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Japan regains top spot among U.S. creditors, ousting China

By Misa Hama, Nikkei staff writer


TOKYO — Japan ended 2016 as the largest holder of U.S. sovereign debt, topping China in December for the first time since 2007 and gaining new financial clout as America’s top creditor.


The Treasury Department reported Wednesday that Japan held $1.09 trillion in U.S. Treasury bonds at the end of December, down 2.8% from a year earlier for a second straight annual decline. But China was an even more aggressive seller, cutting its holdings 15.1% to $1.05 trillion.


Beijing’s sell-off of U.S. Treasurys, held as foreign currency reserves, aimed largely to raise dollars that could then be sold for yuan to shore up the weakening Chinese currency. Japan’s Treasury holdings have exceeded China’s on a monthly basis since October, ending the Asian heavyweight’s buying spree.


Plunging bond prices gave a further reason to sell. The U.S. Federal Reserve hiked interest rates for the first time in a year in December, and hopes for a fiscal spending push by the new administration are rising, causing yields to surge. China has shifted to assets such as other nations’ sovereign debt to avoid erosion to the value of U.S. bondholdings, market sources say.


Different priorities


But in Japan, low yield poses a more immediate threat. The Bank of Japan said in January 2016 that it would impose negative interest rates on certain deposits. This depressed yields on Japanese government bonds, leaving financial institutions struggling to secure sufficient returns.


Banks, insurers and pension funds turned to Treasurys as a reliable friend in troubled times, drawn by the rare combination of safety and fair returns. Investment in other sovereign debt has swollen as well. Though some Japanese institutions have incurred latent losses on their U.S. debt holdings since late last year, a lack of appealing investment options at home makes it tough to cut those losses and sell.


Japan’s renewed status as America’s leading creditor may not be lost on President Donald Trump. The president has pledged to greatly expand spending and slash taxes, purportedly to boost the U.S. economy. But that plan has drawn frequent criticism for a lack of detail on how it is to be funded. Turning campaign promises into reality could involve bolstering Treasury issuance, with Japan as a prominent buyer.


Awareness of this may have fueled the president’s generous welcome extended to Japanese Prime Minister Shinzo Abe in last weekend’s meeting. With Beijing on the retreat, Trump’s America could turn to Tokyo for help with its bills.

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