Japan from the inside out

Time for some value shopping

Posted by ampontan on Wednesday, February 17, 2010

EARLIER THIS MONTH, there was a post about the possibility that the Chinese would reduce their U.S. debt purchases, while Japan would increase theirs.

That’s now shifted from the realm of possibility to reality.

China reduced its stake and lost the position it’s held for more than a year as the largest foreign holder of Treasury debt. Japan retook the top spot as it boosted its Treasury holdings.

In fact:

The Treasury Department said foreign holdings of U.S. Treasury bills fell by a record $53 billion in December. That topped the previous record drop of $44.5 billion in April 2009.

By the numbers:

The Treasury report showed that China reduced its holdings of Treasury securities by $34.2 billion in December…Japan boosted its holdings of Treasurys by $11.5 billion to $768.8 billion. That figure exceeded China’s December total of $755.4 billion and restored Japan’s position as the largest foreign owner of Treasurys.

Opinion was mixed. One the one hand:

Alan Meltzer, an economics professor at Carnegie Mellon University, said China’s shift should be a wake-up call for Washington.

“The Chinese are worried that we have unsustainable debt levels, and we do not have a policy for dealing with it,” Meltzer said.

On the other:

“China may not be too happy with us right now, but you have to ask, what else are they going to do with their money?” said David Wyss, chief economist at Standard & Poor’s in New York.

Oh, I’d bet they could think of something else to do with it. (And yes, Wyss does come off as arrogant, but the big money boys in New York have long had a taste for that kind of locker room swagger.)

Just as interesting is the behavior of the DPJ-led government. They started putting some space between themselves and the Americans and moving closer to China, which was the intention of many in the party when it was in opposition.

But when the Americans got huffy, the government didn’t have the nerve to put its money where its mouth was, and overlooked its fiduciary responsibility as well.

The Obama Administration has tried to implement a yuai foreign policy of its own, even with a soon-to-be-nuclear-armed Iran led by religious lunatics, and with Russia, which has always been disdainful of that approach and considers it weakness.

One of the few times the Americans have showed even a semblance of backbone is in their dealings with Japan.

That Peace Clause in the Constitution sure worked out well for the winning dog, didn’t it?

UPDATE: Most interesting is this story in the Financial Times (registration probably required) reporting that the Bank of Japan won’t buy Japanese government bonds.

Bank of Japan officials have a metaphor to explain why they do not want to buy more government bonds in spite of deepening deflation: Japan’s economy is like a chronically sick dog.

The bank’s regular policy board meeting begins on Wednesday and many in Japan’s government and the markets would like it at the meeting’s end on Thursday to announce aggressive quantitative easing in the form of the purchase of long-term debt as the US Federal Reserve and the Bank of England have done.

But the BoJ is reluctant, fearing that bond buying will not cure the dog but kill it….

“The purchase of government bonds is just like injecting morphine into the dog,” says Teizo Taya, a former member of the central bank’s policy board who is a special counsellor to Daiwa Institute of Research. “All of a sudden the dog will jump and start running,” he says, but the danger is an overdose.

In short, the BOJ is snapping up American bonds, but passing up its own.

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