Bloomberg News

China’s Net Purchases of Japan Long-Term Debt Reach Record

June 07, 2011

(Updates to add overseas demand in fourth paragraph, strategist quote in sixth.)

June 8 (Bloomberg) -- China’s net purchases of Japan’s long-term debt reached a record as the larger nation seeks to diversify the world’s biggest currency reserves.

China bought a net 1.33 trillion yen ($16.6 billion) in Japanese long-term bonds in April, the biggest amount since records began in January 2005, according to data released today in Tokyo by Japan’s Ministry of Finance. The nation sold a net 1.47 trillion yen of short-term debt, the data shows.

“As China tries to diversify its assets with its huge foreign-exchange reserves, it probably wants to have yen- denominated assets to some extent” in the longer term, said Tetsuya Inoue, chief researcher for financial markets for Tokyo- based Nomura Research Institute Ltd. “China has a strong trading relationship with Japan.”

China’s net purchases of Japan’s long-term debt exceeded the previous record of 234.5 billion yen set in March. International investors increased their holdings of Japan’s longer-term bonds for a sixth week, the longest stretch since August, ministry data released on June 2 showed.

Japanese government debt due in 10 years and longer has handed investors a 2.2 percent gain since the start of April, versus a 1 percent advance for the broad market, based on Bank of America Merrill Lynch data. The Nikkei 225 Stock Average has fallen 3.1 percent over the same period.

Low Rates

“Adding to diversification of its foreign reserves, China may have bought mid- to long-term on bets Japan’s interest rates will remain low because of the impact from the earthquake,” said Makoto Noji, a senior bond and currency strategist in Tokyo at SMBC Nikko Securities Inc., one of the 24 primary dealers obliged to bid at government debt sales.

Japan’s economy shrank 3.7 percent in the first quarter after the magnitude-9 earthquake and tsunami on March 11 disrupted production and prompted consumers to cut back spending.

Bank of Japan Governor Masaaki Shirakawa and his eight colleagues decided on May 20 to maintain a 30-trillion yen credit program and a 10-trillion yen asset-purchase fund that represent the bank’s main policy tools. The key overnight rate was kept at zero to 0.1 percent

The benchmark 10-year yield dropped to 1.105 percent on May 16, the lowest since November, after touching 1.335 percent on April 11. The rate on the 1.2 percent security due June 2021 was unchanged at 1.160 today.

The yield spread between 10-year Japanese government debt and five-year notes narrowed to 74 basis points today, compared with 79 basis points on April 4.

China has more than $3 trillion in foreign reserves.

--With assistance from Yoshiaki Nohara in Tokyo. Editors: Nate Hosoda, Jonathan Annells

To contact the reporters on this story: Monami Yui in Tokyo at myui1@bloomberg.net; Shigeki Nozawa in Tokyo at snozawa1@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.


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