Japan Buys Treasuries at Pace to Top China as Top U.S. Creditor

Japan, which has purchased almost five times the amount of Treasuries as China in 2012, is on a pace to overtake the world’s most populous country by year-end as the largest creditor to the U.S., government data show.

Investors in Japan bought $10.4 billion of Treasuries in June, bringing its purchases for 2012 to $61.3 billion and its total holdings of the debt to $1.1193 trillion, Treasury data released yesterday show.

That compares with China’s addition of $300 million to its portfolio of U.S. government securities for the month, raising its purchases this year to $12.4 billion and its stake in Treasuries to $1.1643 trillion. Should both countries continue buying at their respective paces through 2012, Japan will end the year with more Treasuries.

“The last three months have cemented this notion that there’s really a ceiling on Chinese holdings,” said Aaron Kohli, an interest-rate strategist BNP Paribas SA in New York, one of 21 primary dealers that trade with the Federal Reserve. “So far, that’s posed no problem for the U.S. because there are so many other willing buyers.”

Foreign investors held $5.29 trillion of Treasuries in June, an increase of 0.7 percent for the month and 5.9 percent for the year, government data show.

Overseas Holdings

Foreign investors increased their holdings of Treasuries to

50.3 percent of the $10.5 trillion marketable U.S. debt as of June as the European debt crisis continued to worsen and job growth in the U.S. showed signs of sputtering. The Fed extended its program to extend the average maturity of its $1.65 trillion Treasury portfolio through the end of the year. The Fed is the largest holder of U.S. government securities.

The 10-year Treasury yield fell as low as 1.44 percent on June 1, a record low surpassed on July 25 at 1.38 percent amid speculation that the Fed would try to boost the U.S. economy by initiating its third series of asset purchases, a policy known as quantitative easing, or QE.

The U.S. central bank has held interest rates near zero since 2008 and plans to keep them there through 2014 to stimulate the world’s biggest economy. The Fed has also bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of QE.

China Watch

China’s currency reserves have grown 1.9 percent to $3.24 trillion as of June, according to the People’s Bank of China. The country’s currency reserves rose 11.7 percent in 2011, the smallest increase since 2000.

“China’s reduced buying is on a lot of people’s radar,” said David Ader, head of U.S. government bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “There could be bigger issues down the road, and those issues would come about from reduced trade surpluses.”

Japan posted a bigger-than-forecast current-account surplus of 433.3 billion yen ($5.49 billion) in June, compared with a

215.1 billion yen surplus in May, Japan’s Ministry of Finance said Aug. 8. Japan has been more reliant on income from overseas investment to support its current account after last year’s earthquake and nuclear accident bolstered demand for imported energy.

“Japan’s going through the same thing,” Ader said. “They’ve had a trade deficit and so presumably their current account would not warrant the type of buying that we’ve seen, and that would then be a problem.”

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