Japan to purchase $10b Chinese bonds

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Updated: 2011-12-22 06:24(Xinhua)

Japan may purchase $10b Chinese bonds|Asia-Pacific|chinadaily.com.cn

BEIJING - Japan acknowledged Tuesday that it could buy up to 10 billion US dollars worth of Chinese government bonds, a move that can be mutually beneficial for both Asian economic powerhouses.

Japanese Finance Minister Jun Azumi said his country and China would discuss the possibility of purchasing each other's bonds during Prime Minister Yoshiko Noda's visit to Beijing next week.

Tokyo could use 10 billion dollars of its foreign exchange reserves to buy Chinese bonds. It will be the first time for Japan to buy the yuan-denominated bonds.

The historic move will be of strategic importance for Japan, owner of the world's second largest foreign exchange reserves, to diversify its portfolio. It will also be of huge significance for China in promoting the international use of the yuan.

Out of Japan's huge reservoir of foreign exchange reserves, estimated at around 1.3 trillion dollars by the end of November, more than 70 percent is in dollar-denominated assets.

In the current times of uncertainty in international financial markets and debt crisis in the United States and Europe, putting eggs in only one basket is not a good idea for Japan. The country needs to diversify its portfolio.

Buying yuan-denominated bonds can lower Japan's exposure to risk, which is also in line with its traditional favor for lower-risk investments.

For China, it will be the first time a developed country buys yuan-denominated bonds with foreign exchange reserves.

The breakthrough symbolizes the confidence Japan has for China, its largest trading partner. The deal can provide a substantial boost for the internationalization of the Chinese yuan.

Apart from economic benefits, the move is also expected to boost mutual trust between the two Asian neighbors, enabling them to better cope with crises with enhanced coordination.

Cheering news indeed, Japan's initial appetite for 10 billion dollars, or a merely 0.77 percent of its overall foreign exchange reserves, is more a nominal gesture than a policy shift on foreign exchange reserves.

Furthermore, a number of technical problems still need to be ironed out before the deal can be finally sealed. Whether the purchase of Chinese bonds will be followed by other countries remains unclear.

As early as in September 2010, the then Japanese Finance Minister Noda suggested that his country buy Chinese bonds. It took a long time to take the first step, and it remains unclear whether this is just a temporary move or Japan will gradually takes more yuan-denominated assets.

However, the possible purchase will surely benefit both Japan and China, helping the former lower risks through investment diversification and granting the latter an opportunity to push the yuan's internationalization onto a new stage.

For the world as a whole, it will also be good news of far-reaching significance, especially in these time of financial uncertainties.

 

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December 20, 2011 5:49 pm

Tokyo eyes Chinese state bonds investment

By Michiyo Nakamoto and Robert Cookson in Hong Kong

Japan is in talks with Beijing to invest in Chinese government bonds as part of a broader effort to strengthen financial and economic ties with its largest trading partner.

"As we have to deepen economic ties, we are having many discussions. We believe the mutual benefits of investing in each other's bonds would be substantial," said Jun Azumi, Japan's finance minister.

The talks come ahead of a meeting this Sunday between Yoshihiko Noda, Japan's prime minister, and Hu Jintao, his Chinese counterpart.

Mr Azumi stressed that no decision had been made and the finance ministry declined to confirm the possible size of any Japanese investment in Chinese bonds.

But if the plan goes ahead, Japan would become the first country within the Group of Seven industrialised nations to hold the renminbi in its foreign exchange reserves.

Beijing has allowed some central banks to invest in the domestic bond market as part of a push to increase the international use of the Chinese currency.

Japan's $1,304.7bn in foreign exchange reserves are held largely in dollars.

"A G7 country buying Chinese government debt is a huge stamp of approval for the renminbi," said Dariusz Kowalczyk, a strategist at Crédit Agricole.

For Tokyo's part, "it makes sense for Japan to hold more renminbi bonds than US treasuries, given it does more trade with China than the US", said Christian Carrillo, a strategist at Société Générale in Tokyo.

While Mr Azumi denied that the initiative would lead to a big reduction in Japan's US treasury holdings, "there are many central banks that are doing the same thing, which is trying to diversify away from the US", Mr Carrillo said.

Japan's proposal to invest in renminbi bonds is one of a number of initiatives expected to be agreed when Mr Noda visits Beijing on Christmas day ahead of next year's 40th anniversary of the normalisation of relations between the two countries.

The two governments are also discussing the possibility of setting up a fund with an initial Y12bn ($154m) in capital to invest in businesses in the fields of environmental protection and energy conservation, according to a government official.

Mr Noda has been keen to smooth relations with China following a clash over disputed islands in the East China Sea last year when Japan's coastguard arrested a Chinese a trawler captain for colliding with its vessels.

A surge in Japanese Government Bond holdings by China also raised concerns in Japan when it emerged that China had amassed a net $27.4bn in JGBs in the first seven months of last year.

Mr Noda, who was finance minister at the time, said it was "unnatural" that China was able to buy Japanese bonds while Japan could not buy Chinese bonds.

Additional reporting by Lindsay Whipp, Tokyo

Tokyo eyes Chinese state bonds investment - FT.com