Japan poised to overtake China as America's biggest creditor

[SINGAPORE] Japan is set to overtake China as America's largest foreign creditor as the Bank of Japan's latest attempt to end two decades of economic stagnation prompts investors to eke out any returns they can.

While China cut its investment in US government securities for a fifth month in January, Japan added US$7.7 billion, narrowing the gap to US$1 billion, the latest US Treasury Department data showed. Holdings for February will be released late on Wednesday.

"Japanese rates are still low" and that will drive demand from the nation, said James Chiu, a bond analyst in Taiwan at Hontai Life Insurance Co, which oversees the equivalent of US$6.7 billion. Foreign investors represent "big purchase power" that will help suppress yields, he said.

"The US Treasury is the safest security in the world."

With the Federal Reserve poised to raise interest rates, Treasuries offer the highest yields among debt from the world's most-industrialized economies. Then there's the dollar, whose meteoric rise against virtually every currency has made US assets even more appealing.

Signs of capital outflows are mounting in China as economic growth slows, which reduces the need for authorities to buy dollar assets to keep the yuan from strengthening too much. In Japan, the central bank has embarked on record monetary easing to end years of deflation, flooding the financial system with money and resulting in a weaker yen and interest rates close to zero.

For the US government, maintaining Japanese demand in the US$12.6 trillion market for Treasuries is more important than ever, particularly after China pared its own holdings last year by the most on record and as the Fed prepares to raise rates.

Ten-year yields were 0.325 per cent in Japan, compared with 1.89 per cent in the US The Japanese two-year yield fell to zero on Wednesday. US 10-year yields are higher than 19 of 22 other developed nations around the world.

The US Treasury is set to release investment figures for February at 4 pm in Washington. China held US$1.2391 trillion of the securities as of January. Japan boosted its holdings to US$1.2386 trillion. China has held more than Japan since 2008.

The two Asian nations each own almost 10 per cent of the $12.6 trillion in publicly traded US debt. Total foreign holdings account for about half of the market.

BLOOMBERG