Japan Could Overtake China as Top U.S. Debt Holder

October 17, 2012Bonds and Investments by EW News Desk Team


China could soon lose its position as the top purchaser of US government debt as its slowing economy reduces its need to recycle foreign exchange reserves into Treasury holdings.

According to the monthly Treasury International Capital report released today, Chinese holdings of US debt rose just 0.1 percent this year through August to $1.15 trillion.

On the other hand, Japan, a stronger ally of the US, raised its stake by 6 percent to $1.12 trillion – keeping it on pace to top the list of foreign creditors by January.

Over the past year, Japan’s pace of buying has accelerated with its Treasury holdings rising from $907 billion, while China’s overall portfolio has dropped from $1.27 trillion, according to US Treasury data.

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“Simply, we’re not just borrowing from the Chinese, we’re borrowing from the Japanese as well,” Dan Greenhaus, chief global strategist at BTIG, told the Financial Times. “It’s important to remember that Japan lends the US every bit as much money as does China.”

The FT also commented on the report:

China supplanted Japan as the largest foreign holder of Treasuries in September 2008 during the financial crisis, and peaked in July 2011 at $1.31 trillion. China’s need to recycle foreign exchange reserves into US debt has eased as its economy has slowed.

Japan’s Treasury purchases have come amid an effort to defend the yen against appreciation that could hurt its export-dependent economy, while China has been giving its currency more leeway to appreciate against the dollar.

Tokyo has also indicated it may intervene again in the currency market after the Fed’s recent decision to embark on another round of stimulus.

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Overall, international purchases of US financial assets rose in the month of August as investors sought shelter from the debt crisis in Europe.

Millan Mulraine, a US strategiest for TD Securities, told Bloomberg:

This report underscores the healthy demand for U.S. Treasury assets globally as the European uncertainty continues to weigh on investors’ sentiment.

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