Email of the day (1)
Comment of the Day

January 07 2013

Commentary by David Fuller

Email of the day (1)

On Japan's currency policy
"Hello David; I recently read a commentary that espoused the idea that in its attempt to devalue its currency, Japan may divert its attention to buying more of its own debt as opposed to that of the U.S. The writer contended that since Japan has been one of the larger purchasers of U.S. debt, any reduction in future purchases of that debt in favor of its own would negatively impact the current low interest rate on U.S. debt.

"I would be interested in your opinion on this possibility, if you have one."

David Fuller's view I have seen similar comments and it is an interesting point. I do not know the extent to which Japan has added to or reduced its holdings of US or any other foreign debt recently, although a quick internet search produced this item graph and article based on last August's data.

People have worried about foreign holdings of US Treasuries, mainly by China and Japan, for many years and assumed that eventual exit sales would drive up US rates. It is certainly possible, if either country decided to sell in quantity, although while QE continues the Fed's buying would presumably limit the extent of any rise in US yields.

Japan may not wish to jeopardise its relationship with the US by selling Treasuries. However, Japan and any other holder of US debt will logically put its own interests first. These people are not naïve, so Japan and any other big holder of US debt surely knows that this is a bubble, albeit currently propped up by the Fed, in its latter stages of development. They should also know that if they have any intention of selling for financial reasons, it would be better to do so ahead of the crowd.

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