China purchases of Japanese government debt

In Japan’s turn to China as a primary export market, we see that China is a very important economic partner for Japan.  Given this importance, the PRC may have room to take some actions that are in its interest that may be unfavorable for Japan without any diplomatic or economic repercussions.

The purchases of Japanese government debt by the PRC seem to effectively transfer the burden of managing currency values versus the dollar from China’s monetary authorities to Japan’s.

It is an interesting new tactic. It could become a diplomatic issue; although I think that since now China is Japan’s biggest export market that Japanese leaders won’t take an aggressive stance. The marginal reduction in what China purchases from Japan due to the higher yen probably is insignificant.

It seems that Japan’s leadership is viewing China’s actions as an expression of confidence in Japan’s future ability to repay these debts.  Bloomberg reports on this here:

“Japan’s finance minister hailed China’s record purchases of his nation’s government bonds as policy makers seek to sustain confidence in the world’s largest public debt.

“Domestic holdings are very high so we have been trying diversify” our investor base, Yoshihiko Noda said in an interview in his office in Tokyo today. It’s a welcome move “given our objective,” he said.”

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