Japan tops China in buying US Treasury

[GoFlyKiteNow]

Japan tops China in buying US Treasury
Bloomberg / November 10, 2009, 0:36

Japan bought a net $105 billion of US government debt through August, exceeding China as the biggest foreign buyer and boosting its holdings to $731 billion, or more than 10 per cent of the total market, Treasury Department data show. The 17 per cent increase is the most since a 25 per cent surge in 2004.

Mizuho Asset Management Co and Mitsubishi UFJ Asset Management Co are among the investors buying US bonds because they see similarities between America’s response to the recession and their government’s efforts during the so-called lost decade of the 1990s.

An index of Japanese debt securities compiled by Bank of America Corp’s Merrill Lynch unit returned 90 per cent in the 1990s, while the Nikkei 225 Stock Average fell as much as 67 per cent between January 1990 and October 1998.

“The US economy has faced a double whammy: the recession and credit contraction,” said Akira Takei, head of non-yen denominated bonds at Mizuho Asset in Tokyo, a unit of Japan’s second-largest bank. “The US will face a triple whammy with deflation. That’s good for the Treasury market.”

Inflation-Protected Debt

Michael Pond, an interest-rate strategist at Barclays Plc, one of 18 primary dealers that trade with the Federal Reserve, favours Treasury Inflation Protection Securities, or TIPS, and said Asian investors, including the Japanese, have been buying the bonds on concern the dollar will continue to decline and inflation will accelerate.

Barclays expects consumer prices to rise 1.9 per cent in 2010, after a decline of 0.4 per cent this year, data compiled by Bloomberg show. “Japanese investors have been skewed to expecting deflation because of their own experience, but the more pressing concern over the intermediate term is inflation,” said Pond, who works in New York for Barclays.

 

[zuoom]

so, in between Japan and China, they hold more than a quarter of the US treasury.

what kind of impact or influence would there be?

 

[longbow]

Japan's economy will shrink as its population decreases. The Chinese have come from nowhere and now has the highest holding in US Treasury. That trend will continue even as Beijing tries to diversify its holdings.

US concerns are not with Japan not buying it Treasury. Japan has pretty much been blind supporter of US (till recently with the change in government). The main US concern is that Chinese reduces buying US Treasury. Japan alone cannot absorb the amount of debt that the US is doling out. Without Chinese support US economy will collapse. And in a way without US consumers, Chinese economic growth will slow down.

Point here is that Chinese are at the low end of manufacturing and thus even in US economic depression US will buy Chinese goods. The rest of the world will buy Chinese made products. One point in view. 2 years ago there was a lot of talk about Mattel's Chinese made toys with lead paint. 2 years later, most of the toys are still from China. Chinese manufacturing might is untouchable.

However, without the Chinese, no other country will be able to replace Chinese buying of US debt.

Watch the Obama visit of Beijing. US has recognized that it will no longer be the sole superpower. As it is, its economy recovery is dependent on Chinese support. It cannot afford to maintain its current posture. When the smoke finally clears over Afghanistan and Iraq (easily another 10 years), they would have spent another $1.5 Trillion counting from today.

BTW Moodys just upgraded China's outlook to A1.

Moody's upgrades China outlook
Posted 11/09/2009 08:33 PM ET


The credit ratings agency changed the outlook for China's A1 rating to positive from stable as the economy has remained "resilient, robust and relatively stable" through the economic crisis. It added that China's banking system was coming out of the crisis in relatively good shape. Moody's also raised its outlook on Hong Kong's Aa2 rating to positive.


At the same time Moody's will not raise outlook for India because:

India’s sovereign rating won’t be raised unless the government works toward reducing its budget deficit and debt, according to Moody’s Investors Service.

“Unless we see some hope for signs of improvement in government finance, India’s rating won’t be raised,” Moody’s Senior Vice President Tom Byrne said in an interview in Shanghai today. “We don’t see that yet.”

Prime Minister Manmohan Singh’s government is borrowing a record 4.51 trillion rupees ($97 billion) this year to fund stimulus packages and revive growth in Asia’s third-largest economy, forecast by the central bank to expand at the slowest pace in seven years. Higher borrowing is expected to widen the budget deficit to a 16-year high of 6.8 percent of gross domestic product in the 12 months to March 2010, according to the finance ministry.

“India has a lot of domestic-currency debt, a very high debt-to-GDP ratio, and a very high budget deficit year after year,” Bryne said. Moody’s has a Baa3 rating on India’s long- term foreign debt, the lowest investment grade.

A widening deficit made Indian bonds the worst performers this year among 10 Asian local-currency debt markets outside Japan, with a 5.88 percent loss, according to indexes compiled by HSBC Holdings Plc. The benchmark 10-year bond yield has added 2.04 percentage points, the biggest gain in at least a decade, to 7.30 percent, according to Bloomberg data.

Asset Sales

Standard & Poor’s, which has a BBB- long-term credit rating on India, the lowest investment-grade level, cut the outlook on the nation’s debt to negative from stable in February this year on concerns over deteriorating government finances.

Moody’s comments come after Singh’s government last week announced plans to sell stakes in state-run companies, which analysts expect will help reduce the budget deficit.

Prime Minister Singh said Nov. 8 that he hopes the decision would lead to “faster progress” on government sales.

The disinvestment program “is going to add to the amount of money available to the government,” said Ashok Jha, chairman of MCX Stock Exchange, which trades in currency and interest- rates futures. “The first impact of this is that the high fiscal deficit will decline substantially.”

India’s cabinet on Nov. 6 approved a plan requiring all state-run companies to make sure that 10 percent of shares are publicly traded and said proceeds from share sales should be used for spending on social programs such as creating jobs and building roads, ports and utilities.

Ratings company DBRS Inc. last month cut India’s long-term foreign- and local-currency debt rating outlook to negative from stable, citing “discomfort” with the “high” budget deficit.

 

[Watchman]

This will only means that Japan will join United States in the third installment of WORLD WAR III !