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China Buys Japan’s Long-Term Debt for 8th Consecutive Month

China purchased Japanese long-maturity bonds for an eighth consecutive month as the larger nation seeks to diversify the world’s biggest currency reserves.

The country with the fastest growing major economy bought a net 497.1 billion yen ($6.1 billion) of the debt in May, according to a statement released by Japan’s Ministry of Finance in Tokyo today. That’s the second-biggest monthly purchase on record, following an all-time high of 1.33 trillion yen in April. China was a net seller of 707 billion yen of Japanese short-term notes, today’s data also showed.

“China has been seeking a place to hoard their expanding foreign-currency reserves and they found the yen as an alternative to the dollar,” said Koji Ochiai, chief market economist at Mizuho Investors Securities Co. in Tokyo. “China may have shifted to Japan’s longer-term bonds from short-term debt for higher profit. That could also imply their intention to hold Japanese assets for a longer time.”

Overseas central banks boosted their holdings of yen-denominated assets, including Japanese government bonds, by 24.6 percent to about 35 trillion yen last year, according to Bank of Japan data. Bonds made up about 33 trillion yen of the total. China has more than $3 trillion in foreign reserves.

Demand for Refuge

Global currency reserves rose to $9.694 trillion in the first quarter from $9.259 trillion at the end of last year, and those of emerging economies increased to $6.533 trillion from $6.166 trillion, according to the International Monetary Fund report released June 30. The yen’s share of emerging-market reserves climbed to 2.9 percent in the first quarter, the most since September 2000, the data showed.

Concerns that the U.S. economic recovery will lose momentum and Europe’s debt crisis will spread boosted demand for Japan’s debt as a refuge, pushing benchmark 10-year yields to 1.085 percent on June 28, the lowest level since November. Yields were at 1.175 percent as of 11:05 a.m. in Tokyo today.

Japanese government bonds due in 10 years and longer handed investors a 1.2 percent gain in May, the biggest monthly return this year, based on a Bank of America Merrill Lynch index. The broader market posted a 0.5 percent advance.

“It’s likely that China kept money it got from the redemption of short-term bonds in yen assets,” said Daisuke Karakama, a market economist in Tokyo at Mizuho Corporate Bank Ltd., Japan’s second-largest publicly traded lender. “Besides the fact that Japan is the world’s largest net creditor with current-account surpluses, deflation in Japan increases the allure of yen assets as a safe investment.”

Real yields have also made Japanese bonds relatively attractive compared with debt in the U.S., where core inflation accelerated in May at the fastest pace in two years. Ten-year U.S. Treasuries yielded 42.7 basis points less than the growth rate of consumer prices. The so-called real yield on similar-maturity Japanese bonds was a positive 88.3 basis points.

“Diversification of foreign reserves by central banks around the world including China is a strong trend,” Mizuho’s Karakama said.

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