Japan may help U.S. if China stops debt purchaseWhy would the Bank of Japan or anyone else want to switch their overvalued yen for overvalued U.S. dollars, then park those dollars in low-yielding Treasuries? If you are going to spit in the wind of the U.S. Treasury's warning against currency manipulation, you should at least buy currencies with some upside potential and/or assets with some yield.
By Nick Olivari - NEW YORK, Jan 27 - Japan could be a counterweight against rising U.S. borrowing costs should China buy less U.S. government debt in response to pressure from Washington to change its currency policy.
Investors are on full alert that Japan's Ministry of Finance could buy dollars to bring the yen down from a 13-1/2- year peak first touched in December and hit again in January.
Japan, which relies heavily on trade to power its economy, saw its exports plunge 35 percent in December.
Already holding $1.03 trillion in official reserve assets, according to International Monetary Fund data, the next question is what would Japan do with intervention dollars.
Given Japan is the second-biggest holder of U.S. debt after China, it would likely buy Treasuries, denting some of the impact if Beijing hits back over recent foreign-exchange criticism by Timothy Geithner, now Treasury secretary.
"Japan gets a higher dollar/yen rate and keeps the domestic exporters happy while the increased supply of U.S. debt and specifically Treasuries gets mopped up," said Dustin Reid, senior currency strategist at RBS Global Banking & Markets, in Chicago.
The U.S. government "could issue a lot more debt and it is no secret that Japan wants its currency to weaken," Reid said.
Prices of U.S. Treasury bonds fell last week, partly on concerns that Geithner's comments, made in testimony to senators weighing his nomination as Treasury secretary, could provoke China into buying less U.S. debt.
But there was no sign of weaker foreign demand at a $40 billion auction of two-year Treasury notes on Tuesday...
When your country's private and public investors are already heavily invested or even overinvested (Does anyone understand the meaning of the sentence beginning with "Given Japan is the second-biggest holder of U.S. debt after China..."? It baffles me) in a single market (the U.S. of A.) and when these investors have just had their tails singed off because direct and portfolio investments made in that country have turned to lead -- the strategic and emotionally reassuring choice would be to look for other bonfires in which to toss your yen.
I do not deny that yen-for-dollars story offers an attractive quid pro quo...
a) Japan gets to drive down the yen, saving its exporters while
b) absorbing excess U.S. government securities being issued to fund stimulus package and cover revenue shortfalls
... but an excess of Treasuries in the market is not a problem now, nor is it likely to be a problem in the near future.
So are the musings of those quoted in the article part of a legal scam--an attempt to convince otherwise reticent punters to buy dollars in anticipation of a prophecied Bank of Japan dollar buying binge that never actually happens?