Overseas Central Bank Yen Asset Buys Prop Up Bonds, Currency

An increase in Japanese-asset holdings as overseas central banks diversify foreign-exchange reserves may be supporting government bond prices and pushing the yen higher.

Foreign central banks boosted their portfolios of yen- denominated assets, including Japanese government bonds, by 24.6 percent to about 35 trillion yen ($437 billion) last year, according to figures provided by the Bank of Japan. Bonds made up around 33 trillion yen of the total, the document showed.

“Yen-asset purchases by overseas central banks are a factor to strengthen the yen, while their buying provides positive news for Japan’s government bond market,” said Naomi Hasegawa, a senior bond analyst at Mitsubishi UFJ Morgan Stanley in Tokyo. “China, in particular, has been increasing JGB purchases since spring.”

The asset holdings were reported by the Nikkei newspaper on June 25.

Central bankers increasingly point out a need to spread holdings over a basket of currencies as the dollar weakens and the sovereign debt crisis in Europe erodes sentiment on the euro.

“Overseas central banks are apparently shifting investment of foreign reserves to yen assets from euro- denominated assets because concerns about sovereign debt in Greece and other euro-zone nations are flaring up,” Hasegawa said.

China Swaps

China may swap reserve currencies with emerging economies to reduce dollar assets from their present 70 percent, Yang Tao, a researcher with the Chinese Academy of Social Sciences, said in the latest edition of a central bank magazine.

Japanese investors held off on boosting government bond holdings after the March 11 earthquake and tsunami out of concern reconstruction spending would send yields soaring and worsen the nation’s fiscal status, Hasegawa said. Instead, JGB yields have gradually declined and prices have been supported as foreign investors bought bonds.

Overseas buying of Japanese bills rose in April to the highest level since January and foreign investors were net buyers in May, Finance Ministry data show. Japan’s 10-year yields touched the year’s low last week on concern Greece will struggle to pass austerity measures and the U.S. economy is losing momentum.

Still, yen assets aren’t actually attractive, Hasegawa said. They’re being purchased because investors can’t find better alternatives.

“We can’t rule out the possibility that overseas central banks will reverse their stance and reduce investment into the yen should the sovereign problems of Europe and concern about the U.S. start to recede,” she said.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net; Masahiro Hidaka in Tokyo at mhidaka@bloomberg.net

To contact the editor responsible for this story: Paul Tighe at ptighe@bloomberg.net

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