Noda, Japan's finance minister. Close

Yoshihiko Noda, Japan's finance minister.

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Photographer: Haruyoshi Yamaguchi/Bloomberg

Yoshihiko Noda, Japan's finance minister.

China’s Needs

China said its purchases of foreign bonds including those of Japan are based on its needs at any given time.

“Our management always adheres to security, liquidity and good value,” Jiang Yu, a spokeswoman at the Foreign Ministry, told reporters in Beijing today. “We will decide whether or not to buy one country’s bonds according to our own needs.”

While Japan has sought to boost foreign purchases of its government bonds, such a shift would erode its advantage over countries such as Greece, which have seen bond yields soar as external investors fled. Less than 10 percent of Japanese debt is held by foreigners.

China’s purchases are mainly of short-term debt, suggesting officials are making a “tactical” decision “rather than a structural shift in their reserve allocation,” said Masafumi Yamamoto, chief currency strategist at Barclays Bank Plc in Tokyo. “Once the trend turns to a weaker yen, that investment could be withdrawn swiftly.”

The yen has soared 9 percent against the dollar in the past three months, posing a risk to the export gains that have propelled Japan’s rebound from its deepest postwar recession. Noda today said that his government is studying the effectiveness of intervention in the foreign-exchange market, something Japan hasn’t done since 2004.

Highest Since 1995

Against the dollar, the yen traded at 83.66 at 3 p.m. in Tokyo, after it yesterday reached 83.35, the highest level since 1995.

China, which possesses the world’s largest foreign-exchange reserves at $2.45 trillion in June, has sought to diversify its holdings after already becoming the largest overseas investor in U.S. Treasuries. Japan has the second-largest reserves total, at $1.01 trillion, and is the No. 2 foreign owner of U.S. debt.

At the same time, Premier Wen Jiabao’s government has begun to open up access to China’s own debt market. The PBOC said on Aug. 17 it would let overseas financial institutions invest in the nation’s bond market to promote greater use of the yuan in global trade and finance.

Reduce Reliance

The Hong Kong Monetary Authority said last month it’s investigating details of the program. China approved use of the yuan to settle cross-border trade with Hong Kong in June 2009, part of a drive to reduce reliance on the U.S. dollar. The popularity of that program was limited by the lack of investments available in the currency.

Bank Negara Malaysia, which in 2009 won a QFII, or qualified foreign institutional investor, license to invest in Chinese stocks and bonds, hasn’t commented on whether it intends to apply to invest in yuan bonds.

Overseas banks and central banks must first apply for investment quotas on the interbank market, the People’s Bank of China said on Aug. 17. Foreign institutions should also disclose funding sources and investing plans, it said.

The comments by Japanese officials today indicate communication gaps between Asia’s two largest economies even as their trade links deepen, with Noda reiterating he doesn’t understand why China is accumulating the securities.

Tensions have risen this week as Japan yesterday arrested a Chinese boat captain for colliding with one of its Coast Guard vessels near a chain of islands claimed by both countries. China lodged a formal complaint demanding the captain’s release.

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net; Kyoko Shimodoi in Tokyo at kshimodoi@bloomberg.net

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