Foreign holding of JGBs jumps to nearly $1 trillion on Europe worries

TOKYO, June 19 Tue Jun 19, 2012 2:12am EDT

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TOKYO, June 19 (Reuters) - Foreign investors' holdings of Japanese government bonds (JGB) rose to a record of nearly $1 trillion, Bank of Japan data showed on Tuesday, reflecting their flight to safety as the debt crisis in Europe shows no sign of letting up.

Although Japan's debt burden, at twice the size of its $5 trillion economy, is by far the biggest among industrialised countries, JGBs have attracted demand due to their relative safety.

Their main appeal is that the debt has been largely funded by domestic investors, who are backed by about $15 trillion in household savings, helping the country weather credit ratings downgrades and avoid market attacks.

But increases in foreign ownership could make JGBs more susceptible to yield spikes if non-residents start asking for a higher premium, especially as Japan struggles to stabilise public finances due to swelling costs of the fast ageing society.

As of the end of March, foreigners held 76 trillion yen ($963 billion) worth of JGBs, up 23 percent from a year earlier and accounting for 8.3 percent of outstanding JGBs that totalled a record 919 trillion yen, up 4.9 trillion yen, BOJ data showed.

Financial assets at households increased for the third straight year with net assets coming to 1,145 trillion yen, indicating Japan still has room to finance its debt domestically.

The country's debt has been built up as the government tried to stimulate the economy during two decades of sluggish growth and deflation.

Prime Minister Yoshihiko Noda's ruling party last week struck a rare deal with the opposition on a plan to double the sales tax to 10 percent by October 2015, a move seen as a first step towards restoring the country to fiscal health.

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