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Wednesday, September 22, 2010

Don’t Worry About China, Japan Will Finance U.S. Debt

I am posting this because the treasury bonds have been getting investors that offset China's shedding of the dollar.  I told this story in a much different way a month ago, but this was my meaning.  I actually called the Japanese Yen, Chinese...of course I know that the Yen is Japanese.   Forgive me for the currency confusion, but the substance of my conversation is referenced in this article.

By Alex Frangos

China has been diversifying its $2.5 trillion reserves away from the dollar, causing some to worry that less Chinese buying of Treasurys would cause U.S. interest rates to rise and make it more difficult for the government to borrow.

National flags of Japan and the U.S. are seen near a graph displaying the movements of the U.S. dollar and the Japanese yen foreign exchange rates at a dealing room in Tokyo September 15.But Japan’s dollar buying in currency markets Wednesday shows Chinese reserve diversification might actually lead to even more demand for Treasurys.

Here’s how. As China diversifies out of U.S. dollar-denominated assets such as Treasurys, it is buying debt denominated in the currencies of some of its biggest trading partners. Not wanting to lose competitiveness themselves, those trading partners in turn buy dollars to keep their currencies cheap.

As part of the diversification push, China has been a major buyer of yen, snapping up $27 billion in yen so far this year according to Japan’s Ministry of Finance. Analysts say China’s buying has helped an already strong yen get stronger.

Now, Japan, feeling under pressure to weaken its currency, turned around and bought dollars, most likely in the form of Treasurys. It isn’t clear exactly how much dollar buying Japan will have to do to protect the yen from getting stronger, but it’s likely to more than offset China’s diversification into the yen. If the past is a guide, Japan spent $320 billion in its last intervention from 2003 to 2004. And this time the currency markets are 73% far larger, with $568 billion dollar-yen trading a day, according to the Bank for International Settlements.

Japan is not alone in this phenomenon. China has also bought South Korea’s currency, the won. And South Korea routinely intervenes in currency markets, buying dollars to keep its currency from rising too quickly, again offsetting China’s move out of the dollar.

Read this post in Japanese/日本語訳はこちら≫

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