Japan Poised to Overtake China as America’s Biggest Creditor

Japan is set to overtake China as America’s largest foreign creditor as the Bank of Japan’s latest attempt to end two decades of economic stagnation prompts investors to eke out any returns they can.

While China cut its investment in U.S. government securities for a fifth month in January, Japan added $7.7 billion, narrowing the gap to $1 billion, the latest U.S. Treasury Department data showed. Holdings for February will be released late Wednesday.

“Japanese rates are still low” and that will drive demand from the nation, said James Chiu, a bond analyst in Taiwan at Hontai Life Insurance Co., which oversees the equivalent of $6.7 billion. Foreign investors represent “big purchase power” that will help suppress yields, he said. “The U.S. Treasury is the safest security in the world.”

With the Federal Reserve poised to raise interest rates, Treasuries offer the highest yields among debt from the world’s most-industrialized economies. Then there’s the dollar, whose meteoric rise against virtually every currency has made U.S. assets even more appealing.

Signs of capital outflows are mounting in China as economic growth slows, which reduces the need for authorities to buy dollar assets to keep the yuan from strengthening too much. In Japan, the central bank has embarked on record monetary easing to end years of deflation, flooding the financial system with money and resulting in a weaker yen and interest rates close to zero.

Yield Differentials

For the U.S. government, maintaining Japanese demand in the $12.6 trillion market for Treasuries is more important than ever, particularly after China pared its own holdings last year by the most on record and as the Fed prepares to raise rates.

Ten-year yields were 0.325 percent in Japan, compared with 1.89 percent in the U.S. The Japanese two-year yield fell to zero on Wednesday. U.S. 10-year yields are higher than 19 of 22 other developed nations around the world.

The U.S. Treasury is set to release investment figures for February at 4 p.m. in Washington. China held $1.2391 trillion of the securities as of January. Japan boosted its holdings to $1.2386 trillion. China has held more than Japan since 2008.

The two Asian nations each own almost 10 percent of the $12.6 trillion in publicly traded U.S. debt. Total foreign holdings account for about half of the market.

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