* Move to underpin ties, tentative step towards FX
* Seen as boost to yuan credibility as international
* Underlines shifting global power towards China
* Debt buying part of agreement on closer economic ties
By Stanley White
TOKYO, March 13 Japan will buy 65 billion
yuan ($10.3 billion) of Chinese government debt, the first major
economy to do so, giving China a mark of approval in the
credibility of the yuan as an international currency.
Other countries are investing in China through state
agencies, but Japan's investment is by far the biggest in the
yuan. As a currency with limited convertibility, such bets are
symbolic of the shift in global power towards China as the
world's fastest-growing major economy.
Despite sometimes rancorous political ties between the two
neighbours, Japan's economic fortunes are increasingly tied to
China's economic growth and consumer demand.
China is already Japan's biggest trade partner and the two
countries hold the world's biggest piles of foreign exchange
reserves -- $3.2 trillion in China and $1.3 trillion in Japan.
"For China, the move is linked to its efforts to
internationalise the yuan -- allowing foreign investments in its
debt market will make the yuan more accepted internationally,"
said Zhang Yongjun, an economist at the China Centre for
International Economic Exchanges, a government think tank.
Japan's finance minister, Jun Azumi, said on Tuesday that
Japan had received permission from China to buy 65 billion yuan
in Chinese government debt. He said Tokyo needed to carry out
some administrative steps in coming months before purchases
"We feel this is an appropriate amount when considering our
mutual goal of strengthening economic cooperation between Japan
and China," Azumi told reporters.
Analysts said Japan is the first of the Group of Seven
leading economies, which also includes the United States,
Canada, Britain, France, Germany and Italy, to buy Chinese debt.
AN INTERNATIONAL CURRENCY?
Japan and China agreed at a summit in December to strengthen
financial cooperation and that included increased use of the
yuan and yen in bilateral trade as well as Tokyo's buying of
Chinese government bonds.
The Japanese investment will be handled outside of China's
Qualified Foreign Institutional Investor (QFII) programme, a
quota system and the primary channel for foreign portfolio
investment, the Ministry of Finance in Tokyo said.
Japan is likely to buy a small amount of debt at first and
then increase purchases while considering possible market impact
when choosing the timing of the transactions, Azumi added.
"The market impact should be manageable because the amount
isn't that large and the market for dollars is huge," said Junya
Tanase, chief foreign exchange strategist at JPMorgan Bank in
"Still, this is significant for economic cooperation and
reserves diversification. It's difficult to tell now, but it is
possible for the amount of bond purchases to increase in the
Japanese purchases of Chinese bonds would also be a sign of
credibility in Beijing's long-term efforts to elevate the yuan's
status as an international currency. That effort so far has
involved China's promotion of the yuan to settle trade.
Beijing has struck agreements with several nations from
Malaysia to Belarus and Argentina on the use of the yuan in
trade and other transactions. It has expanded a pilot programme
started in 2009 into a nationwide one allowing firms to settle
their trade in yuan.
The result has been a relative surge in the use of the
currency. More than 9 percent of China's total trade was settled
in yuan in 2011, up from just 0.7 percent in 2010.
China said on Monday it would continue its purchases of
Japanese government debt, but would reduce purchases when the
yen is rising to avoid exacerbating the negative impact of a
strong yen on exports. At 82.25 per dollar, the yen is off a
record high reached last October of 75.31 yen, but corporate
Japan is highly sensitive to the exchange rate.
Japan hopes cross-holdings of investments between China and
Japan will improve economic cooperation and communication
between the two countries. Japan may gain more insight into
Chinese thinking on the yuan through the cross-holdings, a
source in Japan said.
The risk for both China and Japan is that sudden big
purchases of their debt could have a major impact on their
respective markets, so communicating their investment intentions
would be important.
China and Japan have been talking about diversifying their
foreign assets, but Japan particularly has been at pains to
reassure of its unwavering confidence in the U.S. dollar, the
globe's pre-eminent reserve currency.
Foreign investors can invest in China's stock and bond
markets only through the QFII programme. The government has so
far granted $24.55 billion in such quotas to nearly 130
Nigeria indicated in September it wanted to diversify up to
10 percent of its $34 billion in foreign exchange reserves into
yuan and the Financial Times reported the same month that
Malaysia had bought yuan-denominated bonds.
Japanese Prime Minister Yoshihiko Noda and his Chinese
counterpart, Wen Jiabao, agreed at a meeting on Dec. 25 to
support Japanese businesses issuing yuan bonds in Tokyo and
other markets outside of China. Japan Bank for International
Cooperation would also begin a pilot scheme for issuing
yuan-denominated bonds in mainland China.
"Japan's buying of Chinese bonds will definitely help the
process of yuan internationalisation," said Li-Gang Liu, chief
China economist at ANZ in Hong Kong.
"Increased buying by advanced countries of Chinese bonds
will help boost confidence in yuan assets and speed up the
process of yuan internationalisation."
Few argue against the idea that the yuan will one day become
a reserve currency. The World Bank expects China, which
generated around $5.8 trillion in gross domestic product in 2010
compared with $14.5 trillion in the United States, to become the
world's top economy before 2030.
But to be a reserve currency the yuan would need to become
full convertible, analysts say. So far China has not indicated
any timetable for achieving that although the central bank said
on Monday it will encourage the value of the currency to be set
by the market and step back from intervention "in an orderly