Japan may purchase $10b Chinese bonds

Updated: 2011-12-22 06:24


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BEIJING - Japan acknowledged Tuesday that it could buy up to 10 billion US dollars worth of Chinese government bonds, a move that can be mutually beneficial for both Asian economic powerhouses.

Japanese Finance Minister Jun Azumi said his country and China would discuss the possibility of purchasing each other's bonds during Prime Minister Yoshiko Noda's visit to Beijing next week.

Tokyo could use 10 billion dollars of its foreign exchange reserves to buy Chinese bonds. It will be the first time for Japan to buy the yuan-denominated bonds.

The historic move will be of strategic importance for Japan, owner of the world's second largest foreign exchange reserves, to diversify its portfolio. It will also be of huge significance for China in promoting the international use of the yuan.

Out of Japan's huge reservoir of foreign exchange reserves, estimated at around 1.3 trillion dollars by the end of November, more than 70 percent is in dollar-denominated assets.

In the current times of uncertainty in international financial markets and debt crisis in the United States and Europe, putting eggs in only one basket is not a good idea for Japan. The country needs to diversify its portfolio.

Buying yuan-denominated bonds can lower Japan's exposure to risk, which is also in line with its traditional favor for lower-risk investments.

For China, it will be the first time a developed country buys yuan-denominated bonds with foreign exchange reserves.

The breakthrough symbolizes the confidence Japan has for China, its largest trading partner. The deal can provide a substantial boost for the internationalization of the Chinese yuan.

Apart from economic benefits, the move is also expected to boost mutual trust between the two Asian neighbors, enabling them to better cope with crises with enhanced coordination.

Cheering news indeed, Japan's initial appetite for 10 billion dollars, or a merely 0.77 percent of its overall foreign exchange reserves, is more a nominal gesture than a policy shift on foreign exchange reserves.

Furthermore, a number of technical problems still need to be ironed out before the deal can be finally sealed. Whether the purchase of Chinese bonds will be followed by other countries remains unclear.

As early as in September 2010, the then Japanese Finance Minister Noda suggested that his country buy Chinese bonds. It took a long time to take the first step, and it remains unclear whether this is just a temporary move or Japan will gradually takes more yuan-denominated assets.

However, the possible purchase will surely benefit both Japan and China, helping the former lower risks through investment diversification and granting the latter an opportunity to push the yuan's internationalization onto a new stage.

For the world as a whole, it will also be good news of far-reaching significance, especially in these time of financial uncertainties.